Debt Financing

ETP 3700
 Life Cycle of a Business Venture

Growth
Pre -launch

Tr ansition
Start -up

Exit/Succession
Bootstrapping

Self, Friends and Family

Equity Financing

Debt Financing
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
SBAs 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
Theres a bank on every corner.
Get to know your bankers 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. Entrepreneurs 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
Terms
Restrictions
Performance requirements
3. Personal guarantees
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