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The Keys to Bank Financing for Start-Up and Early-Stage Businesses Debt as a Supplement to Venture Capital Funding

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. Senior Debt. Sub Debt/Mezzanine Debt.

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The Keys to Bank Financing for Start-Up and Early-Stage Businesses Debt as a Supplement to Venture Capital Funding

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  1. The Keys to Bank Financing for Start-Up and Early-Stage BusinessesDebt 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

  2. Senior Debt Sub Debt/Mezzanine Debt Private Equity Cost of Capital / Returns Financial Flexibility / Risk Lower Higher 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 Hedge funds, mezzanine funds, private equity, venture capital Second lien loans Rate only sub debt Mezz debt with warrants Term Loan A Term Loan B Preferred stock Common equity Tranche B Revolver 13 to 16%+ 14 to 19%+ 20 to 30%+ 25 to 30%+

  3. Conventional Bank Financing-Term Loan Use of loan proceeds Equipment Purchases Capital Improvements Business Expansion Acquisitions Equity Payouts Product Structure 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

  4. Conventional Bank Financing-Term Loan Term and Amount Maximums 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.

  5. Conventional Bank Financing-Line of Credit Use of loan proceeds Short term financing, typically used to fund working capital needs Product Structure 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

  6. 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.

  7. Conventional Bank Financing-Cash Secured Loans 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.

  8. What is required for the typical application? 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

  9. 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

  10. 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.

  11. SBA Financing Options SBA Loans can be used for: Commercial Real Estate • Financing up to 90% • Property improvements, working capital, equipment, closing costs • Fully amortized SBA 7(a) and 504 loans (no balloons) • Terms up to 25 years Business Acquisition • Loans up to $5 million • New-buyer financing up to 80% • Partnership buyout financing up to 100% • Working Capital

  12. SBA Financing Options Franchise Financing Startups, expansions, existing units, acquisitions Financing up to 85% of total project cost Working capital Flexible requirements on collateral Non-franchise startups Cash injection equity required is only 30% Restaurants require minimum 50% hard collateral coverage Expansion Loans Use for working capital, leasehold improvements, equipment No equity injection required In business for at least one year

  13. SBA Financing Options Refinances • No equity injection required • Must save at least 20% on current debt service

  14. 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: • 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.)

  15. What is required for the typical application? 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

  16. 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

  17. Preferred Lender Program Status Preferred Lender Program status is a privilege extended to a small number of banks in the United States. 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. Banks that have Preferred Lender Program status can usually offer faster application processing along with experienced lenders and relationship managers.

  18. SBA Small Business Financing Programs The SBAExpress Program The SBA 7(a) Loan Guaranty Program The SBA 504 Program The SBA Export Express Program

  19. The SBAExpress Program The SBAExpress Program is targeted for smaller credit requests, allowing an expedited and streamlined application process. Use of loan proceeds Fixed asset purchase Debt consolidation Use of line of credit proceeds Current working capital Revolving debt Capitalize on supplier discounts Cash flow management

  20. The SBAExpress Program Term and Amount Maximums Lines of Credit for up to 7 years with maturity extensions permitted Loan term usually based on collateral and a payment schedule that fits the borrower’s cash flow $350,000 is the maximum credit amount Other requirement All owners with 20% or more ownership are required to personally guaranty the loan debt. SBAExpress Features Loans and lines under $25,000 may not require collateral Minimizes paperwork and shortens decision time

  21. The SBA 7(a) Loan Guaranty Program Use of loan proceeds: Real estate, machinery and equipment purchases Construction: expansion improvements Permanent working capital support of Accounts Receivables and inventory Business purchase Refinance business debt Term and Amount Maximums Lines of Credit for up to 7 years with maturity extensions permitted Loan term usually based on collateral and a payment schedule that fits the borrower’s cash flow $350,000 is the maximum credit amount

  22. The SBA 7(a) Loan Guaranty Program Other Requirement All owners with 20% or more ownership are required to personally guaranty the loan debt. Other Borrower Benefits of a 7(a) Loan Another option to businesses that cannot get conventional lending on reasonable terms Provides longer terms than conventional lending, allowing better cash flow management Lower collateral requirements than for conventional loans

  23. 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 The purchase of existing buildings The purchase of land and land improvements, including grading, street improvements, utilities, parking lots and landscaping The construction of new facilities or modernizing, renovating or converting existing facilities Acquisition of long-term machinery and equipment Term and Amount Maximums $5,000,000 $5,500,000 for small manufacturers or specific types of energy projects

  24. The SBA 504 Loan Program Term and Amount Maximums 10 years for machinery and equipment 20 years for real estate 504 Loan Structure The borrower contributes 10% - 20% of the project costs The bank or participating lender lends 50% of the project costs A CDC (Certified Development Company) lends 30% - 40% of the project costs 504 Loan Example $1,000,000 total project cost $500,000 1st lien with bank (loan obtained from private lender covering up to 50% of the project cost) $400,000 2nd lien with 504 loan (loan obtained through a CDC, funded through an SBA-guaranteed debenture, covering up to 40% of the project cost) $100,000 borrower contribution (10% of the project cost)

  25. 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.

  26. The SBA 504 Loan Program Community Development Goals Improving, diversifying or stabilizing the local economy Stimulating other business development Bringing new income into the community Assisting manufacturing firms Assisting businesses in labor surplus areas Public Policy Goals Revitalizing a business district of a community with a written revitalization or redevelopment plan Expanding exports Expanding small businesses owned or controlled by women Expanding small businesses owned or controlled by veterans Expanding minority business development

  27. The SBA 504 Loan Program Public Policy Goals Aiding rural development Increasing productivity and competitiveness (retooling, robotics, modernization, competition with imports) Modernizing or upgrading facilities to meet health, safety, and environmental requirements Assisting businesses in or moving to areas affected by Federal budget reductions such as base closings Reduction of rates of unemployment in Labor Surplus Areas Reduction of energy consumption of at least 10% Increased use of sustainable design or low impact design to produce buildings that reduce the use of non-renewable resources and minimize environmental impact Micro-power or renewable fuels producers including biodiesel and ethanol producers

  28. The SBA 504 Loan Program 504 Loan Benefits 90% financing Longer loan amortizations, no balloon payments Fixed-rate interest rates Improved cash flow Fees Fees typically range about 3% of the SBA debenture and can be financed CDC may charge a packaging fee CDC closing costs are permitted Usual bank origination fees or points are permitted

  29. The SBA Export Express Program Use of loan proceeds Financing export-development activities such as participation in a foreign trade show or translation of product literature Transaction-specific financing for overseas orders Revolving lines of credit for export purposes Acquiring, constructing, renovating, improving or expanding facilities in the United States to produce goods or services for export Financing standby letters of credit used as bid or performance bonds on foreign contracts Term and amount maximums 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

  30. The SBA Export Express Program Additional Requirement All owners with 20% or more ownership are required to personally guaranty the loan debt.

  31. Personal Debt Financing Options Home Equity Loans and Lines of Credit 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.

  32. Questions?

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