There are multiple sources of debt you can access for your business. In this post, we will focus on four types of institutional lenders.
The most common and widely known are traditional banks (national, regional, community and business) and credit unions. This is likely where you have your checking and savings accounts, perhaps a mortgage, a car loan or other types of personal loans. If you own a business, you may have your merchant account and possibly business loans here. Traditional banks typically will offer the best interest rates of any of the institutional lenders. For these lower interest rates, business owners must put up collateral, meet certain covenants related to cash and profitability, and (usually) sign a personal guarantee. Here the business owner accepts the greater risk.
Often, banks will work with small business owners to get loans backed by the Small Business Administration (SBA). SBA loans are generally much more restrictive than traditional bank business loans and always require a personal guarantee. In the right situations, SBA loans can be a good option for the business owner; however, the owner should understand that an SBA loan may mean accepting even greater risk than with loans from traditional banks.
Another institutional lender option is non-traditional banks. These are asset-based lenders, meaning they will require collateral. They also, more than likely, will require a personal guarantee as well. These lenders may sit in second position behind any traditional or SBA loan debt you have. On the flip side, they are less restrictive on the covenants the business must adhere to during the life of the loan. With them potentially sitting in second position and loosening the covenants tied to the loan, non-traditional banks are accepting more risk. As such, the interest rates businesses will pay is going to be higher (sometimes significantly so, depending on the relative liquidity of the collateral).
The final type of institutional lender we will discuss in this post is the mezzanine debt fund. Mezzanine debt is normally subordinate to other institutional debt the business may have and does not require collateral or a personal guarantee. Interest rates tend to be in the mid-teens, BUT payments are generally interest-only for an extended period of time (3-5 years). This allows the debt to work much more like equity. Often mezzanine lenders will want warrants and may also add a small equity investment to the deal. These lenders take on nearly all of the risk . They are a great option when business owners have maxed out their borrowing capacity with their bank, do not have meaningful collateral to support a loan, or want to access capital without it being tied to a personal guarantee.
Fulham Partners has a long history of excellent relationships with institutional lenders. Contact us today to learn more about which option(s) may be best for you.