As business owners eagerly seek to fuel their companies’ growth, many seek financing from banks, which have historically been seen as stable and traditional lenders. In a bank lending relationship, terms, conditions, and covenants can be managed and financial statement disclosures are straight-forward.  However, over the last few years, owners and Chief Financial Officers have increasingly sought alternative financing sources to broaden their options.

Smaller companies, generally defined as businesses that generate less than $100,000 in sales and have fewer than 500 employees, can look to U.S. Small Business Administration (SBA) loans, which are funded by third-party lenders but are unsecured loans. We covered some of the SBA’s key loan programs in the July issue of Looking Forward. In case you missed it, you can read the article here.

In today’s market, smaller businesses may also look to angel investors. These could be friends or family who are willing to help. They also could include affluent businesspeople who are astute at assessing an opportunity or willing to risk some capital. The terms of an angel investor’s investment may require a closer look given the balance sheet ramifications.

For companies with owner-occupied real estate who want to finance or refinance the real estate and where the loan meets adequate criteria, another option exists. Brokers are placing loans directly into an insurance company’s real estate portfolio with fixed interest rates for terms that are three to four times as long as a traditional bank commercial mortgage. This also can be an alternative to a floating rate loan that causes the borrower to secure a swap to receive a fixed interest rate. Note that interest rate swaps require financial statement disclosure detailed in Accounting Standards Codification (ASC) 820, Fair Value Measurements and Disclosures.

A possible route for companies that have begun to mature but continue on a growth track is to look to mezzanine financing provided through private investment groups or merchant banks. However, the terms of this form of financing bear a careful watch, as they may include provisions for mandatory repayment of the loan or the potential for conversion to equity if the loan and any enhancements are not repaid in a timely manner.

The operative literature to capture the proper financial statement recording is included in (ASC) 480-10-05, Distinguishing Liabilities from Equity, where the guidance discusses presentation of financial instruments that contain characteristics of both liabilities and equity.

Options for financing outside of the traditional bank relationship abound, but choose your course of action with the financial statement reporting impact in mind.

Timothy C. Hilbert can be reached at Email or 215.441.4600.