‘A Tale of Two Economies:’ Alternative Financing to the Rescue
When Charles Dickens wrote, “It was the best of times, it was the worst of times,” he might as well have been writing about the current economic climate. An era of uncertainty began after the 2008 crisis, and while certain industries have blossomed, many industries continue struggle through these economic changes. Increased bank regulation and the tightening of credit have severely impacted the traditional financing avenues and the borrower’s ability to secure traditional financing.
Although the economy in the United States is showing resilience amid some negative macroeconomic and microeconomic factors, there are still major concerns for businesses, with many struggling in a lending landscape forever changed by the crisis. Banks’ reluctance to lend, combined with fewer options than years past, has created a demand for alternative financing products and services. Many borrowers, feeling the squeeze from shrinking lending options, have had to search the alternative financing landscape to support and grow their businesses.
Amid the negative economic conditions, there are certain industries flourishing in spite of the difficulties. Unfortunately for the businesses within these industries, they have traditionally relied on the outside capital sources that have since dried up. There have been huge gaps left by the consolidation or exit of some of the more traditional financial lending sources. These gaps, coupled with the banks unwillingness or inability to lend, have led borrowers to search for new options in the form of alternative financing.
Alternative financing, or as we believe, creative and innovative financing, breaks away from the approach that one lender can fill a borrower’s every need, rather choosing to focus on meeting a specific need that can be met through multiple parties. Alternative lenders have grown in tremendous numbers over the last year, specifically lenders focusing on distinct asset classes. To reduce risk, even asset-based lenders have begun outsourcing some of the asset classes from their loans to other parties. For example, an asset-based lender that traditionally offered a formula loan based on inventory, accounts receivable and equipment now prefers to outsource the inventory or equipment pieces to specialized lenders.
The alternative lending industry has surged in growth over the last year to fill the needs of today’s businesses and borrowers. In order to maximize their borrowing ability, lenders bring a “team” approach that allows each party to focus on its specific asset class. This specification and diversification of assets allows a borrower to reach a conventional solution in an unconventional way. Our company, as an alternative lender focused specifically on inventory financing and purchase order financing, has seen a large increase in borrowers and lenders needing this type of specialized service. We provide financing for borrowers that, just a few years ago, would have had more conventional options available to meet their needs. An example of this approach occurred when we provided a creative solution for a company that went from $800,000 in revenue to $60 million within three years. This client, not a candidate for traditional banking due to its limit history and rapid growth, came to us in search of a solution as its cash flow had dried up and it had $14 million in purchase orders from a big box retailer that needed to be filled. In order to provide a solution, the borrower utilized our purchase order financing that allowed them to finance 100% of the cost to fill these orders as we provided letters of credit to its factories producing the goods. The client also used the services of a factor that advanced against the invoices from this big box retailer, allowing us to be paid back and providing additional excess availability to the client.
After six months of this credit support, the client no longer needed purchase order financing because its supplier offered a credit extension. The extension of credit provided the client a solution until its business needs changed requiring it to maintain just-in-time inventory for replenishment orders. Holding approximately $7 million in inventory at this point, the business came back to us for an inventory line of credit that allowed them to continue to grow, maintain additional inventory, and have some working capital for day-to-day operations. We established a line of credit based on the company’s inventory, while it continues to maintain a factoring relationship throughout the rapid growth on sales on excess of $50 million. Through the various alternative lenders involved, we were able to take a client’s growth that was too rapid for traditional outlets and take it to a level where now it will soon be a more attractive candidate for the more conventional lenders.
Another important aspect of alternative lending is the critical need for cooperation and appreciation in lenders’ willingness to work with each other to offer a full array of financing. By enlarging the funnel of businesses through this type of cooperation, alternative lenders have access to a much larger field of potential funding opportunities. Our company has been a proponent of working with other lenders, building the business model around this type of cooperation, to create a complete solution for a borrower. We encourage partnerships, as we believe that, together, we can service the needs of a borrower better by focusing on what we do best. For example, a factor might be looking at assisting a borrower being asked to exit its traditional banking relationship, where a bank has funded against inventory, receivables or other assets. A situation that we experienced occurred when a bank was about to liquidate a client’s assets; we stepped in, along with a factor, and paid off the bank’s position and returned the company to profitability. With receivables alone, the factor might not be able to accomplish this and the borrower might be left with very few options. By adding our services, the factor is able to not only take out the bank in full, but also provide additional working capital to facilitate growth.
As a lender servicing almost every industry, we have been able to see the contrasting economic environment that different industry groups have experienced over the last year. Three areas that we have seen both a positive and an increase in activity are manufacturers, retailers, and wholesale distributors. Manufacturing has picked up in some of the hardest hit areas, and, while the industry’s capital requirements have grown, the traditional sources have been unable to meet manufacturers’ needs. Working capital solutions are needed to acquire inventory used in their processes and there has been an increase in inventory requirements of their customers, which do not wish to carry large amounts of inventory. We have seen a big up-tick in both food manufacturers and manufacturers producing new proprietary products searching for creative funding solutions.
Retailers, needing inventory on hand at all times to realize sales, have also sought out more creative ways to keep the appropriate inventory levels. Wholesale distributors, restrained on their sales by their ability to procure inventory from United States and foreign entities, have seen their alternative financing needs greatly increase as the global economic uncertainty has tightened credit from vendors who once offered generous terms to their customers. These three industry groups have all greatly increased their working capital and cash flow requirements, and, without alternative solutions, would not be able to survive.
The outlook for the remainder of the year and into 2013 remains optimistic, yet uncertainty will prevail due to the vast amount of variable factors that are unknown at this point. These variables, both in the United States and aboard, make predicting the future of the economy a fool’s game. In the U.S, the Presidential election, “Fiscal Cliff,” and tax cut expirations will create most of the uncertainty of 2013, while the European debt crisis and the slowdown in Asia should persist well into 2013 and beyond. Manufacturers, as in any time of economic slowdown or uncertainty, will have trouble accessing credit if the economic pendulum swings significantly to the downside. The European debt crisis and Asian slowdown has had the most powerful impact on the wholesale distributors.
If the debt crisis deepens or Asia growth continues to slow, both European and Asian factories will be unwilling or unable to extend terms to their clients, therefore creating an even bigger need for alternative financing options such as purchase order financing. Retailers, typically first affected when tough economic times hit, will feel pain in all areas as acquiring inventory will prove challenging, especially inventory secured from overseas vendors that are subject to price fluctuations and credit risk.
There will be businesses that navigate through the uncertainty into 2013 and beyond. The flourishing businesses will be the ones that take advantage of every avenue available to them. As many alternative lending options come at a higher cost than more conventional options, the intelligent borrower will look through the higher costs at this crossroads at their business, and use alternative lending as a bridge to conventional lending. From a lender’s perspective, creativity is critical to ensure new pathways are opened up and no rock is left unturned in the borrower’s search for capital. The three most important words for 2013 lenders should be creativity, cooperation and innovation. With these three elements, borrower’s needs will be met, creating an overall increase in economic activity and furthering us along in the road back to robust growth.
The picture we portrayed should not be considered one of “doom and gloom.” The underlying message is that prosperity is attainable with careful, creative planning, and the willingness to adapt to the lending environment around you. Both lenders and borrowers must continue to evolve to keep up with the current climate and the ever-changing conditions by adapting to whatever changes the year ahead brings. As long as the economic variables remain, uncertainty will remain, and the awareness and understanding of what options are available to the borrower will help borrowers get in front of trouble that might be heading their way. One thing is certain, the winners into the next year will be the lenders and borrowers that create, cooperate and innovate.
Darren Palestine is the director of sales for Crossroads Financial, responsible for managing Crossroads’ sales effort, with a focus on creating relationships in the factoring, receivable financing, and asset-based lending communities. Most of Crossroads Financials’ business opportunities originate from the factoring and receivable financing community, and Palestine has formed close relationships with more than 200 of these lenders. He creates Crossroads Financials’ marketing programs, focusing on reaching the company’s network of lending partners, potential referral sources and business prospects. These activities include creating marketing and promotional material and keeping Crossroads Financials’ network informed of deal closings and other Crossroads related news. He graduated the University of Florida with a Bachelor of Arts in Marketing in 2006 and, in 2008, returned to the University of Florida and graduated with a Master’s in Business, specifically with a focus on International Business.
Lee A. Haskin has been president and CEO of Crossroads Financial providing inventory and purchase order financing since 2004. He has daily direct oversight over the sales & marketing function as well as the underwriting department. Crossroads and its affiliates currently manage loan portfolios averaging between $10 million and $15 million in loans outstanding. Prior to founding Crossroads Financial, Haskin was a senior managing partner of Capital Access Group, LLC from 1996 to 2004. Prior to co-founding Capital Access Group, Haskin served as executive vice president and co-founder of Great Western Financial Services Inc. from 1992 to 1996, a factoring and asset-based lending institution. From 1987 to 1992, Haskin co-founded Pinnacle Financial Services, Inc. in Greenwich, CT. Pinnacle was a factoring company funding small to mid-size business in the New York area. From 1984 to 1986, Haskin worked as executive vice president of sales and marketing for Allstate Financial Services, a Virginia-based factoring company. Haskin attended the University of Miami and majored in accounting.
Crossroads Financial has been providing inventory lines of credit and purchase order financing since 2004. The company created a niche market by partnering with A/R factors that provide receivable funding. Crossroads partners with factors, asset-based lenders, banks and other firms to offer a complete asset based lending package. It provides a complementary suite of lending products to its finance partners allowing them to add additional business, take out existing lenders and satisfy their existing clients’ growing working capital needs.