Capital is the blood of business. Without business funding, efforts are anemic. Growth, particularly for mid-sized companies trying to reach their next level, requires a good flow. Unfortunately, these companies face a challenge because traditional lending has yet to return to pre-Great Recession levels. That is why executives must consider non-bank financing strategies.

According to PwC, there is a "'new normal' of slow growth and more restricted access to finance" that has increased pressure on companies that seek access to cash. The consulting firm says that "working capital levels have deteriorated (increased) year on year by almost 2 percent globally, a trend that is reflected across all industry sectors."

Deterioration is equated to increased working capital not because there is more cash currently available to companies to grow, but because money is increasingly tied up in operations, inventory, and slow customer payments. A working capital study by CFO Magazine and REL Consultancy found that while corporate revenues grew by 5 percent in 2012, EBIT profitability fell and working capital levels were up by 6 percent while free cash flow fell 14 percent.

Businesses require capital to operate, but banks are often not where companies can find it.

Whether working capital level changes were 2 percent, 6 percent, or somewhere in between, the trend is clear: There is less cash available to companies to support strategy and growth. That has sent corporations borrowing to bolster cash on hand. CFO and REL found that corporate debt rose by 10 percent and that reinvestment has been high, with capital investment up 50 percent over the last three years.

If borrowing is so robust, why should mid-market companies consider non-bank business funding? Traditional financing is not focused on them. Banks like the security of the biggest corporations, which are safe because of their assets, revenue, and ability to reach capital markets for equity or debt financing if necessary.

Not that mid-sized companies hold no interest for large commercial banks. Traditional lenders, however, have shown a growing taste for sub-prime commercial lending and the accompanying high interest rates available, as the New York Times reported.

Overseas operations do not offer an end run around the system. In the Eurozone, bank corporate lending has fallen month over month since July 2012, according to the Financial Times.

These are the conditions pushing many companies to use non-bank business funding. According to an analysis of 1,400 non-financial corporations between 2005 and 2010, sponsored by the National Center for the Middle Market, more than a third made significant use of non-bank financing. To use non-bank financing, keep the following points in mind:

  • Know the alternatives. There are many potential types of non-bank financing, whether commercial finance companies, insurance companies, state and local government financing, and even the new trend in so-called crowdsourcing from either lenders or small investors.
  • Compare costs. Each type of business funding source will have its own structure of charges and requirements. Some might require asset-secured lending. Many non-bank sources will themselves borrow money and mark up the cost, resulting in more expensive loans. It may be, however, that these costs are on par with the sort of bank rates that a middle market company would qualify for.
  • Consider more than interest rates. Financing might involve factoring receivables or selling and leasing back capital equipment, depending on the industry. But if the company misses a payment, would it lose access to inventory or equipment necessary to operate? Also, some non-bank lenders focus on particular transactions, not an ongoing relationship that would provide a mid-market company with ongoing liquidity.

There are good reasons these days for a middle market company to consider business funding alternatives to banks. Luckily, there is a robust selection of potential choices to provide the cash needed to let companies grow and thrive.

Erik Sherman is an NCMM contributor and a regular business and technology columnist for and His work has appeared in such publications as The Wall Street Journal, New York Times Magazine, Newsweek, Technology Review, and Fortune. He is a public speaker and moderator at business and industry events and the author or co-author of ten books. Follow him on Twitter. Circle him on Google+