Non-bank lenders are increasing their market presence in both acquisition financing and the provision of financial solutions for ongoing operations, including in the asset-based lending context.  The increased presence of non-bank lenders seems to be driven by both the benefits of working with providers of non-regulated alternative capital source funding and the regulatory limitations faced by traditional bank lenders.

Banks are facing increased regulation which in some cases has the effect of restricting their ability to underwrite “riskier” transactions and may require the inclusion of loan covenants which do not suit a borrower.  In the event there is a change in an existing borrower’s business, a bank may be precluded from continuing to provide credit facilities, which would force a borrower to refinance with a non-bank lender at an inopportune time.  Banks are often less willing to provide financing during the early stages of a business, during a downturn or while capital is being actively reinvested.

Conversely, non-bank lenders emphasize the flexibility they offer when formulating covenant packages and the fact that they are not subject to the same stringent regulations as a traditional bank.  Often, borrowers seeking financing from a non-bank lender have been turned down by a traditional bank or are seeking a larger facility than a traditional bank is prepared to offer.

Non-bank lenders often work alongside traditional banks to provide a complete solution for a borrower.  For example, a traditional bank might provide a senior secured revolving facility and a non-bank lender would provide a senior secured term loan, a mezzanine loan or a second lien facility.

When considering the most effective strategy to finance an acquisition or ongoing operations, non-bank lenders may offer worthwhile solutions – on their own or together with a traditional bank.

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