What to Do if a Commercial Bank Refuses to Lend Capital
Part two of a two-part blog that gives you the advice you need to be proactive in a business-critical situation.
As previously discussed, a bank can refuse a company’s request for capital for a range of reasons; the bank can consider a company too risky, a bank may not have the flexibility or capital to lend, or the bank may even consider a company to be a poor client because it doesn’t purchase enough of the bank’s products.
Generally, companies will want to be aware of some common signs that the bank will soon refuse to lend capital. These signs can indicate that companies may want to begin looking elsewhere for capital before a loan is declined. However, there may come a time at which a bank will unexpectedly refuse to lend. At this point, companies will want to immediately begin taking steps to explore other options. There are generally two main paths to take.
Independently seek out funds from other lenders or investors
Many companies attempt to find funds or lenders on their own. While possible, this can be especially challenging. First, capital raising is time-consuming and generally outside the company’s core business function. As such, most companies struggle to allocate sufficient time and resources to finding new capital or lenders while also running its core business.
Second, companies tend to lack experience when it comes to finding the right non-bank lenders. Most other commercial banks will be off the table as viable options, as banks will be reluctant to lend money to a company that has already been refused capital by its existing bank. Companies will then need to source funds elsewhere, which can be risky. Some lenders may not be legitimate, and the company may fail to recognize the warning signs.
Finally, companies may struggle to close transactions. The process of acquiring capital can require the company to go to dozens of lenders; out of those dozens, it may be that only one lender is willing to provide capital. However, the lender can back out at any time before closing, even after months of negotiations. If the lender backs out, the company must go back to square one — which wastes valuable time and further risks the company’s future.
Partner with an investment bank to acquire raise funds
The second most common avenue for raising funds is to work with an investment bank. An investment bank will use its network, including hundreds of non-bank lenders, in pursuit of a market-clearing transaction. In doing so, companies access a range of terms without having to divert attention away from its core business to find that capital.
In addition, the non-bank lenders operate in a far more aggressive manner than commercial banks. Their investment decisions are entirely risk/return-driven without the burden of bank regulatory interference effectively denying otherwise acceptable credit requests. They also do not require that a company purchase other products as do banks. Non-bank lenders generally offer better liquidity than banks, via higher advance rates against accounts receivable and inventory, and also are willing to finance real estate and machinery and equipment, assets that banks generally give little to no value to.
And in many situations, non-bank lenders do not require covenants, which is particularly helpful to companies without consistent EBITDA. Because of their limited offering, non-bank lenders remain focused on increasing a company’s liquidity, rather than trying to “cross-sell” purchase of products to increase returns.
Non-bank lenders may come at a noticeably higher cost, but many companies find this expense worth it when weighed against the benefits of more liquidity, greater flexibility and certainty of access to capital they are paying for.
Working hand in hand
Investment banks are a wise choice to consider when denied — or expect to be denied– capital from a commercial bank, but they can also be a valuable addition at any time. Some companies may opt to keep their commercial bank to finance their accounts receivable and hire an investment bank to arrange credit against their inventory, machinery, equipment and real estate.
Depending on the investment bank, a company may be able to find assistance with M&A, capital raising, and financial restructuring. A wise course of action is to know your options well in advance of needing to choose, so contacting an investment bank can help a company looking to set itself up for future success.
Read part one, “Three Signs that a Commercial Bank is About to Say ‘No’ to Lending Capital,” here.
Meet Our Author
Founder | Managing Director
Mr. Krasoff is a founder of Chiron Financial and is responsible for the strategic direction of the firm and corporate growth.