Transcript Debt Financing - Belmont University

Debt Financing
ETP 3700
Bootstrapping
Self, Friends and Family
Equity Financing
Debt Financing
Exit/Succession
Transition
Grow th
Start-up
Pre-launch
Life Cycle of a Business Venture
Short-term Debt
Expected to be paid within one year
Most often used to finance short-term
expenditures such as inventory, supplies,
payroll, etc.
Short-term Debt
Trade debt
Not a given - need to establish a relationship
Communication critical if cash flow is tight
Build a relationship with long-term vendors
Short-term Debt
Banks
Some banks specialize in working with
entrepreneurs
Smaller local community banks often more
willing to work with local small businesses
Short-term Debt
Asset-based lenders
Lend money against assets
Cheaper than factors, but more expensive than
banks
Short-term Debt
Factors
Advance money on accounts receivable through
“purchase” of A/R
Good for businesses that are not “bankable” at current
time
Expensive money: 4-7% per month (annual 50-85%
equivalent financing rate)
Use for short term only whenever possible
Plan for transition to bank or other lower cost financing
Long-term Debt
Beyond one year
Most often used to fund fixed asset purchases
Long-term Debt
Banks: term loans
Leasing companies
Real estate lenders
Overlooked Forms of Debt
Property leases
Long-term employment agreements
SBA or other government backed lending
programs
SBA Loans
Funds provided by independent lenders
Loan guaranty from SBA transfers risk of
borrower non-payment, up to the amount of the
guaranty, from the lender to SBA
SBA loans are commercial bank loans
guaranteed by the SBA
http://www.sba.gov/financing/index.html
Eligibility for SBA Loans
WHOLESALE - not more than 100 employees
RETAIL or SERVICE - Average (3 year) annual sales or
receipts of not more than $6.0 million to $29.0 million,
depending on business type
MANUFACTURING - Generally not more than
500 employees, but in some cases up to
1,500 employees
CONSTRUCTION - Average (3 year) annual sales or
receipts of not more than $12.0 million to $28.5 million,
depending on the specific business type
Basic SBA Loan Programs
Basic 7(a) Loan Guaranty
SBA’s primary business loan program
Helps qualified small businesses obtain financing
when they might not be eligible for business loans
through normal lending channels.
Basic SBA Loan Programs
Basic 7(a) Loan Guaranty
Loan proceeds can be used for:
working capital
machinery and equipment
furniture and fixtures
land and building (including purchase, renovation and
new construction)
leasehold improvements
Basic SBA Loan Programs
Basic 7(a) Loan Guaranty
Loan maturity is up to 10 years for working capital
and generally up to 25 years for fixed assets.
Start-up and existing small businesses
DELIVERED THROUGH: Commercial lending
institutions
Basic SBA Loan Programs
504 Loan Program
Provides long-term, fixed-rate financing to small businesses
to acquire real estate or machinery or equipment for
expansion or modernization.
Typically a 504 project includes a loan secured from
a private-sector lender with a senior lien
a loan secured from a Certified Development Company (funded
by a 100 percent SBA-guaranteed debenture) with a junior lien
covering up to 40 percent of the total cost
a contribution of at least 10 percent equity from the borrower.
Maximum SBA debenture generally is $1 million
Working with Bankers
Initial contact
“There’s a bank on every corner.”
Get to know your banker’s boss
Make sure they get to know you and your
business before you give them financial
statements or plans
Working with Bankers
Criteria for Lending by Bankers
1. Ability of the business to generate enough
cash flow to easily make interest and principle
payments
2. Entrepreneur’s ability to personally pay back
the loan if the business fails
3. Assets to serve as collateral
Working with Bankers
Key Loan Documents
1. Loan proposal
2. Loan document
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3.
Terms
Restrictions
Performance requirements
Personal guarantees
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Major shareholders
Joint and several liability
Eventually becomes negotiable
Working with Bankers
On-going Communication
Bankers hate surprises
Give them a little more than they want, a little
more often than they want it
Verbal and written
Downside of Debt
Increased risk during economic slowdown
Impact on proceeds from business sale
Restrictive covenants
Personal guarantees