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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.

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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

Bio photo jay krasoff

Jay Kra­soff

Founder | Managing Director

Mr. Krasoff is a founder of Chiron Financial and is responsible for the strategic direction of the firm and corporate growth.

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