Author
Tom Kessel
Principal
Number:
Subscribe To Exclusive Insights, Updates And News
When a bank declines a credit request, the answer is often “not yet” rather than “no.” A business may be sound, growing and well managed, yet fall short of bank requirements on size, financial reporting, cash flow history, collateral mix or credit history.
When a company’s historical results and projections meet those requirements, a commercial bank will typically offer the lowest-cost debt available. When they do not, private credit can serve as a bridge: capital that funds the business today while management resolves the issues standing between the company and conventional bank financing. Used deliberately, and with a defined exit, it is a practical path back to lower-cost bank capital.
When Private Credit Makes Sense
Glengarry Capital Group has advised middle-market companies to consider private credit bridge financing in six recurring circumstances:
Facility Size: Businesses that need a monitored, asset-based facility smaller than the minimum most bank asset-based lending groups will underwrite.
Scale: Companies that have not yet reached the revenue, earnings or enterprise size required to meet commercial bank minimums.
Financial Reporting: Businesses without the accounting infrastructure, or the CPA-reviewed or audited financial statements, that a bank requires for the proposed facility.
Cash Flow: Companies whose historical cash flow does not yet support the proposed debt, but that have identifiable, achievable opportunities to improve it.
Collateral: Businesses whose collateral is concentrated in specialized equipment, slow-moving or work-in-process inventory, or special-purpose real estate that falls outside bank advance-rate policies.
Credit History: Companies or principals with prior credit events, litigation or personal financial history that fall outside standard bank credit policy. Experienced private lenders evaluate these situations case by case.
None of these circumstances makes a business unfinanceable. More often, they reflect a temporary gap between what the company needs and what conventional underwriting standards allow.
The Private Credit Difference
For an owner or CFO, working with a private credit lender is a different experience from working with a bank.
Decisions are faster. Many private lenders operate with streamlined approval processes and give borrowers direct access to the people who make credit decisions. Many also bring specialized industry or collateral expertise, which allows them to underwrite a business on its operations, management, collateral and prospects rather than primarily on historical ratios and standardized policy.
In exchange, borrowers should expect closer oversight: more frequent reporting, collateral monitoring and covenants tailored to the specific risks of the transaction.
This flexibility comes at a cost. Private credit carries higher pricing than bank financing, typically 200 to 500 basis points above comparable bank pricing, reflecting the additional underwriting, monitoring and risk involved. For a business facing a temporary financing gap, that incremental cost is often justified when weighed against the alternative: a stalled growth plan, a missed opportunity or an equity raise on unfavorable terms.
Plan the Exit Before You Enter
The terms that matter most in a bridge financing are often the ones that govern how it ends. Before committing to a private credit facility, owners and their advisors should address:
Term. The maturity should match a realistic timeline for resolving the issues that prevent bank financing. Too short forces a refinancing before the company is ready; too long locks in higher pricing.
Prepayment terms. Prepayment premiums, minimum-interest provisions and exit fees should step down over time, so the company is not penalized for succeeding ahead of schedule.
Reporting and covenants. These should build the track record and reporting a bank will ultimately want to see, not simply satisfy the current lender.
Lender selection. Some private lenders expect, and accept, being refinanced by a bank. Others build their returns around retaining the borrower. The difference should be understood before a term sheet is signed.
The take-out lender. Identifying the target bank at the outset, and keeping it informed, allows that bank to watch the improvement occur rather than evaluate it after the fact.
Using the Bridge Period to Improve Bankability
The value of a private credit bridge is not simply access to capital. It is the opportunity to resolve the specific issues that currently keep the business out of the bank market. Depending on the circumstances, the bridge period can be used to:
Strengthen financial management by adding accounting resources and experienced financial personnel.
Establish CPA-reviewed or audited financial statements and timely monthly reporting.
Increase cash flow through revenue growth and cost reduction initiatives.
Grow revenue, earnings and enterprise value to meet commercial bank minimums.
Reduce debt to reach leverage levels and borrowing-base advance rates acceptable to a bank.
Report progress to the target bank against an agreed plan.
These initiatives should be defined at the outset of the financing process, with milestones, responsible parties and a target refinancing date.
Bridges in Practice
The following examples are drawn from engagements in which Glengarry Capital Group arranged private credit for companies outside the bank credit box. Client details have been withheld.
A Specialty Finance Company
Situation: An independent consumer finance company with an $8 million receivables portfolio and a $3.5 million line of credit from a community bank needed a larger credit facility to fund loan originations. Its portfolio was below the minimum size bank specialty finance groups would underwrite, it did not have the audited financial statements required by most bank lender finance groups, and it lacked an extended track record demonstrating its ability to grow the portfolio while maintaining credit performance.
Bridge: A private specialty finance lender provided a $10 million line of credit secured by the loan portfolio, with advance rates tied to eligible receivables and weekly portfolio performance reporting. As performance held, the lender amended the facility twice to increase the line, raise the effective advance rate and reduce pricing.
Outcome: Over 30 months, the company grew its portfolio to $20 million, documented consistent delinquency and charge-off performance and upgraded to CPA-audited financial statements. It recently refinanced with a regional bank, which provided a $25 million line of credit at lower pricing to support continued growth.
A Small Specialty Vehicle Manufacturer
Situation: A $10 million manufacturer of specialty maintenance vehicles saw its revenue fall 40% because of problems at its principal supplier. The resulting losses led to several commercial bank turndowns, even though customer demand and the company’s order backlog remained strong.
As the supplier issues were resolved, the company needed access to credit to rebuild its chassis and work-in-process inventory and its receivables. The facility it required was far below the minimum size banks will underwrite for a fully monitored, asset-based facility.
Bridge: A private asset-based lender provided a $1.5 million line of credit with advance rates on chassis inventory, work-in-process and receivables, supported by weekly borrowing-base reporting.
Outcome: The company used the facility to deliver its backlog, increased the line to $2 million, returned revenue to its prior level, and refinanced with a regional bank after 24 months.
A Transitional Strategy
Glengarry Capital Group works with middle-market companies whose financing needs fall outside the bank credit box, and with the private lenders who fund them. Its role is to structure the bridge with the destination in mind: the right lender, terms that allow an efficient refinancing and a clear plan for getting there.
Private credit is rarely a permanent answer. Used well, it is the step that makes a company bankable.
If your company has been told “not yet” by its bank, or you advise one that has, contact Tom Kessel, Principal, at 248-798-9194 or tom.kessel@glengarrycapitalgroup.com.
