When considering business financing options, it quickly becomes apparent that a line of credit is one of the most popular and widely used solutions available. Business lines of credit are available in two forms: secured and unsecured. The difference between the two is that a secured line of credit is typically backed by the business’ Accounts Receivable (“A/R”) or another similar current asset. Because Parabilis is a private lender, Parabilis provides flexible secured lines of credit. When compared to alternatives there are several factors to consider.
Unsecured vs. Secured Lines of Credit
With an unsecured line of credit, the facility is not backed by any asset. Personal credit cards are an example of this. Because of the higher risk associated with no collateral, unsecured facilities are typically smaller and are intended to be paid back through the business’ future cash flows. In order to qualify for a larger facility ($500K or larger), the business will need to have significant A/R that revolves consistently to support the outstanding credit balance. This means that a secured line of credit will be one of the only options for a business with monthly needs over $500K.
Institutions that Provide Secured Lines of Credit
Secured lines of credit are offered primarily by two financial institutions: commercial banks and private lenders. The only differences between the two institutions are the cost of the facility and the qualification criteria. In order to qualify for a line of credit with a commercial bank, the requirements are stringent. After qualifying, the bank will also monitor the company’s performance regularly and may even terminate the agreement if performance hurdles (or covenants) are not met. This is in exchange for a low interest rate, typically between 4 – 8% annual interest, in addition to moderate fees. For a business with 5+ years of audited financials, strong year over year growth, solid robust projections, and an experienced executive team, a bank line of credit is typically the best option.
However, the restrictions placed on your business by a bank work against you when major business events drastically change the projections of your business. A large government contract award will cause financing needs to change overnight. Yet a bank will be unlikely to increase your facility since your contract award is not reflected in historical financial performance until the following year.
Flexible Credit Lines with Private Lenders
There is a significant demand in the lending market for larger business lines of credit that younger or less experienced companies can obtain. These facilities come at a higher risk which correlate with their cost. Facilities in this case will cost between 13 – 20% annual interest. In addition, fees for these facilities vary from lender to lender, but an annual commitment fee is standard with almost any commercial line of credit. This is typically between 3 – 5% of the facility maximum and compensates the lender for setting aside the funds that may go partially unused. The application process through a private lender is like a bank. However, lenders are often more flexible and sensitive to a business that may not have the financial strength and/or credit history a bank requires. This flexibility is a major part of what differentiates private lenders when compared to commercial banks.
Parabilis Credit Line
Parabilis is a veteran operated private lender founded in 2013. As a private lender, Parabilis provides flexible lines of credit for government contractors. Parabilis has a unique understanding of the industry through our management team’s 70+ years spent leading both public and private government contracting firms. We have a diverse portfolio of clients, many of whom have previously been with commercial banks and have either outgrown their facilities or have been dropped as clients for tripping a covenant. We also work with numerous businesses that were not as fortunate. Many of them have previously been with factoring companies or even predatory MCA lenders – paying 30% to well over 100% APR and fearing bankruptcy because of it.
In summary, a commercial bank’s business line of credit is the most affordable option for those who can qualify for it. Those who don’t qualify or have unconventional growth needs will need to establish a strong relationship with a dependable private lender or risk being subject to expensive predatory loans. The flexibility that is granted by a private lender is undoubtedly valuable. Many businesses with commercial bank credit lines may do very well to consider the added cost of siding with a private lender in exchange for this flexibility.
If you are a government contractor and would like to learn more about a Parabilis business line of credit, or simply have a general question about business financing, please visit us online at www.parabilis.com or contact us directly at info@parabilis.deepbd.com or (703) 663-7169. We look forward to hearing from you, learning about your situation, and discussion possible solutions.