When the Banks Say "No"

Businesses looking for working capital turn to alternative sources of financing, sometimes at a price.

By Bill Virgin | November 2010 | FROM THE PRINT EDITION

Credit: Illustration by David Cutler

Parts Warehouse is a 14-year-old Lynden company that makes and distributes to wholesalers and repair shops replacement items for dental equipment—vinyl covers for the foot rests of reclining chairs, holders, arms and trays, foot controls, suction tubes, bulbs for lights—but not, says co-owner and controller Cindy Heins, dental drills. “Nothing that hurts,” she explains.

For many small and midsize businesses during the recession, what they might encounter in a dentist’s chair hasn’t been nearly as uncomfortable as dealing with their bankers. As they scramble for working capital to keep the doors open or long-term financing to support growth, they’re running into banks that in many cases have slammed shut the door to the vault, even for business customers with a track record of success and a long-standing relationship with their lenders.

“I’m finding that the banks aren’t quite as flexible with lines of credit,” Heins says. “The expectations are tougher.”

Companies like Parts Warehouse are typical; they’re not fly-by-night startups with high burn rates of capital, and they’re not looking to sell off much of their equity to venture investors. They need working capital, and the traditional source for it, the bank loan, is getting hard to come by even for healthy businesses.

“The credit crunch is absolutely for real,” says Scott Hardman, managing director for Seattle-based investment banking firm Alexander Hutton. “It’s difficult for companies to get financing. Many companies that had long-term relationships have seen those scaled back. Requirements change. When renewals come up, covenants are tighter,” and banks often will lend less against receivables and inventories than they used to.

“The tightening of terms made us look a little more actively” for financing, Heins says. And it turned out the key was in her business.

Parts Warehouse also has customers in Canada, Sweden, Russia, Japan, Malaysia and Ireland, thus generating foreign accounts receivable. Banks generally won’t loan against those receivables because of the hassles of collecting, but Parts Warehouse and Heins found someone who would—a California company, CFS International, that provides credit insurance on those accounts and lending against them. The cost of going that route, she adds, proved to be less expensive than conventional financing. “It was very helpful.”

Heins’ experience isn’t unique. With the credit crunch choking off traditional bank loans and lines of credit, businesses have been looking