Small businesses feel the squeeze as banks are tightening their belts
As the economy improves, bankers are seeing a surge in credit applications. However, banks are not positioned to approve loans as quickly as they did in the past because of substantial regulatory hurdles in determining creditworthiness. Following the too-big-to-fail fiasco, much of the credit capacity has concentrated in a handful of large banks, and these banks are taking a more conservative approach. On the other hand, regional and commercial banks that are willing to lend to small businesses are left with little credit to give.
Small business strategies to offset the big-bank credit crunch
The most common alternative to bank lending is high-net-worth individuals. Lending from these individuals can be done through convertible debt or terms of credit. Convertible debt is a blend between debt and equity. It is secured through a convertible note and carries a per annum interest rate until some point in the future when it converts into equity. The conversion usually occurs during the next round of financing and is given warranty coverage or discounted based on the company’s valuation. Terms of credit are only usually given to companies with a solid track record. They come in the form of a senior secured loan with a high liquidation preference, meaning they must be repaid before all other debt or equity holders.
To better understand how convertible debt or terms of credit can help your business, speak to one of our attorneys by calling 800-743-9900 or visit our website today!