The Quest for Capital

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by Michael Iverson

Once upon a (fairly recent) time, a beverage start-up wanted to introduce a brand new product into a local market. The founders funded the company themselves, with help from friends and family. They developed their proof of concept, the packaging, and ran focus groups. They worked hard.

At the same time, they were showing a well-crafted business plan to potential investors. Eventually aligning themselves with a private equity group with similar companies in their portfolio, they were also able to gain management expertise as well. It was a match made in heaven, and all parties were successful.

“The founders understood the process of securing capital financing,” says Mike Iverson, Numbers Coach. “They did it by the book, and it worked out for them.”

The path to obtaining capital financing for any start-up, or even an established business, is not always so clear-cut. And it doesn’t help that creditors have tightened their belts in the past few years. But money is out there and it pays to know exactly what type of capital is best suited for your business.

Here are some capital investment options that you may consider for your business:

  1. Friends and Family – This money is generally in smaller amounts, when a company needs thousands of dollars, but not millions. Terms are favorable because the investors know you and are trying to help. Still, they expect returns slightly north of the stock market.
  2. Angel Investors – Angels will also invest amounts less than $1 million in very early start-ups, or companies unable to get bank financing. “If a CEO can align themselves with an angel with experience in their industry, he or she can take the company to the next level,” says Iverson. Angels, though, usually want a little more involvement in the business, and it just might be more oversight than an entrepreneur is willing to live with. Also, there could be financing terms that specify that the angel gets control of your company if certain milestones are not met. Angel investors are not as prevalent as they were in past years, but they can still be found. “Ask around in your network, ask your banker, and look on the Internet,” says Iverson. Some sites to get you started include:
    http://nationalnetworkofangelinvestors.com
    http://www.angelcapitalassociation.org/
    http://www.angelcapitaleducation.org
  3. Private Equity Groups – These investors use a combination of debt and equity to help a company grow quickly and offer the founder liquidity or an exit plan, if desired. This option is for companies that need $5-7 million. Some groups offer to finance the debt themselves, at a 9 to 13 percent interest rate; others have a relationship with a bank that will provide the loan. These groups want a 25 to 35 percent return on their investment, so they attach warrants, which allow them to convert the debt to equity at some point. Private equity groups are looking for businesses that have cash flow, some positive earnings and have been around for several years. The fast pace and pressure is not for the faint of heart–investors want their returns quickly.
  4. Bank Loans – Banks are not in the business of helping companies grow rapidly. However, if you have seasonal issues or specific equipment purchases that you want to make, banks are a very good option, and pretty much the cheapest way to get money. These loans are for viable, established companies with some earnings.
  5. Small Business Loans – Small Business Investment Companies (SBICs), which are licensed and regulated by the Small Business Administration, are privately owned and managed investment firms that provide venture capital and start-up financing to small businesses, according to the SBA. (www.sba.gov).  “SBA loans provide favorable conditions,” says Amy Carson, senior business development manager with UPS Capital Business Credit, “such as longer terms – up to 25 years for real estate – and equity as low as 10 percent.”
  6. Mezzanine Financing – A combination of debt and equity financing. Basically, investors give money as debt with the option to transfer it to equity in the company if certain milestones aren’t met. One advantage of mezzanine financing is that it’s usually considered equity on the books (rather than debt), so it may be easier for the company to obtain more debt from a bank or other lender.
  7. Venture Capital – For young companies that need $4-5 million and want to grow rapidly, venture capital is a good choice.  VCs usually invest in a proven management team, even if the company itself is less than a year old. VCs want a board seat, they take equity and they will take control of the company if certain milestones aren’t met. In the past, VCs wouldn’t let a founder liquidate any of his money, but in recent years they’ve loosened that rule. These investors are looking for a much bigger return – typically 50-60 percent – because the companies are younger and the risks are higher.
  8. Factoring – A strict factor will lend money based on the amount of accounts receivable coming in on a monthly basis and can help with cash flow. For example, if you have $100 of receivables, they may advance you $80 of that now. When the customer sends the payment, they keep two percent as a payment and pay you the rest. While this is a simple 24% interest rate and similar to the returns expected by private equity investors, the difference is that you are not giving up any ownership in your business.“Banks like tangible assets. We finance the intangibles, the receivables,” says Steven Gold, president of Allied Financial. “Companies can use the money to make payroll, pay vendors, all in lieu of bringing in equity partners, which is the most expensive money.”

The Bottom Line?

The money is out there – but whether or not you’re successful in securing it for your business depends on the path you follow. Says Iverson, “The way a business is capitalized will ultimately predict how fast it will grow.”

Numbers Coach Tip: If you are considering pursuing a bank loan, be sure to check out our Banking Tool Kit to get your financial records ready for review.

Back to Banking Basics

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by Anne Moore Odell

Is that a ray of sunlight peeking through the economic clouds? Yes, banks are still lending to small businesses. True, loans aren’t as easy to secure as they were three years ago. But businesses that are willing to work to show their ability to repay lines of credit and loans are still getting financial support.

“Things are starting to loosen up,” says Mike Iverson, CEO of Trillium Financial. “Bankers are opening their doors again.”

Banks are getting back to the basics of lending. As a business owner, this means you need to re-familiarize yourself with these basics and make sure your business is ready to request that loan.

Sailing through the Five “Cs”

The “Five Cs” of business credit are more than a banking concept learned in business school. As banks pull back their lending reins, they are investing more time to learn about their clients’ businesses before lending.

“Banks are really looking at lending from a basic banking process,” explains Iverson. “They’re not going to take the same risks they were before. Banks are monitoring loans downstream. Before, some loans were unmonitored, but as businesses want to renew their loans, many banks want to see more information on a more regular basis. You’ll be hard pressed to see unmonitored loans of a million dollars anymore. Even much smaller loans are being monitored quarterly.”

With your business loan application in hand, the bank’s lending committee will examine how well your business can repay its loans according to five critical factors:

  1. Character. The lender is looking at you both as a business owner and a manager. Your character includes your personal financial history, reputation, and, importantly, your relationship with your lender.
  2. Collateral. Both business and personal collateral. More banks are asking for business owners and partners to sign personal guarantees so that loans are secured at an acceptable margin.
  3. Capacity. More than ever, banks require you to demonstrate your capacity to repay the loan. Although the recession has changed and often slowed down cash flow, lending committees must be convinced that your business has the liquidity and cash to repay on time.
  4. Capital. By supplying current, in-depth and correct financial information to your bank, a lender can understand that your business has the capital structure to survive and thrive in these tough economic times.
  5. Conditions. You also need to show that you understand the conditions of your industry, the economy and other factors that could impact your ability to repay the loan.

Communication is Key

Be upfront on your application and honest with your banker on where and when risk could occur. Communicate your business plans and clearly explain to your banker how you plan to use the borrowed funds. Once you have your secured your loan, keep the lines of communication open between yourself and your banker.

“If you have bad news you need to tell your banker ‘here is the issue, here is how I plan to address the issue,’” says Iverson. “If they get surprised, they get worried.”

Filling out a loan application and talking to your banker shouldn’t be an angst-filled experience. The irony is that when you don’t need a loan, when your cash flow and income are high, it is the best time to apply for one. “You get the loan, you use it, you pay it back it back, and you show the bank that you have the management and cash flow to do it,” adds Iverson.

Even in these tough times there are lenders ready to loan money to well-run businesses. Remember the five “Cs” and always communicate with your banker in good times and bad times.

Capital Financing: Back to Banking Basics

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by Anne Moore Odell

In these challenging economic times, it can be difficult for businesses to know where to turn for capital financing opportunities.   The answer might be right around the corner at your local community bank.

”It is going to be the small businesses that drive the economy and new jobs, not the government,” says Mike Iverson, CPA and principal of Trillium Financial. “People need to talk to their bankers now.   Your bank needs to get an understanding of your current situation.  Don’t wait until 30 days before your line of credit comes due.”

“Banks are not charitable organizations, but are in business to make money,” says Phyllis Murdock, Senior Vice President of Private Entrepreneurial Banking at the Buckhead Community Bank.   The bank serves businesses around metro Atlanta. She elaborates, “We will consider the traditional five C’s of Credit:

  1. Capacity to repay
  2. Capital invested in the business
  3. The Collateral or ‘guarantees’ that provide supplemental forms of repayment
  4. The Conditions surrounding the loan
  5. Character of the borrower.”

To get capital funding from banks, businesses must demonstrate their ability to repay loans.  Banks look carefully at cash flow from the business and the timing of the repayment.   Says Murdock, “We’ll take a look at past credit relationships, both individual and commercial, and payment history if this is a renewing line. There may be contingent forms of repayment—these will come into play as well.”

In response to downward economic trends, banks are looking at all lines of credit and requests for capital with greater scrutiny, including close examination of another of the five “C”s of credit:  Collateral.  Equipment, buildings, accounts receivable and in some cases inventory may all be sold by the bank for cash.  If accounts receivables are to be used, banks might request an “aging receivables” report and monitor the accounts receivables during the life of the line of credit.  Both business and personal assets of owners are considered.

Murdock explains, “The money that the applicant has personally invested in the business becomes an indication of how much the principals have at risk should the business fail.  This is the capital injection and we believe that the borrower who has significant personal investment in the business is more likely to do everything in his power to make the business successful.”

“It is very important to talk to your bank regularly and them updated on any significant changes to your business — good or bad,” says Iverson.  Murdock adds, “Local banks understand the economic climate of the community that they serve and have a willingness to invest in that community. Frequently bankers are invested in the community and have a true understanding of what is occurring in the town.”

Current conditions have made banks very cautious, lending only to clients with whom they have had previous relationships. Stay in touch with your banker and other financing partners.  It can make the difference in getting your loan renewed.

Need help getting your financials in order to approach your bank?  Contact Trillium today!