Debt Financing

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Debt Financing
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Debt Financing

• Loan to be repaid
• Usually with interest
• Future date may or may not be specified
• NO ownership claim

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Sources

• Traditional financial institutions
• Banks, Savings Loans, Commercial Banks, Credit
  Unions, Community Banks
• Fixed and Variable rate loans
• May be willing to take more risk if you have a
  history with them

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Sources

• Commercial Finance Companies
• Higher interest than commercial banks
• Accept greater risk
• Small Business Administration

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Small Business Administration

• 504 Loan Guarantee
• Certified Development Company
• Facilities and major equipment
• 10 to 20 years
• Fixed rate (3 fees)
• 10-40-50
• 65,000 to 1.5M (2M if public policy)

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SBA cont.

• 7A Loan Guarantees
• SBA guarantee
• lt 150,000 85
• 150,000 to 1.5 M 75
• Up to 25 years for fixed assets
• Up to 10 years for working capital
• Fixed or variable rates plus fees

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SBA cont.

• Other SBA Loan Programs
• SBAExpress
• Community Express
• CAPLines
• Prequal Pilot
• Microloans
• Patriot Express
• Disaster Assistance

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Commercial Finance Co.

• Willing to take on more risk
• Collateralized
• Higher rates
• Prepayment penalties

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Business Suppliers andAsset-Based Lenders

• Trade Credit (Accounts Payable)
• Financing provided by a supplier of inventory to
  a company, which sets up an account payable for
  the amount
• Short-duration financing (30 days)
• Amount of credit available is dependent on type
  of firm and suppliers willingness to extend
  credit

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Business Suppliers andAsset-Based Lenders
(contd.)

• Accounts Receivable Financing
• Collateral for loan
• Factoring
• Inventory Financing

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Business Suppliers andAsset-Based Lenders
(contd.)

• Equipment Loan and Leases
• Installment loan from the seller of machinery
  purchased by a business
• Equipment leased from a supplier
• Frees up cash for other purposes
• Leaves lines of credit open
• Provides a hedge against obsolescence

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Lease Financing

• Operating Lease
• Capital Lease
• Payments similar to a loan
• May or may not transfer ownership
• Tax deductible
• Interest
• Depreciation

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Sources of Extended-Term Financing

• Equipment Manufacturers
• Higher interest
• Higher risk accepted
• Fewer covenants
• Independent Leasing Companies
• Shorter maturity
• Easy to cancel

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Sources of Extended-Term Financing

• Life Insurance Companies
• Against Cash Surrender Value
• Reasonable interest rate
• Longer maturity
• Equity sweetener or kicker

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Sources of Extended-Term Financing

• Small Business Investment Companies (SBIC)
• Licensed and regulated
• Straight debt
• Debt with equity sweetener
• Equity through purchase of common stock
• Venture Capitalists
• Angels

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Types of Loans

• Loan Terms
• Maturity
• Secured/Unsecured
• Fixed/Variable
• Open/Closed
• Repayment

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The Bankers Concerns
How much money is needed?
What is the venture going to do with the money?
When and how will the money be paid back?
When will the money be needed?
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Financial Information Requiredfor a Bank Loan

• Three years of the firms historical statements
• Balance sheets, income statements, and statements
  of cash flow
• The firms pro forma financial statements
• The timing and amounts of the debt repayment
  included as part of the forecasts
• Collateral

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Financial Information Requiredfor a Bank Loan
(cont.)

• Personal financial statements
• The borrowers personal net worth (assets
  debts) and estimated annual income
• Tax Returns
• Credit Report

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Negotiating a Loan Interest Rate

• Fixed Interest Rate
• Interest rate remains the same for the term of
  the loan
• Points and Fees
• Prepayment penalties
• Covenants
• Compensating balances
• Financial Statements
• Subordination agreement
• Inventory limitations
• Spending limitations

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Negotiating a Loan Interest Rate

• Floating Interest Rate
• Rate set to an index plus a margin
• Prime Rate
• COFI (11th District Cost of Funds Index)
• LIBOR (London Interbank Offered Rate)
• MTA (12-month Treasury Average Index)
• CMT (Constant Maturity Treasury
• National Average Contract Mortgage Rate
• Bank Bill Swap Rate (BBSW)
• Caps
• Floors and Ceilings
• Annual and lifetime

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