The Keys to Bank Financing for Start-Up and Early-Stage Businesses
Debt as a Supplement to Venture Capital Funding
Carl Luger, SVP, Senior Banker
Timothy Brown, VP, Senior Business Banking Relationship
Manager
Jacqueline Lavoie, VP, Branch Manager
1
Capital Alternatives
Each of the financing alternatives follows a fairly linear trend of flexibility vs. cost of capital
(from Issuer’s perspective) or risk vs. reward (from Investor’s perspective)
Traditional banks and
commercial finance companies
Traditional banks, commercial finance
companies, private equity funds
Term
Loan A
Second
lien
loans
Revolver
Term
Loan B
Tranche B
Rate
only sub
debt
Mezz debt
with
warrants
Preferred
stock
Common
equity
13 to 16%+
14 to 19%+
20 to 30%+
25 to 30%+
Senior Debt
Lower
Hedge funds, mezzanine funds,
private equity, venture capital
Sub Debt/Mezzanine Debt
Cost of Capital / Returns
Financial Flexibility / Risk
Private Equity
Higher
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Conventional Bank Financing-Term Loan
Use of loan proceeds
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Equipment Purchases
Capital Improvements
Business Expansion
Acquisitions
Equity Payouts
Product Structure
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Term loans enable the client to match the term of the loan against the useful life of the collateral
securing the loan
Loans typically have level payments
Fixed and variable rates vary by size, relationship and credit worthiness
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Conventional Bank Financing-Term Loan
Term and Amount Maximums
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Typically up to 7 years
Most financial institutions set a minimum and a maximum loan amount, typically between
$10,000 and $3,000,000
Other Requirement
•
All owners with 20% or more ownership are required to personally guaranty the loan debt.
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Conventional Bank Financing-Line of Credit
Use of loan proceeds
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Short term financing, typically used to fund working capital needs
Product Structure
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Lines of credit allow a business owner to borrow, repay, and re-borrow funds when necessary
without having to negotiate a new loan each time
Instant accessibility to funds when needed
Variable rates: Vary by commitment amount and credit qualifications
Larger lines typically have maturity dates and must be renewed
Repayment amounts vary from interest only to a percentage of the prior month’s outstanding
principal balance along with accrued interest
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Conventional Bank Financing-Line of Credit
Term and Amount Maximums
•
Most financial institutions set a minimum and a maximum line amount, typically between
$10,000 and $3,000,000
Other Requirement
•
All owners with 20% or more ownership are required to personally guaranty the debt.
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Conventional Bank Financing-Cash Secured Loans
Loans secured by cash or marketable securities
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Loans can be secured by savings accounts, certificates of deposit, or non-qualified (non-IRA)
brokerage accounts. Most banks will lend up to 100% of cash-secured loans and up to 85%
of the value of marketable securities depending on the collateral. Loan-to-value ratios will
typically be lower for equities versus bonds due to the expected fluctuation in value.
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What is required for the typical application?
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Business tax returns from prior three years, if available
Business financial statements from prior three years, if available
Current business financial statement (not more than 60 days old)
Aging of accounts receivable and accounts payable as of the same date or later as the current
financial statement
Articles of Incorporation and Bylaws
Personal tax returns from prior three years
Current personal financial statements for all principals
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What will a bank look for in an applicant?
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Good character
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Management capability
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Sufficient cash flow of the business to service debt
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Lien on asset purchased and/or other business assets
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Eligibility criteria including for-profit businesses and within the size guidelines based on
industry type
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The SBA-Government Assistance for Small Business
The U.S. Small Business Administration (SBA) is a government agency dedicated to helping small
businesses through loan guaranty programs, counseling and training assistance, and government
procurement.
Access to Capital and Debt Financing
The SBA provides micro-lending services through community development organizations, loan
guaranty programs, and venture capital though the SBA Small Business Investment Program.
Entrepreneurial Development (Education, Information, Technical Assistance & Training)
The SBA provides free personal and internet counseling to entrepreneurs and established small
businesses.
Government Contracting (Federal Procurement)
The SBA’s Office of Government Contracting sets goals with other federal departments and
agencies to reach the statutory goal of 23% in prime contract dollars to small businesses.
Advocacy (Voice for Small Business)
The SBA reviews Congressional legislation and testifies on behalf of small business. The SBA
also assesses the impact of regulatory burden on small businesses and conducts research on the
small business environment in the United States.
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SBA Financing Options
SBA Loans can be used for:
Commercial Real Estate
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Financing up to 90%
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Property improvements, working capital, equipment, closing costs
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Fully amortized SBA 7(a) and 504 loans (no balloons)
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Terms up to 25 years
Business Acquisition
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Loans up to $5 million
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New-buyer financing up to 80%
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Partnership buyout financing up to 100%
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Working Capital
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SBA Financing Options
Franchise Financing
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Startups, expansions, existing units, acquisitions
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Financing up to 85% of total project cost
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Working capital
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Flexible requirements on collateral
Non-franchise startups
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Cash injection equity required is only 30%
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Restaurants require minimum 50% hard collateral coverage
Expansion Loans
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Use for working capital, leasehold improvements, equipment
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No equity injection required
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In business for at least one year
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SBA Financing Options
Refinances
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No equity injection required
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Must save at least 20% on current debt service
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Why are SBA loans so good for small businesses?
The SBA guarantees 30% - 40% of all long-term loans to businesses nationwide. SBA loans are
designed to meet the specific needs of small business owners. The terms are flexible and
reasonable. The SBA lending staff is helpful and knowledgeable. Here are some of the ways SBA
loans work for small business:
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Longer terms – can be as long as seven years for working capital, 15 years for equipment,
and up to 25 years for real estate
Interest Rates – variable-rate loans usually 1.5% - 2.75% over the prime rate (as stated in the
Wall Street Journal) for loan amounts over $50,000
Flexible Repayment Options – monthly installments of principal and interest; no balloon
payments; may delay first payment up to three months with prior arrangement; three year
prepayment penalties on loans longer than 15 years
Minimal Costs – loan packaging fee of $250 - $2,000, fully refundable if SBA declines your
application; SBA guaranty fee (based on the guaranteed portion of the SBA loan); no points
(Due to the 2010 Small Business Jobs Act, some fees associated with the SBA loans are
waived.)
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What is required for the typical application?
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•
•
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Business tax returns from prior three years, if available
Business financial statements from prior three years, if available
Current business financial statement (not more than 60 days old)
Aging of accounts receivable and accounts payable as of the same date or later as the current
financial statement
Articles of Incorporation and Bylaws
Personal tax returns from prior three years
Current personal financial statements for all principals
15
What will a bank look for in an applicant?
•
Good character
•
Management capability
•
Sufficient cash flow of the business to service debt
•
Lien on asset purchased and/or other business assets
•
Eligibility criteria including for-profit businesses and within the size guidelines based on
industry type
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Preferred Lender Program Status
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Preferred Lender Program status is a privilege extended to a small number of banks in the
United States.
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Banks that have Preferred Lender Program status do their own underwriting. The SBA does
not have to review or approve loans unless there are unusual circumstances.
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Banks that have Preferred Lender Program status can usually offer faster application
processing along with experienced lenders and relationship managers.
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SBA Small Business Financing Programs
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The SBAExpress Program
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The SBA 7(a) Loan Guaranty Program
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The SBA 504 Program
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The SBA Export Express Program
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The SBAExpress Program
The SBAExpress Program is targeted for smaller credit requests, allowing an expedited and
streamlined application process.
Use of loan proceeds
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Fixed asset purchase
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Debt consolidation
Use of line of credit proceeds
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Current working capital
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Revolving debt
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Capitalize on supplier discounts
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Cash flow management
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The SBAExpress Program
Term and Amount Maximums
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Lines of Credit for up to 7 years with maturity extensions permitted
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Loan term usually based on collateral and a payment schedule that fits the borrower’s cash
flow
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$350,000 is the maximum credit amount
Other requirement
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All owners with 20% or more ownership are required to personally guaranty the loan debt.
SBAExpress Features
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Loans and lines under $25,000 may not require collateral
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Minimizes paperwork and shortens decision time
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The SBA 7(a) Loan Guaranty Program
Use of loan proceeds:
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Real estate, machinery and equipment purchases
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Construction: expansion improvements
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Permanent working capital support of Accounts Receivables and inventory
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Business purchase
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Refinance business debt
Term and Amount Maximums
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Lines of Credit for up to 7 years with maturity extensions permitted
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Loan term usually based on collateral and a payment schedule that fits the borrower’s cash
flow
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$350,000 is the maximum credit amount
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The SBA 7(a) Loan Guaranty Program
Other Requirement
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All owners with 20% or more ownership are required to personally guaranty the loan debt.
Other Borrower Benefits of a 7(a) Loan
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Another option to businesses that cannot get conventional lending on reasonable terms
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Provides longer terms than conventional lending, allowing better cash flow management
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Lower collateral requirements than for conventional loans
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The SBA 504 Loan Program
The SBA 504 Program is an economic development loan program that gives businesses another
option for financing while promoting business growth and job creation. The SBA 504 Loan
Program provides approved small businesses with long-term fixed financing used to acquire
fixed assets for expansion or modernization.
Use of loan proceeds
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The purchase of existing buildings
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The purchase of land and land improvements, including grading, street improvements,
utilities, parking lots and landscaping
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The construction of new facilities or modernizing, renovating or converting existing facilities
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Acquisition of long-term machinery and equipment
Term and Amount Maximums
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$5,000,000
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$5,500,000 for small manufacturers or specific types of energy projects
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The SBA 504 Loan Program
Term and Amount Maximums
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10 years for machinery and equipment
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20 years for real estate
504 Loan Structure
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The borrower contributes 10% - 20% of the project costs
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The bank or participating lender lends 50% of the project costs
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A CDC (Certified Development Company) lends 30% - 40% of the project costs
504 Loan Example
$1,000,000 total project cost
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$500,000 1st lien with bank (loan obtained from private lender covering up to 50% of the
project cost)
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$400,000 2nd lien with 504 loan (loan obtained through a CDC, funded through an SBAguaranteed debenture, covering up to 40% of the project cost)
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$100,000 borrower contribution (10% of the project cost)
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The SBA 504 Loan Program
About CDCs
A Certified Development Company (CDC) is a non-profit corporation that promotes economic
development within its community. CDCs are certified and regulated by the SBA and work with
the SBA and participating lenders (typically banks) to provide financing to small businesses.
Local CDCs include the Rochester Economic Development Corporation and the Empire State
Business Development Corporation.
Important 504 Loan Specifics
Generally a business must create or retain one job for every $65,000 guaranteed by the SBA.
Small manufacturers must create or retain a ratio of one job for every $100,000. As an alternative
to job creation or retention, a business may qualify if it meets a community development or public
policy goal as long as the CDC maintains its portfolio job average requirements.
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The SBA 504 Loan Program
Community Development Goals
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Improving, diversifying or stabilizing the local economy
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Stimulating other business development
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Bringing new income into the community
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Assisting manufacturing firms
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Assisting businesses in labor surplus areas
Public Policy Goals
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Revitalizing a business district of a community with a written revitalization or redevelopment
plan
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Expanding exports
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Expanding small businesses owned or controlled by women
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Expanding small businesses owned or controlled by veterans
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Expanding minority business development
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The SBA 504 Loan Program
Public Policy Goals
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Aiding rural development
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Increasing productivity and competitiveness (retooling, robotics, modernization, competition
with imports)
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Modernizing or upgrading facilities to meet health, safety, and environmental requirements
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Assisting businesses in or moving to areas affected by Federal budget reductions such as
base closings
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Reduction of rates of unemployment in Labor Surplus Areas
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Reduction of energy consumption of at least 10%
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Increased use of sustainable design or low impact design to produce buildings that reduce the
use of non-renewable resources and minimize environmental impact
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Micro-power or renewable fuels producers including biodiesel and ethanol producers
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The SBA 504 Loan Program
504 Loan Benefits
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90% financing
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Longer loan amortizations, no balloon payments
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Fixed-rate interest rates
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Improved cash flow
Fees
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Fees typically range about 3% of the SBA debenture and can be financed
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CDC may charge a packaging fee
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CDC closing costs are permitted
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Usual bank origination fees or points are permitted
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The SBA Export Express Program
Use of loan proceeds
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Financing export-development activities such as participation in a foreign trade show or
translation of product literature
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Transaction-specific financing for overseas orders
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Revolving lines of credit for export purposes
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Acquiring, constructing, renovating, improving or expanding facilities in the United States to
produce goods or services for export
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Financing standby letters of credit used as bid or performance bonds on foreign contracts
Term and amount maximums
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Lines of Credit up to 7 years with maturity extensions permitted
Loan term usually based on collateral and a payment that fits the borrower’s cash flow
$500,000 is the maximum credit extended under the SBA Export Express Program
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The SBA Export Express Program
Additional Requirement
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All owners with 20% or more ownership are required to personally guaranty the loan debt.
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Personal Debt Financing Options
Home Equity Loans and Lines of Credit
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The difference between a home’s market value and the outstanding balance of all liens can
serve as collateral for a fixed-rate home equity loan or a variable-rate home equity line of
credit.
Home equity loans and lines of credit typically require good to excellent credit history and
reasonable combined loan-to-value ratios.
Loans secured by cash or marketable securities
•
Loans can be secured by savings accounts, certificates of deposit, or non-qualified (non-IRA)
brokerage accounts. Most banks will lend up to 100% of cash-secured loans and up to 85%
of the value of marketable securities depending on the collateral. Loan-to-value ratios will
typically be lower for equities versus bonds due to the expected fluctuation in value.
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Questions?
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