When Bank Financing Isn’t Available

Commercial banks meet the large majority of credit needs for privately held middle market companies, and for good reason. For a profitable, conservatively capitalized business growing at a moderate pace, a bank working capital line and term debt are the cheapest and most straightforward capital available. Owners and their finance teams generally know the banks active in their market well. Most have a dozen banker business cards in a desk drawer or a contact manager, and a relationship that predates the current CFO.

That arrangement works until the company’s situation changes. Then the same banker who has been calling quarterly for years becomes difficult to reach, the credit request sits in committee, and the answer arrives late, often after the window for solving the problem has narrowed considerably.

What follows is an overview of what happens next: which situations push a company outside bank credit, how non-bank lenders evaluate those situations differently, what the alternatives actually cost, and when an owner or advisor should start looking.

When a Company Falls Outside the Bank Credit Box

Bank credit policy is built to finance stability. A company becomes difficult to bank when its circumstances stop looking stable on paper, even when the underlying business is sound. The common triggers:

• Rapid growth. Receivables and inventory outrun the line, and leverage covenants won’t support the increase the company needs to keep filling orders.

• Tight or negative cash flow. A loss year, a compressed margin cycle, or heavy investment ahead of revenue.

• Acquisitions. The target’s cash flow doesn’t yet support the debt required to buy it.

• Ownership transitions. Partner redemptions, shareholder disputes, and owner buyouts, particularly where the exiting party’s note sits ahead of the bank.

• Covenant defaults. A technical trip moves the relationship to special assets, where the objective becomes exit rather than support.

• Turnarounds and recovery years. The trailing twelve months tell a story the forward twelve won’t.

• Customer or supplier concentration. A dependency the credit committee reads as risk regardless of how long it has held.

• Seasonality and long working capital cycles. Financing needs that peak precisely when the borrowing base looks weakest.

• Financial statements requiring add-backs. Real earnings that only appear after adjustments a bank is reluctant to underwrite.

• Restricted industries. Sectors where bank appetite is structurally limited regardless of company performance: construction, tooling, oil and gas, firearms and ammunition components, and licensed hemp and cannabis among them.

Any one of these can move a well-run company from bankable to unbankable without a single thing changing about the quality of its operations.

How Non-Bank Lenders Evaluate Risk Differently

The alternatives come primarily from non-bank private credit lenders: specialty finance companies formed specifically to fund the situations above.

They operate outside the regulatory capital and examination framework that governs bank credit. That gives them latitude in structure, advance rates, and risk tolerance that a regulated institution does not have, not because they take risk casually, but because they price and control it differently.

The practical difference is in how the credit decision gets made. Bank underwriting leans heavily on trailing financial metrics. Private credit underwriting weighs the business itself: the quality of the collateral, the strength of the ownership group, the company’s operating history, and the credibility of its forward prospects. A lender in this market will spend time on why the loss year happened and what changed since. A bank credit committee generally cannot.

What These Facilities Look Like

“Private credit” covers several distinct structures, and the right one depends on the specific problem:

• Asset-based lending: revolving facilities advanced against receivables and inventory, sized by collateral rather than cash flow.

• Factoring: the sale of receivables, useful where the customer’s credit is stronger than the borrower’s.

• Equipment financing and sale-leasebacks: capital raised against owned machinery or real estate, often the least expensive alternative when a company is asset-heavy.

• Cash flow term debt and unitranche: a single facility replacing a senior and subordinated structure, typically for acquisitions and recapitalizations.

• Mezzanine and subordinated debt: junior capital that fills the gap between senior debt and equity.

• Recurring revenue facilities: debt sized against contractual ARR for software and subscription businesses, without reference to EBITDA.

Most solutions in practice combine two of these rather than relying on one.

What Private Credit Costs

This capital is more expensive than bank debt, and any advisor who declines to say so plainly should be viewed skeptically. All-in interest cost across private credit solutions generally starts around SOFR plus 4.00%, roughly 7.5 to 8 percent at current index levels, and runs into the mid-teens, with pricing moving up as the structure shifts from collateral-secured to cash flow-based. A well-collateralized asset-based facility sits near the bottom of that range; junior capital supporting an acquisition sits near the top.

Cost is not confined to the rate. Borrowers should expect:

• More frequent and more detailed reporting, sometimes weekly borrowing base certificates.

• Active collateral controls, including lockboxes and field examinations.

• Prepayment penalties, exit fees, and minimum-term economics that affect the true all-in cost.

• Personal guarantee expectations, which vary widely by lender and are more negotiable than most borrowers assume.

The honest framing is that for most middle market borrowers this is bridge capital, not permanent capital. The objective is to finance the growth, complete the acquisition, or fund the recovery, and return to bank pricing in eighteen to thirty-six months. Facilities that are not structured with that exit in mind tend to become expensive for longer than anyone intended.

In Practice

A specialty vehicle manufacturer builds its product on a base chassis sourced from a major OEM. When semiconductor allocation constrained chassis availability industrywide, the company could not obtain enough units to meet demand it had already booked. Production volume fell, and with it revenue and profitability, not because of anything management had done, and not because of any deterioration in the underlying business. The trailing financials, however, showed a company in decline. That is a difficult set of statements to bank.

The solution was a tightly monitored asset-based lending facility, with availability governed by a borrowing base tied to accounts receivable and inventory. That structure fit the problem: the company’s collateral remained sound throughout, even as its earnings did not, and a lender advancing against assets could get comfortable where a lender advancing against cash flow could not. The distinction that made the credit work is the one described above: the cause was external, identifiable, and finite. As chip supply normalized, chassis deliveries resumed, and production, sales, and profitability recovered along with them. The all-in interest cost of the facility was in the low teens. As sales rebuilt and the receivable and inventory balances grew with them, the facility was increased after six months. Two years in, the company refinanced into a lower-cost solution, which was the point of the exercise from the beginning.

What This Means for Bankers, CPAs, and Attorneys

Advisors encountering these situations face a different question than the owner does: whether referring the client elsewhere puts the primary relationship at risk.

In practice the opposite is usually true. A company that cannot be banked today is frequently bankable again within two to three years, and the banker who helped arrange the bridge is generally the one who gets the relationship back, often with a larger company than the one that left. The alternative, watching a client run out of options without a referral, ends relationships permanently.

When to Start Looking

The most common and most costly mistake is waiting for a formal decline. Bank rejection is usually a slow process communicated in soft signals: requests for additional information that go nowhere, deferred committee dates, a relationship manager who stops initiating contact, and by the time the answer is explicit, the company has often spent months of runway.

The better sequence is to open a parallel conversation while the bank process is still active. It costs nothing, it preserves optionality, and it produces a materially better outcome than negotiating from a position of urgency.

Glengarry Capital Group was formed in 2022 and maintains active dialogue with more than 200 non-bank private credit lenders across the structures described here. The firm advises privately held lower middle market and middle market companies throughout the United States, Canada, and Mexico.

Contact Tom Kessel to open a conversation.