A structural deficiency in the U.S. banking sector leaves businesses that gross under $50 million without credit facilities sufficient enough to support their needs. That may sound like a bold statement, but given the state of banking today, it might not be as dire as you think. There are approximately 7,000 banks in the U.S. Less than 20% of those have assets greater than $500 million, and fewer than 200 banks can offer credit lines in excess of $2 million.
National Banks May Not Want Your Business
Businesses booking more than $50 million in annual revenue tend to be well-served by America’s big national banks. Companies like JP Morgan-Chase and Bank of America offer those businesses a range of credit options, such as lines of credit, and other financing vehicles. However, over 90% of all building supply dealers have less than $50 million in annual sales. Such businesses simply aren't big enough to be worth the effort to serve, and the history of seasonal or sloppy payment patterns in our industry is often a powerful reason on its own for big banks to steer clear.
Regional and community banks do wish to serve businesses that earn less than $50 million in revenue; however, their comfort level with serving dealers in this space is conditional. They want to be sure the default risk is very low, meaning dealers need to have strong financials, performance histories, and collateral. In addition, there is a cap on how much these banks will be willing to lend.
Underserved Businesses Lack Cash to Grow
If your business has typical days-sales-outstanding trends, you need approximately $1.5 million in your credit line for every $10 million in business that you book. However, if you are a $30 million gross business, it’s unlikely that you have access to a $4.5 million credit line held by a regional bank. As humbling as it may be, a $30 million business probably has to really fight to get the attention of a national bank. That fight is made all the more complicated because the building supply industry is perceived as risky, due to boom/bust cycles and perceived lack of discipline in A/R practices.
This leaves the $5 million to $50 million businesses without the funding they need or deserve. These underserved businesses are similar to someone who eats just two-thirds of the calories they need to be healthy. They may survive on the diet, but they can’t grow, and they lack the full complement of calories. They are chronically hungry, or in the case of businesses, cash-starved.
How do businesses in this sector access cash flow solutions so they can grow? There are three pathways.
- Alternatives to traditional banks, such as OnDeck, BlueVine, and Fundbox, are available. Beware that the effective APR on these solutions can be exorbitant (over 60%).
- You can use mezzanine debt, which is like taking out a second mortgage. It functions similar to a bank line, but carries higher APR (typically 15%-25%) and often includes warrants in your company.
- You can go to a B2B credit management provider that will fund you upfront for your sales and protect you from risk. They can free up cash flow, integrate seamlessly into how you run your business, and can even take collections off of your plate.
In the absence of a bank willing to offer you a line of credit commensurate with your needs, there are other available sources for cash. You must use care when selecting a financial vehicle from the list above, and closely examine the net carrying costs of the debt. Bottom line, there is simply no need to go hungry.