Article offers a brief summary of alternative debt sources. The bulk of the article is dedicated to case research illustrating one company’s search for financing from various resources. The entire case study covers the search, the types of funding entities pursued, and the planning and steps the business took to actually garner the financing.
Generally, borrowing funds from alternative debt financing sources is more costly than taking right out a traditional mortgage. However, often companies either do not be eligible for a traditional mortgage or credit line, or must pay high interest rates, add a co-signer/co-borrower, and/or connect communal assets. In that full case, these alternative sources are excellent financing sources.
Remember, banks determine the interest rate charged based on risk. The best credit grade corporate and business customers are billed prime. If a loan provider shall not provide financing, the perceived associated risk is higher. These choice funding resources mitigate their risks by focusing on a specific industry or asset class and compensate for this risk by charging higher fees and/or interest levels. A data casing firm, Acme Technologies, made the decision to spin off its data-management operations in preparation because of its strategic acquisition by a more substantial corporation.
The data management department had largely gone undetected despite its successful management by the division’s management. Having to recoup some value from the department, which Acmes CFO suspected might be terminated by Acmes acquirer, Acmes CFO made the offer to sell the business to the division’s management. Even though the division’s management team was skilled in a true quantity of functional areas including sales, operations, and cash management, that they had no experience handling complex financial transactions. They needed guidance so they used their network to find an advisor.
They contacted a U.S. Department of Commerce-sponsored Minority Business Enterprise Center (MBEC) located at a renowned college or university for assistance. The MBEC assigned a business consultant to help them. The business advisor advised the management team to make a company to choose the assets of their employer. She then found a lawyer that completed their incorporation documents and successfully registered the company within three business days.
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Next, she spent hours asking for and compiling paperwork to generate an Executive Summary, pro-forma financials, and management team resumes to present to banks and direct lenders. Finally, she was utilized by her relationships with financial institutions to locate three entities that financed acquisitions and worked rapidly. The CFO at first gave management six weeks from the time the offer was designed to complete the transaction.
The business advisor pushed back conversations with the CFO and wrangled an expansion. Several issues arose that your business advisor worked through quickly with the management team. Two institutions, one direct lender and one community bank, emerged as leading runners. Both were highly reactive and flexible and suggested the use of an SBA loan.