Seeking Credit For Your Venture Backed Business
Topics: venture capital, business loans, credit lines, legal. contracts, funding
Throughout my career I have raised and deployed tens of millions of dollars in venture capital to build out products and infrastructure and expand our marketing reach for various ventures. As a business owner there are a series of important questions to answer as you continue to pursue greater market opportunities:
Question 1
When should we supplement our ability to internally fund growth with additional capital infusions? Considerations include business focus, valuation issues, and the availability of various capital sources.
Question 2
What are the implications of the various funding alternatives to important constituents (investors, management and our customers)? For example, debt takes a senior position in the capital structure to equity holders, and you will have various loan covenants and triggers relative to financial plans and balance sheet ratios. Make sure these are well understood as you are aggressively chasing market growth.
Question 3
How do you balance the competing interests of your stakeholders?
Question 4
What is the true cost of each potential source of capital?
Given our stage of development (post revenue, several successful products, positive cash flow), we’re able to consider securing a somewhat traditional bank line of credit. I say “somewhat” because, being a technology and content provider, we don’t have a lot of traditional assets to collateralize, and until recently, we haven’t had the cash flow to justify a bank line from commercial banks.
Fortunately, there are some great lenders for companies like us, including Silicon Valley Bank, Comerica, and a relatively new entrant that we’re quite impressed with, Square One.
These banks are looking to make a premium over traditional lenders through warrants and fees, and in establishing a long term banking relationship with a
hopefully growing new company.
In return, they are providing lower cost capital in the $500k-$2mm range to allow you to stretch into better valuation milestones. They are not a substitute for larger venture financing or in
situations where current cash flow can’t meet line repayment obligations.
In the “fixing to get ready” category, the banks will suggest putting together the following materials for your initial discussions:
- 2 years historical and YTD Financial Statements
- 2 Year (Current plus Next Year) Forecast Financials (Income statement, Balance Sheet, and Cash Flow Statement)
- Aged listings of A/R and A/P
- Current Capitalization Table
- Most recent Power Point Deck used in connection with fund-raising or Board communication (to gather a sense for the market opportunity, the competitive landscape, the technological differentiator(s), the Management Team, etc.) In addition to these, I’d add a few more (some obvious, some not so much):
In the obvious category, take care of the general housekeeping. Make sure you’re all caught up with tax and corporate compliance issues. These deals are all about credibility, and potentially they can be time sensitive.
As much as it can seem like it’s all about the numbers, the good ones in the venture-backed technology lending space are looking to the following in evaluating the application (in some order):
- Your venture partners. Are they excited about your growth prospects, or are they getting tired? And why do they feel that a line is more appropriate at this time than another venture round?
- The management team. Is it seasoned, well grounded and reasonable? Do the financial projections make sense, or do they look like an enormous hockey stick?
- Understanding the business opportunity. Your venture backers got in, but is it something the bankers can get excited about? And how much of a banking opportunity is it? As an entrepreneur, you need to be able to succinctly talk about your business, and you’re always selling. This is no exception. Again, with your feet firmly planted on the ground, be able to present this as an exciting opportunity. Start building those relationships early.
The longer they have to get to know you and watch the business, the more comfortable they will be.
One of our challenges is to value the true price of the line relative to other potential sources of credit. In addition to the hard costs (application fees, interest expense, etc.), the line has a finite life and must be repaid.
Assuming it is not refinanced, against a $500k line that is fully drawn down in the first year, you might
have about $150-200k in costs over the 4 year period (the draw down, plus say a 3 year repayment) for temporary access to $500k in Yrs 1-2, $300k in Year 3, and $150k in Year 4.
Surprising? Look at the breakdown:
Application fee - $15-25k (including legal)
Warrants - 3% of line ($45k in exercise price - value is up to you)
Interest costs - 12-14%/yr, or $60-75k in years 1-2, $40-50k in year 3, and $25k in year 4. True, you’re ideally providing your venture investors with a 35-40% ROI over that period, which compounds very quickly, and there are plenty of other strings attached.
But at least you’re not repaying that money over what might be a cash-constrained period, and your venture investors are all about value creation, not loan repayments. Oh, and if you secure a new venture round, new money is generally not fond of paying off prior obligations.
John Siegler is a co-founder and CFO of Practice Technologies, Inc., creator of RealDealDocs. RealDealDocs gives you access to legal documents drafted by top US Lawyers. Search over 10 million documents and clauses for Free at www.RealDealDocs.com.
Previous Articles Highlighter:
How To Get A Great Deal On Your Car Loan (1)
Topics: loans, car, auto, finance, bad, credit, history, vehicle, payment, interest, cost, approved, bank Getting the new car that you want can be a lot of fun - it can really make your day.
How Do I Become Eligible For Student Loans? (2)
Make sure to fill out the FAFSA even if you think that your financial situation is too good for them to give you any funds for your college experience. There are several requirements that you need to fulfill if you want a loan, whether private or federal.
College Is Expensive, But Worth It (3)
It is important, more than ever each year, for you to learn all that you can about what is available and how to get into and succeed in higher education.
If I'm Studying Abroad Can I Still Get Student Loans? (4)
The following private loans are available: Signature Student Loans, MBA LOANS, Tuition Answer Loans, LAWLOANS, and Global Health Education Loans Program (GHELP). Schools must be approved by the Department of Education to offer the private loans listed above.
Auto Insurance Michigan: The Online Option Provides Many Options As Well As Quick Insurance Formalit (5)
You will be sure to find some very low rates and car insurance Michigan makes it possible to compare different rates as no other state can. You can find auto insurance Michigan rates from online Car Insurance companies for a number of towns in Michigan such as Ann Arbor, Detroit, Clinton as well as Dearborn and many more.
Information On The William Ford Direct Loan Program (6)
Ford Federal Direct Loan Program (FDSLP), often referred to as "Direct Loans," is a United States Department of Education program that provides loans to help students pay for education after high school.
Tips On Getting Student Loans As A Graduate Student Abroad (7)
This can be a nearest relative or friend not living with you. When you apply with a co-signer, you will need the same information for your co-signer as follows: Full name, Social Security Number, Date of Birth, Permanent Address and Number of Years at the Address (no PO addresses), Monthly Rent or House Payment, Home Phone Number, Occupation, Employer and How Long Employed, Business Phone, Gross Annual Income, Proof of Enrollment such as Tuition Invoice or Letter of Acceptance.
For Business Tax Return First Time Filers (8)
Such taxes should be calculated as a part of your total estimated taxes when paying estimates quarterly. Aside from the ones mentioned, there are still others that need to be considered by the business owner in preparing business tax returns.
What Is The Best Way To Consolidate Student Loans (9)
It is a factor of how you plan to repay your debt and what is most important to you at this in your life. It also depends on where you live.
Home Equity Loans-Lower Rates, Smaller Payments, A Better Option (10)
Home equity loans are, essentially, fixed rate home loans that enable you to take advantage of the money you've already invested in your home to finance larger debts at a lower interest rate than most revolving credit options.
Bad Credit Mortgage Refinance-Using Your Equity To Get Out Of Debt (11)
While it's not something that needs to be done annually, refinancing your home is one of the most important things you should consider, at least ever few years, experts say.
How To Save With A Subprime Mortgage (12)
Lending institutions love people that can qualify for a standard mortgage and are eager to do business with them, but what about the other 80% that cannot qualify? It would not make sense to ignore this group seeing as how they are clearly the majority, and so the subprime lending market was born out of the necesity to help the potential homeowners with an imperfect credit history.
Bad Credit Debt Consolidation-If You Can't Get Rid Of The Debt, Make It Manageable (13)
Debt consolidation will improve your financial life by lowering your debts to a single payment, frequently as much as 50% less than what you are paying out now. These consolidation loans are great for lowering monthly payments and enable you to solve the main problems of high debt without taking drastic steps such as considering bankruptcy.
Is Paying Off Student Loans Early A Good Decision? (14)
Those contributions could grow to $78,000 in 30 years. How many cars would she have to buy over and over and over again in 30 years with nothing to show?
5 Considerations When Choosing A Business Credit Card (15)
However, once the introductory period is over, the ongoing rates often increase greatly and you should be aware of this. Perks and Benefits - Many business credit card companies offer perks similar to those offered to personal card holders.
Which Is Right? Paying Down Debts Or Investing? (16)
Topics: consolidate private student loans, stafford loans, student loan programs The best way to narrow this down is to examine your debt and separate your good debt from the bad debt.
Basic Guide To San Diego Mortgage Refinancing (17)
When you purchased your house, you took out a loan, (your mortgage) which is now in first lien position in position to be paid first. When you refinance, or take out a second mortgage, your new loan moves into second lien position.
How To Save Money And Avoid Temptations (18)
6. You should also educate yourself on the fundamentals of money and debt. If you know more about how to save and how to manage your money, you will be prepared to handle any circumstance.
Potential Pitfalls Of Business Credit Cards (19)
Below are a few common risks associated with using a business credit card: Potential for Abuse: Many business owners find the possibility of instantly funding their start up business with a credit card to be very appealing.
Learning To Budget And Earn As A Starving College Student (20)
Contact your newspaper and see what opportunities they might have. A landscaping part-time job also has flexible hours and can pay pretty well. This can include mowing lawn, trimming, watering lawn and plants, shoveling snow in the winter or whatever is needed.
Newer Articles Highlighter:
Putting Money Away For College With A 529 Plan (1)
State sponsored 529 plans can be a great option for parents, but they are not flawless. Every 529 plan is different and some are in fact better than others.
A Government Agency That Assists With Student Loans (2)
The Student Loan Company undertakes specific tasks for individual Devolved Administrations, such as payments of Education Maintenance Allowances, and especially administer on behalf of the private sector, one of the two student loan portfolios sold by the government.
Need College Expenses? - Try Refinancing Your Mortgage (3)
Just subtract the amount you owe from the worth of the home, and then multiply by .8. This figure will actually show you 80% of your equity. If you take out more than this, you will need to pay for private mortgage insurance.
How To Stick To Your Budget And Avoid Repossession (4)
Once you get you car, you will need to revise your monthly budget to accommodate the amortization of your car. Income the schedule of the amortization of your car in your schedule of payments for the month and then set aside the amount of the amortization right after you have received your pay check for that period.
Home Equity Loans For People With Bad Credit (5)
Take your time, and learn about mortgages first, and keep a sharp eye out for the best deals. Joe Kenny writes for the UK personal finance sites offering loans, credit cards, mortgages and insurance products - www.ukpersonalloanstore.co.uk and www.nationsfinance.co.uk.
Refinancing Your Mortgage Or A Home Equity Loan - Which Is Better? (6)
If you can afford the extra payment, this may be the way you want to go. It will also have a higher rate of interest than a first mortgage, and usually has a time frame of up to 15 years for repayment.
What Is Repossession And What Can You Do To Stop It (7)
You also have to be sure that you are notifying the bank if you cant make them, and that you are communicating with the bank at all times. Some banks will work with you during times of financial difficulty and help you get back on track to paying your bill on time.
The New 50 Year Mortgage - Should You Run To Get It? (8)
The difference between a 30 year mortgage and a 50 year mortgage means that you are now paying about two-thirds additional interest. The bottom line is that the house you wanted so bad has now cost you possibly up to six times more than the house is worth, whereas, two to three times is normal.
Hot Tips For Successful Online Forex Trading - Part 2 (9)
These tips, and a good online forex trading system, will help you be a successful one. Who Else Wants To Learn A Simple, Step-By-Step System For Generating Quick & Easy Profits, Trading Forex?
Is A Stock Market Investment Club Right For You? (10)
Investment clubs have the ability to invest in the stock market even when the market is dropping, or is slow. Because the money in spread out among a group of members the chances of a large personal loss is unlikely, as a part of a group of people you can also diversify your stock market investments, and not be limited to just one or two market choices.
Understanding The Risks And Rewards Of Joining A Stock Trading Clubs (11)
You need to weigh the risks and rewards of being in stock trading clubs with your own thoughts and feelings about money and savings. If you find that the rewards outweigh the risks, then you will find that stock trading clubs may be the perfect way for you to take charge of your finances, and work towards the profits the stock market brings to many committed investors.
Beginner Trader Wins By Learning Top 10 Option Picks Warning Signs (12)
Focusing on winning trades, and on maintaining a high percentage of winning to losing trades. One losing trade can wipe out a number of winning trades. Successful traders focus on minimizing the loss from losing trades, on getting solid returns from winning trades, and on maintaining good risk to reward ratios.
Discover Ways To Solve All Your Stock Options Investment Club Troubles (13)
It doesn`t matter whether you`re an amateur investor just starting out, or a more experienced investor that wants to expand into more stock options investments, there are tools and resources out there to make all parts of investing clear to your club members.
Self Certification Loans: Your Ticket To Home Ownership (14)
So check out the self employed certification loans today and start on the path to owning your own castle! Youll never regret it, especially years down the road. James Copper is a writer for www.any-loans.co.uk
The Elements Of A Mortgage (15)
The most important tool to understanding how a mortgage will affect you is to have a good mortgage broker who is willing to explain things to you. Let them know whenever you have questions and never be afraid to ask anything that may seem simple.
The First Lesson I Learned As A Forex Trader (16)
When I first started out I used to make a lot of mistakes, but it was all part of the learning experience and I've come out of it a consistently profitable trader.
Drowning In Debt? Consolidation May Save You (17)
Restructuring your existing debt with your creditors, it gives you a solution for lowering interest rates on bills, reducing monthly payment obligations or even just to simplify financial management. It is NOT a loan, and it does not require you to take out a second mortgage on your house.
Understanding The Repossession Of Your Car (18)
The lenders stated goal is to take the car, clean it up a bit and then resell it at an auction or with the help of specialized car dealers whose corner n the market is the sale of repossessed vehicles.
Small Business Credit Cards (19)
Not only do you save time writing checks, but you'll also have an easier time balancing your checking account. Plus, if you have employees, issuing them a credit card linked to your account means you'll see their expenses on your monthly statement as well- making it easy to keep track of everything in one, convenient place.
Croatia Property Buying For Dummies (20)
This is paid by the buyer. Once the transaction has been completed, the change of ownership should be registered within 30 days. The tax can be paid by money transfer, and is then changed into kuna.
Permalink to Seeking Credit For Your Venture Backed Business