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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

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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)

Senior Debt Sub Debt/Mezzanine Debt Private Equity

Cost of Capital / Returns

Financial Flexibility / RiskLower Higher

Traditional banks, commercial finance companies, private equity funds

25 to 30%+

TermLoan A

TermLoan B

CommonequityRevolver

Secondlien

loansTranche B

Rateonly sub

debt

Mezz debtwith

warrants

Preferredstock

13 to 16%+ 14 to 19%+ 20 to 30%+

Traditional banks and commercial finance companies

Hedge funds, mezzanine funds, private equity, venture capital

Capital Alternatives

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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

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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.

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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

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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.

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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.

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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

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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

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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 FinancingThe 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.

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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

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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

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SBA Financing Options

Refinances• No equity injection required• Must save at least 20% on current debt service

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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.)

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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

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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

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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.

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SBA Small Business Financing Programs

• The SBAExpress Program

• The SBA 7(a) Loan Guaranty Program

• The SBA 504 Program

• The SBA Export Express Program

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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

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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

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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

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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

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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

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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)

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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.

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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

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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

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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

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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

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The SBA Export Express Program

Additional Requirement• All owners with 20% or more ownership are required to personally guaranty the loan debt.

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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.

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Questions?