I was recently mentoring a late-stage technology start-up who was projecting additional working capital needs. While the owners of the company felt at some point they would need additional working capital, they did not want to dilute the ownership of the company. I suggested we get a bank loan, even though we did not need the money at the time. Why? Fact: The best time to secure a loan is when you do not need the money.
Step 1: Create a Financial Package
We put together a financial package with projections for the banks. This gave them a full picture of the health of the business and our future needs.
Step 2: Identify the Banks You Want to Pitch
There were 13 banks in the Providence, Rhode Island area. Appointments were made with each of the banks. When the banks came to visit our office and data center, we gave them a tour and reviewed the financials and projections with them. We told them we were looking for $500,000 for working capital to expand the business.
Step 3: Be Prepared to Answer Questions (A LOT OF THEM!)
After we went through our presentation with the first 12 banks, they each asked the same question: What is your collateral for the loan? We showed them our client contract lists that were all A+ credit clients with readily known names.
Step 4: Expect Rejection
We got turned down by each of the first 12 banks because we did not have any hard assets and their bank policy was only to lend money on hard assets. We did not have any hard assets because all of our equipment was leased.
Step 5: Don’t Give Up!
We had just one more bank to approach. We set up a meeting and went through the same tour and reviewed financials and projections as before. The banker then asked us the same question: What is your collateral for the loan? We sat down once more and reviewed our contract list with the banker. This time we got completely different reaction. The banker was impressed by the list and said he would review with the lending committee our request. He explained to us that the bank had lost its manufacturing client base and now had service companies like ours as its clients. The banker called me back after the committee gave him the initial go-ahead to proceed with negotiation of the bank loan. He asked me how much we wanted to borrow and I asked him what was his personal lending limit. He said $250,000 and I said that would be fine to start with the first year and the goal was to raise it to $500,000 the next year. The loan was approved and the next year the loan limit was raised to $500,000 as agreed.
Tip: Seek Mentor Who’s Dealt With Securing Working Capital
My bank board knowledge and working capital experience, coupled with the enthusiasm and business knowledge of the technology company founders, enabled us to find and secure funding. If you own a business that needs working capital – don’t go it alone! Seek a business mentor who can help you follow the steps above until you get what you need. What’s been your experience with getting working capital? What tips can you share to help those seeking funds?
P.S. – Do you need an Outside Director, Advisory Board Member, Trusted Advisor, or Interim CEO? Someone who can help you see your business and your goals through “Fresh Eyes.” Contact me and I will work with you to look at where you want to go and help you find the best way to get there. Sometimes all it takes is someone with a fresh viewpoint, unencumbered by company politics or culture to help find the right solution.
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Avoid painful lessons learned. Let me help solve your business problems. A fresh set of eyes can show you a different set of possibilities. Use my experience to save time and money. I have been there and done that. What makes me highly effective is my fresh viewpoint, unencumbered by company politics or culture.
Larry,
Fantastic advice for securing funds. Your point about diluting the investment for the entrepreneur spoke loudly to me. So many entrepreneurs don’t realize what they give up by going to outside investors too early. Losing the control of their “baby” is not why they start the business in the first place.
Keep the great advice coming.
Thanks,
Lisa
Lisa, thanks for your comments and reminding us that timing is everything.
– Larry
I would reaffirm the factual but frustrating irony in “the easiest time to borrow money is when you don’t really need it”. Your experience confirms how risk tolerance varies between banks, and the challenge to accessing affordable bank debt is understanding how a bank thinks and presenting the loan request in a package that minimizes perceived risk. While business owners may accept that general premise, too frequently they fall victim to a lack of objectivity when it comes to anticipating a lender’s perceived risk of their own business. Your Steps provide worthwhile advice for negotiating the process.
Peter, your comments are great for all business owners. I especially like your advice on minimizing the perceived risk when presenting the loan request.
– Larry
Larry, you asked me for my comments.
First, I think one mistake you make is in using the phrase” startup” in your title. Any company sound enough to secure a loan will have to have clients and a revenue track record sufficient to impress a bank. In my opinion (and in my usual world), that’s no longer a startup.
The splitting of the overall ask into $250,000 first and then doubling it later is a very smart one. Most bankers will gladly double the loan balance (especially if it is a line of credit) if things are progressing and most have the authority to do so on their own without having to go back to committee again.
Several companies I know went the convertible debt route. One in particular offered a nice interest rate and guaranteed payments of the interest instead of accumulating it and got the full amount they wanted from some local Amish farmers. Another took the money from investors as a convertible debt and later offered to convert them to a prefered stock A round with a guaranteed 4X on their money of the company is acquired or goes public or merges.
Lastly, a company’s Board members or Advisory Board members can make all the difference to bankers looking at a loan package. In addition, don’t overlook assets grossly undervalued on the balance sheet – like real estate on which the business operates. I helped one company secure a large loan because we were able to establish that the real estate was probably worth 2X the loan amount without even considering the business operations itself (a 60-year old company).
Much has to do with the purpose of the loan itself. I once financed a business importing and selling wine from South Africa without any collateral by negotiating a buy-back agreement from the wineries at 80% of cost (to protect their brand if the importing company ever failed) thereby virtually eliminating the risk to the bank. In another company we used HBG Chamber& CREDC to guarantee a line of credit for equipment purchases (one thing they can do) and a bank to oversee the line.
In yet another I helped a true start-up win a grant for $2 Million from NIST’s ATP program which provided the funds and by agreement the funds could only be used for technology development, not sales and marketing. NIST took a very minor option stake as a kicker and individual investors came on board as a result of this. Everyone was handsomely rewarded the day the company was acquired by a prominent company for 19X Revenues.
There are lots of ways to skin this funding cat. I hope this helps your readers.
Cheers,
Jan
Jan, thanks for your comments.
There are many solutions for finding working capital. It all depends on the purpose of the loan. Thanks for the innovative examples.
– Larry