Bank Loans
Non Bank Options
Stock and Securities
Funding Documentation

Bank Loans

Your banker has just turned down your business loan. The company still needs the funds, maybe desperately, what do you do now?

First, not all banks are the same; many specialize having a preferred and secondary class of loans. Some banks are not interested in working capital loans unless a significant portion of the loan is real estate. Large regional or national banks can be especially formidable to deal with. Your first self-question should be, "Did I select a bank that is comfortable doing business loans to companies similar to mine?" The second question is, "Was I properly prepared to make a presentation to the banker?"

It is very difficult for most individuals to quickly determine if their banker is interested in making commercial loans to companies similar to yours. The primary bank selection process used by most companies and individuals is proximity to the company! The second is a senior company manager using that bank for her/his personal banking needs.

Bank commercials imply that their bank is "your full service bank able to satisfy all of your banking needs". But that is not so. Banks must limit/manage their risk exposure to loan losses. Some will specialize in doing personal loans coupled with home equity loans and a few commercial loans that are well secured by established companies. Others focus on single family home construction loans converting the construction loan to a permanent loan, sprinkled with personal loans, and a few loans to well established companies or companies that have solid collateral.

Regional and national banks provide a broad range of loans. The problem with large banks is that the banker who solicits your business or who you make your loan presentation to, seldom has any lending authority. They are really a business development person. This banker uses a checklist to have you provide the information that will be used by their credit department to analyze your company, compare it to similar companies and then either grant or deny your loan request. The credit approval process has been reduced to a fairly rigid mathematical model with almost no human input.

So how do you find a bank for your company? You can ask other companies that you do business with where they bank and if they had any experience getting a loan. Your customers will give you their experience, often in more detail than you wanted, but this is a starting point. When you meet the banker for the first time inquire of them what type of loans do they prefer to make, and then listen to the order in which the banker responds. If business loans are near the end of those mentioned you might have the wrong bank.

The next question is, "Were you prepared to present your loan request and answer the many questions the banker must ask to understand your company?" To have the meeting be positive for you, you must develop a Finance Plan that anticipates the questions they will ask about your business and demonstrates how your business can repay the loan. Banks are not an investor in your company. They want their money back, with interest, and you must be able to convince them that your company can and will do that.

We can help you create a solid Finance Plan that includes funding options and lenders that we believe are likely to loan your company the funds it requires. See: Business Plans.

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Non Bank Options

Is your company faced with a money crisis? Most people naturally think of getting money from a bank. If the bank denies their loan request they often become angry and frustrated. They may not be aware that there are many other potential sources that could provide them with the funds they require.

Examples of non-bank funding sources are: commercial finance companies, asset based lenders, lease companies, hedge funds, insurance companies, and several other entities. Some of these entities get part of their working capital from large commercial banks, others from pension funds or trusts, some from stock or bond sales, while many are a mixture of sources. The problem is finding the entity whose funding strategy is similar to your loan requirements and then making a presentation that they can comprehend and concur with.

All non-bank lenders charge a higher interest rate than a bank loan. There are two reasons for this. One is their customers have a greater risk of not paying the funds back and two is their cost of funds is greater than a bank.

We understand the needs of these funding sources, who they are, and how to structure a funding proposal that generally meets their requirements. As with a bank, these funding sources require a solid Finance Plan that demonstrates both the rewards and the risks of repaying the funds advanced. See: Business Plans.

There are cases where no commercial lender would make a loan based on the risk and the manager's only viable option is self-funding, if possible, or loans from friends and family. Loans from friends and family are made because they believe in the borrower and not that they understand the risks associated with the business and the potential for not getting paid back.

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Stock and Securities

Selling stock in your company may be an option. If you plan to sell stock in your emerging company it will be difficult, costly and very time consuming - and not always successful. One key is to have what we refer to as a Stock Business Plan. A Stock Plan differs from a Finance Plan in many ways, chief among them is the absence of "positive statements" about future events, legally referred to as forward looking statements.

A Stock Plan sets forth the good, the bad, and the ugly about the company. Entrepreneurs and managers are often shocked when they see the first draft because the really positive things that are about to happen have been made to sound like they might never happen and if they did they wouldn't be as big or important as management believes they could be. After the company's securities attorney has completed "wrapping" the Stock Plan with legal disclosures management is now convinced that anyone who reads this plan would never purchase the stock. Often all of the work done with the company's accountants is not even made part of the wrapped Stock Plan or if it is included the disclaimers create the impression that management doesn't believe the pro forma financial statements.

A wrapped Stock Plan is legally referred to as a Private Placement Offering Memorandum ("PPM") and effectively is an Offering Prospectus. It must conform to rules established by the Securities and Exchange Commission ("SEC") and the State the company is incorporated in. The purpose of the PPM is to protect both the company selling the stock or securities and the stock purchaser. The purchaser should be informed of all known and potential risks associated with this company's success or failure so they can make an informed investment decision. The company and its officers want to disclose the same information to avoid potential litigation from investors if the company is not successful, or not as successful as anticipated.

A "security" may be a promissory note or bond issued by the company. They may be unsecured or secured. If the company sells promissory notes or bonds it also needs to have a PPM describing the securities to be sold.

In addition to creating the Stock Plan, the company and its advisors must develop a strategy for the stock or securities sale. Management must take a global view of its present and future financial requirements in order to develop a Stock Plan. They need to determine how many additional rounds (stock sales) may be required to raise all of the equity the company will need. With that information they know how much stock should be issued to the founders and key employees. A per share selling price must be determined but for an emerging company this price is generally not based on any established criteria used to estimate the value of publicly traded stock (multiple of earnings, multiple of sales, etc.). The price of a company's stock is set by what management and its advisors believe the investors might pay for the stock.

If, for example, the company needs $1,000,000 to do everything necessary to go to market the potential investors will only want to provide the company with enough funds to meet the first of a series of milestones. The Stock Plan for the $1,000,000 must be divided into multiple milestones, and each milestone will have a funding budget. For example if it will take 6-months and $200,000 to develop a working prototype, that can be the first milestone. The PPM will show that the company must sell $250,000 of stock and net $200,000 after selling costs to have the funds necessary for the prototype milestone. Knowledgeable investors like to say, "It takes twice as long as management projects and costs twice as much". Unless your company is a growth company, it will be difficult to raise more than $250,000 in your first stock sale.

There are two common misconceptions founders and managers have. The first is they overvalue the company. They believe that investors should invest $1-million in their emerging or growth company for a small portion of the company such as 10 to 20%. The second common misconception among managers is that they must retain absolute control of the company by having both 51% of the stock outstanding and a majority of the board of director's seats.

Although every company is unique, generally the founders will have their ownership percent diluted to 35 to 40% after two to three stock sales (called "rounds"). Accredited investors (often called "angels") are sophisticated businesspersons who invest in companies whose products or services they know something about. If an accredited investor makes a large investment in your company, they will often require a seat on the Board of Directors as a condition of the investment. Sometimes one accredited investor will be excited enough about your company that she/he brings in friends. If that happens they may want two or more Board seats.

Emerging companies and growth companies represent significant risk to investors. Even growth companies can fail if their management team is unable to transition by developing the infrastructure to allow for the expansion. Emerging and growth companies can have their sales stall, encounter production or price problems, or have a well entrenched or financed competitor enter their market robbing them of their advantage and crushing their profits.

Investors in emerging and growth companies know the risks and attempt to manage risk by becoming a director to help management make critical decisions. They may also require that the company enter into a legal document known as an Investors' Rights Agreement. An Investors' Rights Agreement limits certain actions the company's board previously had the right to do e.g. issue new stock, issue a new class of stock, borrow more than a specific amount of money, pledge assets, enter into certain agreement and contacts without first getting approval from the investors. The concept is to not "handcuff" the company, but rather to limit certain actions that could dilute the investors' interest, or be harmful to the company as a whole.

Our intent here is give you a brief overview of some of the major factors that must be considered when planning to sell securities.

We understand the needs of most accredited investors and working with your accountant and securities attorney, we know how to structure a funding proposal that generally meets their requirements. Selling stock or other securities is very difficult and takes time, patience, and a good economic environment. Having a solid Stock Business Plan that has been wrapped to create a Private Placement Offering Memorandum by the company's securities attorney is part of a critical entrée to get accredited investors to consider your company. See: Business Plans.

We do not invest in our clients. We are not broker dealers and we are not finders. We will assist you in identifying potential investors who may be interested in investing in your company, but the actual sale of your company's stock or securities is the sole responsibility of its designated officers. Our assistance is limited to assisting you in identifying potential investors and helping you make a presentation to them, which we do as consultants.

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Funding Documentation

We know of funding sources that are interested in specialized credit financing. We have provided some forms as word documents and as pdf documents. Please refer to:

1. Specialized Credit Financing: A two-page document that provides you with how we function and with some of the many Financial Terms you may or may not be familiar with.
   
   
2. Credit Financing Documentation Requirements: A two-page document that details the information our funding sources will require.
   
   
3. Personal Financial Statement: This three-page document is at the core of your request for funding. Lenders really loan money to individuals. Borrower creditability is a key factor in getting funding. Lenders look at the Personal Financial Statement to get this information:
   
   
1. Personal Financial Status: How does the individual handle her/his personal finances, are they over extended, have many credit cards, little savings and nominal amounts in a retirement account (based on the applicant's age)?
2. Secondary Source of Repayment: A lender may look to see if the potential borrower has another source of income, e.g. a spouse that works, rental income, or other forms of continuous income.
3. Secondary Source of Collateral: Perhaps the company, who may be the primary borrower, has few assets or few assets that have value, the lender may see another way to provide the company with the funds needed by having a company officer secure the loan with her/his personal assets.



4. Filed Federal Income Tax Return: Why do funding sources want to see the company officers personal federal income tax return? The federal income tax return is one method of confirming a borrower's income. Have you ever heard of anyone who filed a tax return claiming more income then they earned ? no.
   
   
5. Financial Statement Example: provides information about the 3-forms of business financial statements, assumptions used to create a pro forma financial statement and the importance of financial projections.
   
   
6. Due Diligence Checklist: A due diligence checklist is a handy tool to help the company's managers check that they have all of the documents required for either a lender or to sell stock. Entrepreneurs and managers often overlook paperwork that later becomes critical to lenders and investors as they attempt to confirm that the company owns certain assets, has certain contacts for goods, services and production, has formal sales contracts, and non-disclosure agreements in place and a host of other details. We have found that many times investors will want to have a personal background check (credit report) on principals who own 20% or more of a company.