What is Creative Financing

Companies in search of capital are often looking for 'creative financing.' What does that really mean and how do you get it?

Creative financing is really just financing that is tailored to your business and your specific growth or funding needs. Practically every business has some unique wrinkle to their financing. We had a client that had taken a seller's note to buyout a portion of their business but the terms of the seller note didn't allow the company to have any bank debt with a maturity longer than one year. As a result, the company worked around this issue every year by creating new credit agreements for working capital. When we went to finance the business for future growth the company was given the option of totally paying off the seller note (to eliminate the clause) or continue automatically renewing their business loans before maturity. The company chose the later. There is no wrong or right answer, only preferences.

Shopping for financial capital is much like buying any other physical product. The provider of that product (the financial institution) likes to put all the clients in the same box. That is just human nature.

The way to get 'creative financing' though is to 1) know exactly what you need, 2) consider numerous sources of financing and 3) ask for it or demand it.

You find out what you need by creating thorough financial projections that are easily understood not wildly optimistic. You then seek financing from a wide variety of sources that go beyond the bank to include different types of specialty lenders, commercial finance companies and investment funds (i.pension funds, hedge funds etc). Most companies only talk to local banks. While these banks are often the least expensive financing option, they are typically the most risk averse and thus the least likely to do 'creative' or "outside the box' financing structures. Once you have cast a wide net, aggressively seek your ideal financing terms. Many financial institutions will say 'no' at first and then when they learn it is a competitive situation, they will give 'creative' terms. Many times they will come up with the creativity as a way to separate their product offering from another.

By clearly articulating your financial need, going to a wide audience and creating a competitive shopping environment, you can get customized financing covering the key issues of your business. Creative terms, we have seen include eliminating personal guarantees, securing over advances (i.e. the ability to borrow beyond your collateral limit) or changing or removing certain financial covenants during specific phases of your growth plan in order to not 'trip' a covenant or even worse create default. Negotiating these specific covenants on the front end of your agreement significantly changes (for the better) your future relationship with your banking partner(s) and greatly reduces management's stress.