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Because of a deteriorating commercial lending environment, some of our earlier advice is now likely to be especially relevant for many businesses. Banks are currently saying “no” more frequently than they have in decades, and we provided advice a few years ago about what actions business owners should consider if their bank rejected a small business financing request.

As described in this article, while a bank saying “no” is not an outcome that any business owner would hope for, it can eventually lead to an overall improvement in commercial financing options under many circumstances. Small business owners are increasingly hearing their bank say “no” to requests for needed business financing and working capital. Most commercial borrowers are often not sure what to do next since such an awkward situation represents uncharted waters for them.

Banks are routinely saying “no” to small businesses which are both profitable and long-term customers. It is now common to hear phrases such as “thinking outside the bank” and “business loans without banks” when talking about strategies small business owners might need to analyze because this has become such a widespread commercial lending problem.

There are two financing situations that businesses should especially be prepared for banks saying “no”. One of these involves commercial real estate loans and the other working capital financing (including business lines of credit). While a small number of banks are still proving to be reliable sources for some business financing options, recent nationwide commercial lending reports clearly show a drastic reduction in commercial loans for commercial real estate financing and working capital loans.

Small businesses have only rarely pursued the option of replacing their bank. However, an astute business owner will quickly realize that they have little recourse but to pursue such a path when their bank says “no” to routine requests for business financing. Improvements to the overall financial health of a business will be achieved in a pleasantly surprising number of cases even though this search for new commercial finance alternatives is undertaken under protest by most commercial borrowers. Keep in mind that in many cities and communities, one or two banks frequently operate in a near monopoly environment. When small business owners have literally been forced to find new business finance options, they are often pleased to discover that they can not only replace existing bank financing satisfactorily but also improve their bottom line in the transition.

A prudent starting point for commercial borrowers to adequately evaluate how to get working capital and other business loans when their bank says “no” is likely to be a lengthy conversation with a small business financing expert. Finding and selecting such an expert will not be a quick or easy task for business owners, but this step is likely to be critical to eventual success in formulating a strategy for obtaining new sources of effective commercial finance funding. Ensuring that the commercial financing expert chosen is totally independent and not affiliated in any way with the bank which said “no” is an especially crucial aspect not to be overlooked in locating a reliable expert to help.

Introduction

A venture financing can be structured using one or more of several types of securities ranging from straight debt-to-debt with equity features (e.g., convertible debt or debt with warrants) to common stock. Each type of security offers certain advantages and disadvantages to both the entrepreneur and the investor. The characteristcs of your situation and current market forces will impact the type and mix of security package that is right for you.

Types of Securities
Senior debt: Which is usually for long-term financing for high-risk companies or special situations such as bridge financing. Bridge financing is designed as temporary financing in cases where the company has obtained a commitment for financing at a future date, which funds will be used to retire the debt. It is used in construction, acquisitions, anticipation of a public sale of securities, etc.
Subordinated debt: Which is subordinated to financing from other financial institutions, and is usually convertible to common stock or accompanied by warrants to purchase common stock. Senior lenders consider subordinated debt as equity. This increases the amount of funds that can be borrowed, thus allowing greater leverage.
Preferred stock: Which is usually convertible to common stock. The venture’s cash flow is helped because no fixed loan or interest payments need to be made unless the preferred stock is redeemable or dividends are mandatory. Preferred stock improves the company’s debt to equity ratio. The disadvantage is that dividends are not tax deductible.
Common stock: Which is usually the most expensive in terms of the percent of ownership given to the venture capitalist. However, sale of common stock may be the only feasible alternative if cash flow and collateral limits the amount of debt the company can carry.

While each of these securities has unique characteristics, they can be grouped into two categories: debt or equity. In structuring a venture financing, the primary question is whether the financing should be in the form of debt or equity.

Disadvantages of Debt to a Company

From a company’s viewpoint, there are two potential disadvantages to debt.

An excessive amount of debt can strain a company’s credit standing, thereby reducing its flexibility in meeting future long-term financing requirements on a favorable basis. It can also negatively affect a company’s ability to obtain short-term credit. Of course, the form of debt the venture financing takes makes a difference. For example, subordinated debt will have less impact on borrowing capacity than senior debt.
The venture capitalist has the option of calling his loan if the company is in default of the loan agreement. This remedy, which is not available to him under other financing agreements, puts him in a better position to influence the company’s affairs when it is in default.
Advantages of Debt to a Venture Capitalist

From the venture capitalist’s viewpoint, there are three principal advantages to debt.

There is a greater likelihood that the venture capitalist will get his principal back and, at least, a small return. Many of the companies in the average venture capitalist’s portfolio are referred to as “the living dead.” Needless to say, their performance has turned out to be disappointing. In some cases, these companies are able to repay principal with interest but have limited appeal to potential acquirers or the public. As a result, a venture capitalist with an investment in such a company’s common stock may be unable to recover his investment within a reasonable period, if at all.
As previously discussed, under certain circumstances the venture capitalist is in a better position to influence the company’s affairs.
The venture capitalist has a senior claim. However, it should be emphasized that the meaningfulness of a senior claim depends on the marketability of a company’s assets and the amount of equity it has to cushion its creditors’ position. For example, in the case of a start-Lip situation with little or no equity, a senior claim means little or nothing.
Percentage Ownership Needed

While the difference may not be great, depending on the particular circumstances of the company, a debt position involves less risk than an equity position for the venture capitalist. Accordingly, a company should not have to relinquish as much ownership when a financing is in the form of debt. However, this advantage must be weighed against the disadvantages of debt.

No matter how the venture financing is structured, it must be priced so that it is attractive to the venture capitalist. There is no clear-cut answer as to how much ownership a company will have to relinquish to make a financing attractive. Broadly speaking, the greater the potential return perceived by the venture capitalist, the less ownership he will demand. In other words, if a company has a patented product which a venture capitalist thinks is revolutionary and highly marketable, he will undoubtedly settle for less ownership than he would in the case of 4 company with a relatively less attractive product. Thus, his ultimate position will be a business judgment based on his potential return.

Before you enter negotiations with the venture capitalist, you should determine what your company is worth and how much of your company you want to sell. The following procedure can be used to get a rough idea of how much ownership you will have to give up to make the financing attractive.

Estimate the risk associated with the venture financing. If the investment is very risky, the venture capitalist may be looking for a return as high as 15 times his investment over five years. Conversely, if a relatively low degree of risk is involved, the venture capitalist may be satisfied with doubling or tripling his investment over five years.
Make a reasonable estimate of the price/earnings ratio applicable to comparable publicly held companies. The market value of the company can then be projected by multiplying forecasted annual earnings by the estimated price/earnings ratio for comparable companies.
Divide the estimate of the total dollar return the venture capitalist wants by the projected market value of the company. This yields the percentage ownership the venture capitalist will need, as oil the future date, to realize his desired return. It is important to note that any equity financing required during the interim period must be considered in making these calculations.


Case Study

Suppose XYZ Company, Inc., a start-up, needs 0,000. The company’s product appears to have excellent potential. However, because the product is new and unproven, an investment in the company would be extremely risky. Accordingly, it is reasonable to estimate that a venture capitalist would want a potential return of at least ten times his total investment in five years. Management estimates that the company should be able to “go public” at 20 times earnings in five years. Projected after-tax earnings for the fifth year is ,250,000. Additional long-term financing of 0,000 will be needed at the beginning of the third year.

Scenario I

In the calculations below it is assumed that the venture capitalist who provides the initial financing (0,000) also provides the subsequent financing (0,000), and that he wants a return equal to ten times both. However, it should be noted that if the company made satisfactory progress during the first two years, it would be reasonable to assume that the venture capitalist would be satisfied with a lower return on the subsequent financing since it would involve less risk.

Estimate of Total Dollar Return Required Total Investment $ 1,000,000 Estimate of Return Required X 10

,000,000

V. Projected Market Value in Fifth Year VI. VII. Projected Earnings ,250,000 VIII. Estimate of P/E Ratio x 20

,000,000

Percentage Ownership Needed in Fifth Year Estimate of Total Dollar Return quired ,000,000 Projected Market Value of Company in Fifth Year 25,000,000

40% Scenario II

In this set of calculations it is assumed that a second investor provides the subsequent financing (0,000). The calculations show that the venture capitalist who provides the initial financing (0,000) would need 20% ownership as of the fifth Year to realize the return he wants. However, since the ownership to be given up for the subsequent financing will reduce his ownership position, he will want more than 20% ownership initially. For example, if it is assumed that 15% ownership will have to be given up for the subsequent financing, the venture capitalist who provides the initial financing would need 23% ownership initially to end up with 20% ownership in the fifth year.

Assume the same facts as Case I, except a second investor provides the subsequent financing for 15% ownership.

Estimate of Total Dollar Return Required Total Investment $ 500,000 Estimate of Return Required X 10

,000,000

Projected Market Value in Fifth Year Projected Earnings ,250,000 Estimate of P/E Ratio x 20

,000,000

Percentage Ownership Needed in Fifth Year Estimate of Total Dollar Return required ,000,000 Projected Market Value of Company in Fifth Year 25,000,000

20%

Thus, it appears that the investment (0,000) may be attractive to an interested venture capitalist if the principals of XYZ Company, Inc. are willing to give up approximately 23% ownership.

Conclusion

It must be emphasized that the above procedure is highly subjective. And, you should remember that what really matters is how the venture capitalist views the relative attractiveness of a company. Typically, venture capitalists are satisfied with a minority interest. Although a venture capitalist may demand a majority interest, generally they are not interested in operating control. Some of them like to tie the amount of ownership they ultimately get to the performance of the company. For example, a venture capitalist who wants a majority interest initially may give the principals the opportunity to earn part of it back. Such an arrangement can be used to compromise on pricing when there is a significant disagreement between the principals and the venture capitalist.

To entrepreneurs unfamiliar with venture capital, it may appear that the venture capitalist is seeking an extraordinary high return on his investment. However, it is important to understand that, even under the best of circumstances, only a minority of the companies in which the venture capitalists invests will be successful. He is well aware of this, and must make a sufficient return of his successful investments to come out with an acceptable return overall.

If you are shopping for a car you need to get mentally prepared for the salesperson. Plan your negotiation tactics, because you will need them in the trenches of the deal. You need to also prepare yourself for another major player in the auto-buying process, the finance manager.

Find Free: Auto Loan Help

When you are searching for a new car, the phrase “Buyer Beware” is a good term to keep in mind.. You have heard the stories about the pushy salesperson that will do anything to sell a car. The other person who will have a major impact on your car purchase is the finance manager himself. You need to ask a few questions when the two of you make the deal:

1. Find our the interest rate of the loan.

The interest rate is the most important factor to a great purchase. You can ask the dealer what the APR is when you are comparing loans. Ask him how they figure their APR, remember many lender have different ways to figure rates. This will help you know exactly what they are figuring in their loan cost.

2. Find out about any auto loan penalties and fees.

Be careful because allot of dealers like to hide fees with in the loan. You need to know what all the fees are that will be included in the loan. Try to avoid any extra penalty fees the dealer may try to charge for paying off the loan early. Latter on this may cause a problem if you decide to refinance, so try to avoid this.

3. Get a final approval, before you leave, on the finance package.

The finance manager can mislead you by telling you the deal is done, then calling you the next day to say the deal fell through. They will of course have another lender that will do the deal at a much higher interest rate, and additional fees. Do not get caught in this trap, make sure you have a done deal before you leave the lot.

4. Be careful with additional credit insurance.

The auto dealer likes to generate extra revenue by selling you credit life and credit disability policies. Make sure you get all the details for one of these extras before you agree and compare the policy with others out there.

These four facts will help you with you auto loan and make you prepared for the finance manager.

Competition is stiff among real estate investors. There are a lot of properties out there but you’ll be left out if you have financing problems. You’ve got to have an ace to win over your competitors. Do you want to know how? The best way to close your real estate deals is through hard money financing.

You can get hard money loans faster and easier than traditional loans from banks. Hard money lenders have a different way of processing a loan request, and this is preferred by most investors. When investors apply for bank loans, it usually takes a month before they know whether it is approved or not. Banks take their time in scrutinizing a borrower’s credit history. It is a long process.

Hard money lenders,on the other hand, focus on the borrower’s real estate project. Your property is the main concern here. If you can convince these lenders that your property can make thousands of dollars, you are sure to get the financing you need. That is all you need to do. Don’t get discouraged by your poor credit score due to last year’s recession. By making a good proposal, and by making your project a huge success, you can wipe out that bad record of yours.

Another advantage of using hard money loans is the amount of money lenders are willing to give to the borrower. In a rehabber’s case, for example, he needs money to purchase the house plus the money for house repairs. If he will use bank loans, most probably, he’ll only get enough money to buy the house. That’s all. However, in hard money financing, lenders are generous enough to provide the repair cost.

Even though hard money loans have high interest rates, investors are still applying for it. They don’t care so much about the interest rates. The reason why they turn to hard money financing is because they need urgent money for their real estate deals. All they need is fast cash so the opportunity of making huge profit will not just pass them by. It takes a positive attitude to succeed in real estate venture. These positive investors who believe that they can pull off their projects are the ones who make thousands of dollars in this business.

Nothing beats cash when closing deals in real estate. Don’t let financial constraints ruin your investing career. Hard money financing is what you need.

To learn more about hard money loans, visit RehabHardMoney.com today.