Peter Martin: Gear Up for Alternative Lending

As a finance and growth consultant with K•Coe Isom, Peter Martin helps businesses identify opportunities, source capital and manage expansion challenges. ( Farm Journal Media )

Expect alternative lenders to play a bigger role in financing in the coming months, as fewer producers will be able meet traditional lending standards. That means there will be fewer credit approvals by conventional banks—and more distressed businesses seeking out alternative options.

“We’re already starting to see an increase in applications and expect the spigot to open come January,” says Nick Stokes, managing director of Conterra Ag Capital, which provides both alternative and traditional loan structures for farms and ranches.

Alternative lending is a fast-growing industry, providing financing options without the policies that often constrict the typical loan process. These nontraditional capital providers don’t have the regulatory pressures of traditional banks. They’re willing to take higher risks and tend to offer a higher rate of loan approvals, but their capital also comes with higher costs.

Troubled businesses, however, aren’t the only ones seeking alternative lenders. Many operations wanting to expand, invest in technology, start new companies or diversify are also turning to alternative lenders. In these nonconventional financial providers, many operations find a flexible, forward-looking approach to help them move in new directions.

If you’re considering working with an alternative lender, make sure to keep the following points in mind:

Alternative lending isn’t a quick process. Traditional and alternative lenders go through a similar process to evaluate your financial information and approve your loan. But alternative lenders often dig deeper to understand more about your operation and why you didn’t qualify for conventional financing.

“One of the biggest hurdles we deal with is producers don’t understand where they’re at financially or why they have to come to an alternative lender,” Stokes says. “We end up educating them, and that takes time. But those conversations must be had.”

It’s expensive. Alternative lending often provides interest-only loans with higher rates and fees. “The cost is higher,” Stokes agrees, “but you’ll have lower repayments and a cash flow over the next two years that will buy time for you and your business.”

Alternative lending should be a short-term strategy. Your goal should be to return to a conventional lender with cheaper borrowing costs.

“Good alternative lenders will work with you to determine the best way to strengthen your cash flow and get you back to a traditional lender,” Stokes says. In fact, he often works as a part of a three-way team with a producer and a conventional bank to help return the borrower to conventional financing. “Eighty percent of our deals are the result of bankers reaching out to put together a plan that will bring that customer back to them within three to four years,” he says.

Get familiar with your financial data. Just as with a conventional lender, you’ll need to understand your financial statements and what they’re telling you. That’s key criteria for any applicant.

Avoid the scammers. Every industry has them. The bad ones would love to have you paying higher fees indefinitely. Good alternative lenders want to help you rebuild your working capital and return you to a traditional lending model as soon as possible. Seek advice from a trusted, outside adviser before reaching out to an alternative lender. Work with those who will help you navigate these rough waters and return you and your business to more solid ground.