In real estate, it is “Location, Location, Location.” In business the mantra is “Cash is King.” Cash to purchase assets, cash to support business and financing obligations, cash to take out as profit, cash to grow the business, etc. This article deals with the various sources of cash that are available in the marketplace to meet these needs.
When considering the sources of funding for business needs, there are numerous resources that can be accessed, with tiered financing involving multiple participants often the best solution. Before going out to the marketplace to find financing, the most important “first step” to consider is how the funds will be used. If a property is being acquired to house a business, Mortgage financing is the most logical vehicle. If a piece of equipment is being purchased which is used in the business’s production of goods & services, an Equipment Loan makes the most sense. When everyday working capital is needed to fund short term financing needs, a Working Capital Line of Credit is recommended. These facilities are the most commonly used and understood, but the variations between financing structures and availability varies widely between funding sources and it is easy to get confused quickly when listening to the “professionals” as each source can have a different language when describing the same general product. Consequently, I have always started by asking my client what the money will be used for, and then we can move on to discuss the various options available to them to satisfy that need. Sometimes the cost of the financing is the most critical component for the Borrower, both upfront and on an on-going basis. Other times when cash flow is a concern, the amount of the monthly payment is the most important consideration. Often it is a case of how to minimize the amount of upfront cash that is needed to effectuate the transaction that is the most important factor. Regardless of which of these is the most critical component, there is usually a way to structure a transaction to accomplish the final result – which in most cases is to obtain cash for a business to continue operations and (hopefully) expand its profitability.
In order to simplify the topic of funding sources, we will just be discussing Loans and Grants in this article. There are many other types of financing as well as hybrids which have sprung up in the past 25+ years, but in most cases these are more costly to obtain and generally involve larger dollar amounts. A short listing of the types of loans typically provided by traditional funding sources includes:
• Working Capital Lines of Credit
• Equipment Lines of Credit and Loans
• Term Loans (permanent working capital)
• Commercial Mortgages – acquisition or refinance (first lien position)
• Bridge Financing
• Construction Loans and Lines of Credit
• Land Development Loans (residential subdivisions)
• Letters of Credit – Standby and Infrastructure
• Demand (“Bullet”) Loans
Following is a brief listing of the various sources of Loans, Grants and the types of facilities provided:
Commercial Banks:
Commercial Banks are your best source for the “traditional” financing products listed above. Not only is funding still widely available, but the regulatory agencies that govern this sector closely control the disclosure and processing of loan requests. Each institution has different underwriting criteria, but the basic types of loans available are relatively uniform. Pricing and structure are what vary widely in this sector. Banks have very different capital structures and mission statements which results in diverse product offerings that are structured to meet the Bank’s internal goals. This is why it is so critical for the applicant to communicate the purpose of the loan proceeds as the primary determinant of the product options available to them with each Bank. A knowledgeable Loan Officer should then be able to offer several options for satisfying their funding needs based on the use of funds and available collateral.
United States Small Business Administration (SBA):
The SBA provides a much broader level of support to businesses than simply offering Loan and Grant programs. The SBA also provides technical assistance through various training and counseling programs (the most recognized being the SCORE program); it provides contracting assistance, disaster assistance, business information for special interests, advocacy programs, etc. Most of the programs that businesses utilize locally are a partnership between a Bank and the SBA under the SBA’s direct loan or the loan guaranty programs. These include SBA Express loans, SBA 7(a) guaranteed loans and SBA 504 loans. There are also many other more specialized loan and grant programs that can assist new businesses with counseling services, help women and minority owned businesses obtain funding, provide disaster relief assistance, etc. More information on their programs may be obtained from their website: www.sba.gov.
New York State Excelsior Linked Deposit Program:
The Linked Deposit Program (LDP) “is an economic development initiative created to encourage and assist small businesses within the State to make investments and undertake eligible projects that will contribute to improving their productivity, performance and competitiveness by reducing the cost of capital through interest subsidies.” Under the program, eligible businesses can obtain commercial loans at an interest rate that is 2 or 3 percentage points lower than the prevailing rate on such loans, thereby making borrowing less expensive. Lenders are compensated with a deposit of State funds at comparably reduced rates. More information may be obtained through their website at: http://esd.ny.gov/businessprograms/linkeddeposit.html.
Local (City & County) Economic Development Agencies:
Your City and/or County’s Economic Development Departments are another excellent source of funding for ongoing operations, expansion, acquisitions, etc. Each Economic Development Department has a range of financing programs and incentives available to assist small businesses to continue to reside in their community and to attract new businesses to the area. For example, in Monroe County these products and services include:
• Buying Equipment: Great Rate, Great Rebate, SBA 504, COMIDA.
• Purchasing or Constructing a Building: SBA 504, COMIDA, JobsPlus. Enhanced JobsPlus, Green JobsPlus, Shelter Rent Pilot and LeasePlus.
• Entrepreneurial Education: The Entrepreneurs Network.
• Exporting/Importing: Monroe County Foreign Trade Zone.
• Job Training: RochesterWorks!
• Venture Capital: Venture Capital.
• Government Contracting: Rochester PTAC
• Monroe Manufactures Jobs Program
New York Buisness Development Corporation (NYBDC)
The NYBDC’s mission as stated on their website is to “promote economic activity within New York state by providing innovative loans to small and medium-size businesses; to assist our partner banks in making such loans; and, particularly, to assist minority and women-owned businesses by offering credit opportunities not otherwise available to them.” NYBDC is able to complement conventional Banks by partnering with them to provide term loans, many of which do not meet the requirements for traditional financing. In many cases, the NYBDC includes multiple participations, SBA guarantees, flexible amortization and long-term payouts. The NYBDC also provides educational outreach to encourage small businesses in New York State to maximize their potential. Their various programs can be seen in more detail on their website: http://www.nybdc.com.
United States Department of Agriculture (USDA) Rural Development Agency
USDA Rural Development Agency is the economic and community development arm of the federal Department of Agriculture. Tasked with improving economic conditions and the quality of life in rural America, Rural Development provides loans, loan guarantees and grants through its housing, utilities and business programs. Within these three overarching programs, more than 20 different programs are available. In 2008, Rural Development, along with its federal, state and local partners, invested more than $273 million in rural New York. Programs are targeted at rural areas within the state, however the definition of rural can be quite broad, thereby providing programs in areas not typically considered “rural” by most businesses. More information on the programs and eligibility can be found on their website: http://www.rurdev.usda.gov/ny.
New York’s Upstate Regional Blueprint Fund Program
The Regional Blueprint Fund Program seeks to promote economic development by financing capital investment in New York State. $120Million became available in June, 2009 to finance business investment, infrastructure upgrades and downtown redevelopment to advance New York’s economic vitality. The Fund supports projects that help provide a framework for future growth in regions with stymied development. Eligible applicants include municipalities, businesses, academic institutions, and Not-for-Profits with awards ranging from $100,000 to $5Million. For more information, go to http://esd.ny.gov/businessprograms/data/upstatedownstatefunds/programguidelines.pdf.
New York State Energy Research and Development Authority (NYSERDA)
NYSERDA was created in 1975 with the goal of reducing the State’s petroleum consumption through Research and Development efforts. Currently, NYSERDA is primarily focused on energy-efficiency programs, research and development initiatives, low-income energy programs, and environmental disclosure activities. Energy efficiency is promoted through NYSERDA’s educational programs and grants and loan subsidies for the installation of energy efficient systems. More information is available at http://www.nyserda.org.
Venture Capital
Venture capital is a type of private equity capital typically provided to early-stage, high-potential, growth companies in the interest of generating a return, typically through either an IPO or sale of the company. Venture capital investments are generally made as cash in exchange for shares in the invested company. It is typical for venture capital investors to identify and back companies in high technology industries such as biotechnology and information & communication technologies. Venture capital typically comes from institutional investors and high net worth individuals and is pooled together by dedicated investment firms.
Private Financing
Traditionally, the most common sources of private financing are relatives and/or seller financing. In a sale transaction, often the seller will hold a portion of the sale price as a Note Receivable in order to consummate the deal. A collateral position subordinate to the institutional lender is typical with a shorter (5-10 year) term. Family is also another common source of external financing when a shortfall exists. Banks typically require any private financing be subordinate in both payment and lien position to their collateral interest. This increases the risk to the private financing source, often resulting in a higher interest rate to compensate for the increased risk.
Specialty Lending Sources, i.e. Factoring Agents, Asset Based Lenders, Warehousing Lines, etc.
Specialized lending targeted at either specific industries (i.e. Warehousing Lines for vehicles) or types of collateral (Factoring of Accounts Receivable) are also used extensively when traditional Bank financing is unavailable. Collateral is the primary consideration when underwriting these facilities, therefore collateral monitoring by the Lender is detailed and meticulous. As a result, this has spawned a whole industry dedicated to this type of lending.
In conclusion, a profitable, well-managed business has multiple resources available to generate capital and/or obtain financing for their business. Reliance on your team of experts (Accountant, Attorney & Banker) for recommendations on the type and structure of the financing is critical upfront to ensure funding is available when needed and repayment matches the cash flow generated by the business.