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Financing
Bank Loans
“Non” Bank Options
Stock and Securities
 Bank Loans
Is there such thing as a “full service bank”? We have all heard this claim before; however, it is simply not true. This is a result of each bank’s unique risk tolerance to limit and manage their risk exposure to loan losses.
Many banks specialize in personal loans coupled with home equity and some commercial loans that are well secured by established companies. Other banks pursue different concentrations in the marketplace. Regional and national banks provide a broader range of loans however; the problem with large banks is that the banker who solicits your business (or who you make your loan presentation to) seldom has real lending authority. In actuality, they are business development or sales people.
This “banker” uses a checklist to gather information for their credit department in order to better analyze your company, compare it to similar companies and to ultimately grant or deny your loan request. Unfortunately, the credit approval process these days has been reduced to a fairly rigid
process and mathematical model with little human input.
How do you identify the ideal bank for your company?
It’s simple, just call on Strategic Business Group and let us do the work for you. We accomplish this by partnering with our clients in order to strategize and develop a unique finance plan that anticipates information your lender will require of you. Your personalized finance plan will also need to demonstrate how your business intends to repay the loan – and through the use of our custom templates, we will create the ideal plan for you.
It is important to remember that banks are not “investors” in your company; they want and expect their money back! You, in turn, must convince them that your company can and will repay them. To accomplish this, Strategic Business Group will help you to create a solid business and finance plan to include funding options that will interest lenders into loaning your company the funds it requires. See: Business Plans.
We will then present your unique Finance Plan to banks that have expressed interest in your loan request. The advantage in doing this is that these banks will already have been notified of you or your company and are requesting additional information about you.This will significantly increase your possibility of receiving a commitment letter from these banks.
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“Non” Bank Finance Options
Is your company facing a money crisis? Most people will instinctively look to a bank as a means of receiving a loan. But if the request is denied – one is left frustrated and desperate. Fortunately, a bank is not the only solution for a money crisis. Many people are not aware that there is a bounty of other potential funding sources.
Some examples of non-bank funding sources are: commercial finance companies, asset based lenders, lease companies, hedge funds, insurance companies, amongst other entities. Some of these entities receive a portion of their working capital from large commercial banks, pension funds or trusts, and some from stock or bond sales, while many others are a mixture of resources. The challenge is to identify the entity whose funding strategy is similar to your loan requirements and then to prepare a presentation that these non traditional sources can comprehend and concur with.
One important aspect to note is that all non-bank lenders will charge higher interest rates than a bank for two reasons; one is that their customers carry a greater risk of not repaying the funds and two is their cost of funds is greater than a bank.
Strategic Business Group understands who these funding sources are, their needs 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 often cases where commercial lenders would not approve a loan simply based on the risk involved and then the manager/owner's only viable option might be self-funding or securing a personal loan. Unfortunately, loans given from friends and family are most often made because they believe in the borrower; however, they do not necessarily understand the risks associated with the business and with the potential for not getting their money back.
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Stock and Securities
You may have considered that selling stock in your emerging company may be an option, but keep in mind that it will be difficult, costly, time consuming and not always successful. One key to success is to have what we refer to as a Stock Plan. A Stock Plan differs from a Finance Plan in many ways with the principal difference being the absence of "positive statements" regarding future events (legally referred to as forward looking statements).
A Stock Plan addresses the good, the bad, and the ugly about the company. In fact, entrepreneurs and managers are often astounded when they review the first draft because the positive things that will happen have been made to appear as though they might never happen. If these events were to happen, they are made to appear less than what management actually believes they could be. Once the company's securities attorney has completed "wrapping" the Stock Plan with legal disclosures, management is 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. 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 is effectively an Offering Prospectus. The PPM must conform to rules established by the Securities and Exchange Commission ("SEC") as well as to the rules of the State that the company has 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 which may be secured or unsecured. If the company sells promissory notes or bonds, it also requires 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 takes a global view of its present and future financial requirements in order to develop a solid Stock Plan. They will need to determine how many additional rounds (of stock sales) may be required in order to raise the entire amount of equity needed. With this information they can determine just how much of the stock should be issued to the founders and key employees. A per share selling price is then determined; however, for an emerging company this price is generally not based on specific established criteria typical of estimating the value of publicly traded stock (multiple of earnings, multiple of sales, etc.). Ultimately, the price of a company's stock is determined by what management and its advisors believe investors are willing to pay for the stock.
If, for example, the company requires $1,000,000 to accomplish all necessary preparations in order to go to market, the potential investors will only want to provide the company with funds sufficient enough to meet the first of a series of milestones. The Stock Plan for the $1,000,000 must be divided into milestones, and each milestone will have a funding budget. For example if it takes 6 months and $200,000 to develop a working prototype, then they may consider this as the first milestone. The PPM will state that the company must sell $250,000 of stock and net $200,000 after selling costs in order to have the funds necessary to achieve the prototype milestone. Knowledgeable investors like to say, "It takes twice as long as management projects and costs twice as much" and with this said, unless your company is a growth company, it will be difficult to raise more than $250,000 in your first stock sale.
One common misconception founders and managers experience is that they “overvalue” the company. They believe that investors should invest $1 million in their emerging or growth company for only a small portion of the company such as 10 to 20%. A second misconception is that they must retain control of the company by maintaining 51% of the stock outstanding as well as having the 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 (or “rounds”). Accredited investors (or “angels”) are sophisticated businesspersons who invest in companies whose products or services they are familiar with. If an angel 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. On occasion, an angel is excited enough about the company that she/he is motivated to bring in friends which then may require two or more Board seats.
Emerging and growth companies represent significant risk to investors. Growth companies have potential to fail particularly if their management team is unable to transition by further developing the infrastructure to allow for expansion. Emerging and growth companies risk having their sales stall, encounter production or pricing problems, or having a well entrenched or financed competitor enter their market, and essentially robbing them of their competitive position and risking their profits.
Investors in emerging and growth companies understand the risks and attempt to manage them by becoming a director and assisting management in making 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 or rights the company's board previously had such as; issue additional stock or a new class of stock, borrow more than a pre-determined amount of money, pledge assets or enter into certain agreements and contacts without first getting an approval from investors. This is not to "handcuff" the company, but rather to limit certain actions that could dilute the investors' interest, or that may be harmful to the company as a whole.
Strategic Business Group understands the needs of the majority of accredited investors and in partnering with your accountant and securities attorney, we will structure a funding proposal that generally meets their requirements. Selling stock or other securities is 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 just one vital part of a critical entrée to motivate accredited investors to consider your company. See: Business Plans.
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