Small businesses continued to have difficulty obtaining conventional
bank loans during 2012. The lingering downturn in the economy along
with the more stringent underwriting standards that were imposed on
the banks by the bank regulators has forced many small businesses to
look at the alternative lending market to locate a lender who can
satisfy their working capital needs. Asset based lenders; factoring
companies; equipment lenders; finance companies; and private lenders
all experienced an increase in commercial loan requests and a
subsequent increase in loan volume during 2012. That trend should
continue during 2013.
Commercial banks continue to maintain a surplus of cash on their
balance sheets as their inertia to originate new commercial loans to
small businesses continues. In fact; studies that have been conducted
demonstrate that only one out of every five small businesses that
achieve sales of $1 million to $5 million annually qualifies for a
conventional bank loan. The Wall Street Journal recently reported that
SNL Securities just finished conducting a study that showed that the
bank's overall Loan to Deposit Ratio has decreased from 95% in 2007 to
72% last year providing further evidence that banks are "sitting" on
hordes of cash as their appetite to make small business loans has
diminished. Banks are no longer "loaned up" as outstanding commercial
loans on the bank's balance sheets have decreased by 5.3% during that
time period.
In order to access readily available capital for their operations,
small businesses who do not qualify for bank financing will have to
continue to scour the alternative lending market to locate a suitable
lender. Since alternative lenders can quickly close loans that banks
typically shun, the cost of the capital is more expensive to the small
business. On average, alternative lenders typically charge a range of
2% higher on the lower end of the scale to 15% higher on the highest
end of the scale than the banks for those borrowers who are considered
the most risky. The increased cost of capital that these alternative
lenders charge is based on several factors and clearly has a risk
premium attached to it. Alternative lenders are not as concerned about
cash flow as the banks are and alternative lenders are very focused on
the underlying collateral of the business that they are lending to and
can make a loan to a business that does not demonstrate a standard
debt service coverage ratio of 1.25x.
Despite paying higher rates for the debt capital that is being offered
to small businesses by these alternative lenders, it is still critical
that the small businesses who are unable to close on a conventional
bank loan find a reasonable alternative lender who can fund both their
short and long term capital requirements. In many cases, a small
business can pass on some of the additional cost of capital to their
customers. In addition, the business can also establish much needed
credit and track record with a reputable lender that could allow them
to rotate into a conventional bank loan more quickly as opposed to
obtaining no commercial credit at all. Most alternative lenders are
short term financiers by nature. These lenders fully expect their
"blue chip" customers who are prospering to find a commercial bank who
will lend that business the money to pay off the alternative lender.
Alternative lenders provide a much needed "bridge" for those small
businesses for a short period of time that in many cases will allow a
business to grow and succeed and become "seasoned" enough to tap into
the debt capital market that commercial banks are offering at a lower
cost of money.
As commercial banks continue to stockpile cash on their balance sheets
and choose to invest in Treasuries as opposed to commercial loans to
small businesses, the small business community will need to continue
to search for alternative lenders that are actively making commercial
loans in that market segment. The marketplace of alternative lenders
continues to grow thus providing these small businesses with numerous
viable options that they can utilize to satisfy their business
operations working capital needs.

Worth Avenue Capital, LLC closed several transactions during 2012 for
many small businesses who were unable to obtain a conventional bank
loan. WAC expects to be very active during 2013 in handling the debt
capital needs of the small business community and we should be able to
increase the number of closed transactions for small businesses this
year.

Michael Ciaburri is the founder and principal of Worth Avenue Capital, LLC, Guilford, Conn.