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Obtaining Debt Capital for Your Business
DISCLAIMER - The information provided here is of a general nature and may not apply to any specific or particular situation. It is not to be considered as a legal advice nor presumed to be indefinitely up to date.
1. Introduction
Because most loans and lines of credit are
asset-based loans, knowing the lender’s guidelines is very important.
The industry and market characteristics, the stage and health of the
startup in terms of cash flow, debt coverage, and collateral are critical
to the lender’s evaluation process. Naturally, startups have more
difficulty borrowing money from banks than established businesses because
they don’t have assets, track record of profitability and a positive
cash flow. Banks that
advance loans to startups usually do so for previously successful
entrepreneurs of means or for firms backed by investors with whom banks
have had prior relationships and whose judgment they trust.
Although, startups managed by entrepreneurs with a track record and with
significant equity in the business who can present a sound business plan
can borrow more successfully, still with little equity or collateral to
pledge, the startup won’t have much success with banks.
How good of a borrowing deal an entrepreneur can
strike is also a function of relative bargaining position and the
competitiveness among the alternatives. If the startup already has
significant debt and has pledged its assets, there may be no room for
negotiations. A bank with full collateral in hand for a company having
cash flow problems is unlikely to give up such a position to enable the
company to attract another lender, even though the collateral is more than
enough to meet this guidelines. Further, the availability of bank
financing for high-tech startups also depends on where a business is
located. Debt and leases as well as equity capital can be more available
to startup companies located in clusters of entrepreneurial and
technological activity such as Ottawa, Toronto, London, Kitchener and
Waterloo than for those that are located in the northern Ontario. In
centers of high technology and venture capital the main officers of the
major banks will have one or more high-tech lending officers who
specialize in making loans to early-stage, high technology ventures.
Through much experience, these bankers have come to understand the market
and operating idiosyncrasies, problems, and opportunities of such
ventures. They generally have close ties to venture capital firms and will
refer entrepreneurs to such firms for possible equity financing. The
venture capital firms in turn, will refer their portfolio ventures to the
bankers for debt financing.
2. Loan Process
The process of obtaining a loan generally consists of the following stapes:
3. Before the Application
Once a startup is formed, the entrepreneur should look for a banker and bank with
which he or she can establish a
relationship. Choosing a bank and more specifically, a banker is one of
the most important decisions an entrepreneur will make. A good lender
relationship can sometimes mean the difference between the life and death
of a business during difficult times. The choice of a bank and the
development of a banking relationship should begin when the entrepreneur
does not urgently need the money. When the entrepreneur faces a near-term
financial crisis, the venture’s financial statements are at their worst
and the banker has a good cause to wonder about entrepreneur’s financial
and planning skills ?all to the detriment of the entrepreneur’s
chance of getting a loan. Because of the importance of a banking
relationship, the entrepreneur should shop around before making a choice.
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