Raising capital without using a bank

Alternative lenders provide financial services when traditional methods fail

One of the biggest struggles facing Canadian manufacturers, particularly the successful ones, is managing cash flow.

When business is good and the market is active, they have many opportunities for growth, whether it is from existing or new clients. But managing these opportunities can create problems. It’s almost a “be careful what you wish for” scenario.

Many shop owners seek out people like me because they are looking for a strategy to put more equipment on their floor without taking funds from their working capital. Bringing in new business or producing larger volumes for existing clients puts pressure on cash flow because additional expenses are incurred to support the new orders.

These expenses can include the purchase of more material and tooling and the hiring of more operators and programmers.

None of these costs can be financed except with a bank operating line, which for most businesses big or small usually is inadequate relative to the amount of money that they actually need.

Security necessary for loan

The reason most bank lines are limited is that the security required by any bank or any tier one institution is a minimum of three times what they loan out. Because the bank is in a stable financial position, it is able to offer relatively cheap rates for an operating line (normally a couple points above prime), but it also is the reason that only a relatively small amount of funds are available.

This situation really isn’t drastically different than a standard mortgage in which interest rates are low, again in relative terms, because the lending institution is in an equity position from the onset and are lending only a percentage of the value of the property.

Raising working capital

One of the first places a growing company can look to raise working capital is at the equipment currently on its shop floor.

Most traditional lenders do not place much value on manufacturing equipment, but an asset-based lender, particularly one that has a background in machinery and equipment, will happily provide money secured with good used equipment.

This type of lender understands resale values, and also knows where an active market can be found in the unlikely event of a default. However, when machinery and equipment are being evaluated for these purposes, it is important to understand how the lender perceives value.

If a loan is in default, the exit strategy for any lender is to sell the equipment at auction, recovering the amount loaned against the equipment based on what it will bring at the sale minus costs associated with getting it picked up, delivered, cleaned, and repaired.

Financially healthy businesses get a better loan-to-value ratio, but equipment alone may not be able to raise the amount of capital required; therefore, other avenues need to be found.

Funding other growth

Even though using the value of existing equipment is a great strategy for adding a piece of equipment to the shop floor, what if enough money is needed to purchase a company’s industrial unit or another commercial property?

As many of my customers grow, they look at monthly rent costs and realize that same money could be used to make a mortgage payment. In this instance, another place to look to raise capital is private mortgage lending.

Private mortgage lenders are equity lenders and will first look at the quality of the property and their relative security position on that property. Next, they look at the borrower’s situation from a financial perspective, as well as evaluate the character of the individual to determine whether this is someone with whom they want to partner.

Unlike banks that have an application process based on a rigid scoring system, private lenders adopt a common-sense approach to lending. They understand that not all income is verifiable, and sometimes a person’s credit score has been adversely impacted for justifiable reasons.

Private mortgages are filling a growing need because banks are becoming increasingly stringent in their lending criteria, even shutting their doors to self-employed individuals. Private lenders, on the other hand, create their own lending guidelines and often provide a quicker, more flexible method of financing.

Regardless of whether you are trying to get financing for equipment or mortgage loan, it is important to know that many lenders exist in the market beyond traditional banks. Being aware that you have these options, as well as a basic understanding of how they work, may very well provide you with an opportunity that would otherwise be unavailable.

Ken Hurwitz is senior account manager, Blue Chip Leasing Corp., 416-614-5878, www.bluechipleasing.com.

About the Author
Equilease

Ken Hurwitz

Vice-President

41 Scarsdale Road Unit 5

Toronto, M3B2R2 Canada

416-499-2449

Ken Hurwitz is the Vice-President of Equilease Corp.