Generally, borrowing funds from alternative debt financing sources is more expensive than taking right out a bank loan that is traditional. However, many times companies either do not qualify for a bank that is traditional or line of credit or must spend high interest levels, include a co-signer/co-borrower, and/or attach public assets. These alternative sources are excellent financing sources in that case. Remember, banks determine the interest rate charged based on risk. The highest credit grade corporate customers are charged prime. All the companies are charged prime + a risk element. If a bank will not provide financing, the perceived associated risk is higher. These alternative funding sources mitigate their risks by devoted to a particular industry or asset class and compensate with this danger by charging you higher costs and/or interest prices.
Example – SBA loan
an information housing company, Acme Technologies, made a decision to spin its data management operations off in preparation for its strategic acquisition by a larger corporation. The data management division had largely gone unnoticed despite its management that is successful by division’s administration. Needing to recoup some value from the division, which Acme’s CFO suspected could be terminated by Acme’s acquirer, Acme’s CFO made the offer to offer the company to your division’s administration.
Even though the division’s management team was skilled in several functional areas including product sales, operations, and money management, they had no experience managing complex financial transactions. They needed guidance so they used their network to find an advisor. They approached a U.S. Department of Commerce-sponsored Minority Business Enterprise Center (MBEC) located at a renowned university for assistance. The MBEC assigned a business consultant to aid them.
The business enterprise consultant encouraged the administration team to produce a ongoing company to buy the assets of their employer. She then found a lawyer that completed their incorporation documents and successfully registered the company within three company days. Next, she spent hours requesting and documentation that is compiling create an Executive Summary, pro-forma financials, and management team resumes to present to banks and direct lenders. Finally, she used financial institutions to her relationships to locate three entities that financed acquisitions and worked rapidly.
The CFO initially gave administration six months through the right time the offer was made to complete the transaction. The business advisor pushed back in conversations with the CFO and wrangled an extension. Several issues arose which the business consultant worked through quickly using the administration group.
Two institutions, one direct lender and one community bank, emerged as the front runners. Both were highly responsive and flexible and suggested the application of an SBA loan. Town bank met face-to-face aided by the administration team and championed one other banking functions it may offer, along with the long-term advantages of dealing with them. Afterwards, the management group opted to acquire financing from the bank.
Five weeks after ending up in the business advisor, the community bank provided a Letter of Commitment (LOC) to finance the acquisition. Three weeks after obtaining the LOC, the management team closed on the financing and the purchase of the division and began operating under the company that is new, Acton Technologies.