Empowering Entrepreneurs Speaker Series

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Empowering Entrepreneurs Speaker Series
Business Financing Options
John Phelan Commercial Group Ocean National
Bank February 8th, 2007
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Business Financing Options
The purpose of todays session is to assist small
business owners or entrepreneurs who are
seeking financing by highlighting information
that prospective borrowers need to know about the
credit process before they seek financing.
Topics

• Stages of a Developing Business
• Basics of capital
• Sources of Funding
• Types of Funding
• Elements of a successful loan application
• What the lender will review
• Resources
• Q A

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Stages of a developing business

• Stage 1 Businesses are Start-Ups
• Stage 2 Businesses have plans in place and
  product samples but no revenues
• Stage 3 Businesses have full business plans and
  pilot programs/small revenues in place.
• Stage 4 Businesses have been in operation for
  some time and have achieved ongoing revenues and
  expenses.

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Basics of Capital
Capital consists of equity and debt Equity is
provided by the owners investment in the company
and the companys net profit. Debt is created
when the company incurs a financial obligation to
be paid in the future payables to suppliers,
accrued expenses, loans or other forms of debt.
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Sources of Funding

• Equity Financing -
• Definition
• Equity Funding means raising money by selling a
  portion of your ownership in the company.
• Friends, Family, Business associates
• Angel Investors, Venture Capitalists

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Sources of funding contd
Features of Equity Funding - Most investors do
not expect an immediate return during the first
phase of the business, and can wait a number of
years. - Investors can be active or passive
- Investors are usually entitled to a share in
the profits.
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Sources of funding contd

• Debt Financing
• Definition
• Borrow money for a predetermined amount of time,
  and pay
• it back with interest
• Banks, Credit Unions
• Specialized finance companies, non profit orgs
• State and local governments

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Sources of funding contd

• Basic principles
• Financing choice should match the timing of the
  repayment schedule with
• the incoming cash flow you will use to make the
  payments.
• Current assets eg. AR, Inventory should be
  financed by
• short term loans. These are generally classified
  as current
• liabilities on the balance sheet because they are
  payable
• within one year from their origination.
• Fixed assets eg. Property, plant and equipment,
  franchise costs etc,
• should be financed with term loans. These loans
  are split up into
• two parts on the balance sheet the portion that
  will be paid within
• 12 months is classified as short term liability,
  and the portion
• after 12 months is classified as a long term
  liability.

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Types of Funding

• Short Term Options
• Special Commitment / Time Note
• - used to support a specific increase in current
  assets eg. Single contract.
• - Interest only repayment monthly with periodic
  payments made to principal.
• Seasonal / revolving working capital line of
  credit
• - used to finance an increase in current assets
  such as AR and Inventory
• - Interest only monthly repayments
• - variable rate usually linked to Wall Street
  Journal Prime

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Types of Funding contd

• Short Term Options
• Letter of credit
• -Facilitates a transaction by securing payment at
  a future date.
• -Issued by the lender to the beneficiary on
  behalf of the customer, substituting the lenders
  credit for the customers credit by providing the
  lenders guarantee that payment will be made upon
  the satisfaction of certain conditions.
• Factoring
• -Lender purchases accounts receivable at a
  discount. Customer receives cash promptly, and
  lender collects the receivable.

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Types of Funding contd

• Long Term Options
• Term Loans
• -Used for the replacement or purchase of fixed
  assets such as equipment furniture and fixtures,
  leasehold improvements etc. Usually anything
  except real estate.
• -Usually a set payment of principal and interest
  monthly, with a fixed rate over a five to seven
  year term.
• -Lender will usually provide up to 70 or 80 of
  the value of the equipment.
• -Borrower owns the asset, however lender secures
  it as collateral.

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Types of Funding contd

• Long Term Options
• Leasing
• - Capital Leases V Operating Leases. Both
  contain tax implications to consider.
• - Various payment options eg. Skip payments, Step
  up payments
• - 100 financing available
• - May have higher fees than Term loans
• - Purchase options at the end of the lease

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Elements of a successful loan application

• Business Plan
• Executive Summary
• Company description
• Market Analysis
• Products and Services
• Operations
• Marketing Plan
• Management and key personnel / advisors
• Funds Required and Expected use
• Financial Statements Historic and Projected-
• Income Statements
• Balance Sheet
• Cash Flow Statement
• Personnel Financial Statements
• Appendices / Exhibits

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What the lender will review

• Credit Analysis The 5 Cs
• Capacity to repay is the most critical of the
  five factors.
• - The lender will consider the cash flow from the
  business, the timing of repayment, and the
  probability of successful repayment.
• - Payment history on existing credit
  relationships personal or commercial- is
  considered an indicator of future performance.
• Capital is the money you have invested and how
  much of a risk of financial loss you will face
  should the business fail.

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What the lender will review contd

• Collateral or guarantees are additional sources
  of repayment.
• -Pledging of assets you own either in the
  business or personally
• provides the lender a secondary source of
  repayment should the business
• Fail.
• -A guarantee by you personally or another is very
  often required.
• -Where collateral is unavailable or weak, SBA,
  BFA guarantees
• can be used
• Conditions focus on the intended purpose of the
  loan.
• Use of the funds either for working capital,
  equipment etc.
• The lender will also consider the local economic
  climate and conditions
• both within your industry and in other
  industries that could affect your
• business.

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What the lender will review contd

• Character is related to the principals involved
  in the company and the
• impression they make on the lender.
• Educational Background, Experience, Quality of
  references etc.
• will be taken into consideration and provide the
  lender with an opinion
• of your ability to repay the loan or generate a
  sufficient return on funds
• invested in your business.

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What the Lender will review contd

• Financial Analysis Both Historic and Projected
  (pro forma)
• - Personal Financial Statement
• - Current within 30 days for principals with
  20 or more ownership in the company.
• - covers personal net worth, debt obligations
  and evidence of personal assets you can pledge
  to secure the loan.
• - Balance Sheet
• - Current within 30 days, and corresponding
  dates for the previous 2/3 years
• - Profit and Loss Statement
• -Previous 2/3 years and projected, if
  applicable
• - Statement of Cash Flows
• Presents sources and uses of cash

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What the Lender will review contd

• Ratio Analysis
• - Ratios permit the lender to review the company
  performance versus
• a) that of previous and future periods
• b) that of a similar company or its industry
• - Categories include Profitability, Leverage,
  Liquidity, Turnover

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Resources

• SBA
• 55 Pleasant st., ste 3101
• Concord NH
• [phone]
• www.SBA.Gov
• SCORE
• 100 Elm St, 6th Floor
• Manchester NH
• [phone]
• www.SCORE-manchester.org

• MICRO CREDIT
• 7 Wall st
• Concord NH
• 1 800 769 3482
• www.microcreditnh.org
• SBDC
• Rivier College, Sylvia Trottier Hall
• 420 Main St, Nashua
• [phone] www.nhsbdc.org

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Q A