Types of Lenders
No risk lenders are banks. Calculated risk lenders are asset-based lenders. Risk lenders are government affiliated lenders. Anyone can give away equity to raise capital. The challenge is to borrow money without giving equity kickers when your company lacks the asset strength to collateralize loans or the cash flow to repay them. Because most entrepreneurs are fanatically driven to build their companies with the least amount of equity dilution, borrowing versus selling stock is far more appealing.
You must understand your company and its assets, both hidden and visible, in order to know which of the three sources to raise what kind of money and how mu ch. For example, a manufacturing company that seeks to purchase machinery and equipment might be able to borrow money from a commercial bank if the projected cash flow generated from the equipment exceeds the pro-forma loan repayment schedule and the entrepreneur personally guarantees the loan. A signed-up customer makes the projections credible. Banks like belts, suspenders and safety-pins: collateral, cash flow and personal guarantees — before they commit to a loan.
The machinery might be financed by an asset-based lender if the ability to repay is questionable: e.g., if the company has experienced a loss year or had too brief a track record of cash flow. Asset-based lenders have an auctioneer’s mentality. If the equipment they are taking as collateral is generic and can be sold at auction they may loan against it. Specialized or triggered equipment will not attract lenders.
Barring these two conventional lending sources, there exists in most communities State and Federal lenders or loan guarantors, such as the Small Business Administration whose goal it is to stimulate productivity and job creation. The SBA will guarantee loans up to $750,000 and for a term of seven years but they will ask for your personal guarantee.
Another Federal agency, the Farmer’s Home Administration (“FMHA”) provides long-term loans to entrepreneurs in rural communities at the rate of $l0,000 per job to be created so long as the loan does not exceed 75% of the value of the assets to be acquired with the loan proceeds. Depending on the state you live in — the Rust Belt being best for entrepreneurs — there are generally several loan programs for the entrepreneur to tap into: one for job creation, another to purchase equipment and a third to construct a plant. Your telephone book and your city’s Department of Economic Development are the two places to begin the search.