Financing for Start-ups: There Are More Options Than You Think

Seeking the best solution to finance your start-up venture is essential to the long-term success of your business. The right solution depends on the current needs of the business, as well as those you anticipate in the future.

The majority of lending institutions base their credit decision on two factors: the business plan and the strength of the owner’s personal guarantee.

The main financing options for start-up businesses are:

• Government guarantee loans offered by traditional banks
• Term loans or lines of credit with a traditional bank
• Factor financing (accounts-receivable financing)
• Equipment leasing

We’ll examine the first two of these, which are both offered by traditional banks, in this article and follow up next week on the other non-bank sources.

Government Guarantee Loans

Government guarantee loans, which are offered by traditional banks, can be used for the purchase of equipment and leasehold improvements up to a maximum value of $350,000.

• The loan cannot be used for working capital or the purchase of inventory.
• The amount lent to the company is tied to the cost to purchase the assets or complete the leasehold improvements.
• Traditional banks will look not only for the owners’ ability to personally guarantee the loan, but also at whether the owners of the business have the wherewithal to inject money in the event the company requires it.
• Rates on government guarantee loans are capped at prime +3% and are typically repaid over 60 months.
• A benefit to the borrower is they will have to personally guarantee only 25% of the loan value. Typical industries would be food service, manufacturing and retail.

Term Loans or Lines of Credit

Traditional bank financing via either a term loan or operating line of credit can be used to fund initial inventory purchases and to provide working capital.

• In order to secure traditional bank financing, the entrepreneur will need to have a proven track record, strong personal net worth and the ability to invest in the business as required.
• Typically, the bank will want to keep the debt to equity ratio below 4:1, which means for every dollar the bank advances to the company they expect the owners of the business to invest a quarter.
• The difference between a traditional bank loan and a government guarantee loan is that the amount advanced to the company does not depend on the purchase of assets or cost of leasehold improvements.
• Also, the owner of the business will have to personally guarantee 100% of the loan value. Rates and term will depend on the strength of the business plan and the personal guarantee of the entrepreneur.

Next week we’ll look at factor financing and equipment leasing as alternative, non-bank sources of financing for start-up businesses.

Farber’s Small Transaction Financing group specializes in arranging loans from $100K to $3M and leases from $5K and up. We arrange financing for businesses that are either experiencing growth, a bump in the road, or are in distress. Please contact Eric Friedberg, CPA, CMA, at 416.496.3078 or efriedberg@farberfinancial.com.

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