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This post is part of our Field Guide to DTC eCommerce Capital. Click the links below to read more chapters from the guide.
Bank Term Loans (Non-Sponsored)
Banks act more conservatively than other financial actors and institutions because of regulation. Dodd-Frank dramatically increased the regulatory requirements on banks, and the net result was that underwriting became far more conservative. An unintended consequence of this has been the rise of private credit. As banks left whole markets, funds stepped in to fill the void. Today, banks have very specific rules about the types of loans they can provide, the reserves they have to keep on-hand for various loans, and the type of reporting they must conduct.
Everyone seems to know someone who knows someone who got a loan from a bank at some incredible interest rate. Before you go hunting for your 3% interest rate, remember these loans typically happen in one of two ways:
- A borrower has a ton of underwritable assets (Hey, we own the warehouse!) and/or a good history of profitability.
- A borrower got a loan from Silicon Valley Bank or one of its competitors.
With option number one, you’re looking at what we refer to as a “Non-Sponsored Bank Term Loan.”
- Low rates and longer terms.
- It’s easier to mix and match among third parties, as compared to the process of trying to mix and match with Sponsor-Focused Bank Term Loans.
- Often there are bullets, balloons, and other structures available for flexible payment options.
- You have to be profitable to get this type of loan and/or have real, easy-to-value assets. The longer and steadier the history of your business and the easier it is to value and liquidate your assets, the better.
- This type of loan usually includes lockboxes and cash sweeps (if you are on the smaller side).
- Expect lots of covenants.
- There are lots of reporting requirements required with bank term loans.
- Profitable, maturing companies with a CFO and built out finance and accounting teams.
Everything, given the constraints above.