Tips for Successful Loan Negotiation

hennesseycap.com

Toby DahmSenior Vice President Hennessey Capital

Over 25 years of experience in commercial lending

Traditional, workout, factoring and asset-based lending experience

Expertise in underwriting, portfolio management, marketing and product development

Former entrepreneur

Recognized and trusted expert – Automation Alley, Tech Town, etc.

Goals of this session

Understand the various funding sources available

Review pros and cons of each

Determine which fits the client best

Learn to negotiate a good deal

Seed CapitalAngel Investment

early stage equity investment

Financing Spectrum

Poll Question #1

For a company in the rapid growth stage of its business life cycle, which of the following sources of financing is the most appropriate?

a. Seed capital b. Asset based financingc. Conventional bank loan d. Equipment lease

The First Step

Business Plan

What value does your business provide? How does that translate into profits? Where are you in the business life cycle? What are your financing needs? What finance structure should you request?

Business Plan Assistance

Michigan Small Business Technology Development Centers (MI-SBTDC)

Mission is to support business growth 42 office throughout the state http://misbtdc.org

Poll Question #2

Preparing a business plan is a cost-prohibitive endeavor for a small business.

a. Trueb. False

Seed Capital Used for New Businesses to fund initial idea or prototype

Sources Include:• Friends and family• High net worth individuals• Company or organization• More patient investor, provides mentorship, co-investment opportunities, industry expertise, smaller investment.

Seed Capital Assistance

Tech Town First Step Fund

A partnership of the Invest Detroit Foundation, Tech Town, Ann Arbor Spark and Automation Alley

It is a revolving loan pool that provides funding up to $50,000 to support the development and growth of businesses in Southeast Michigan

http://www.investdetroit.com/managed-funds/first-step-fund

Seed Capital Assistance

Automation Alley

Has a pre-seed fund which offers qualified companies in competitive edge technologies funding of up to $250,000 as well as consulting services

The Alley also provides connection to other funding sources

www.automationalley.com

Seed Capital Assistance

Ann Arbor Spark

Provides consulting services & connections with seed capital funding sources for Ann Arbor-based firms.

www.annarborusa.org

Poll Question #3

Which of the following is NOT a source of seed capital to support the launch of a new business?

a. Tech Town First Step Fund b. Main Street Bank c. Automation Alley d. Ann Arbor Spark

Angel Investment

Investor(s) provide capital for a new business, usually in exchange for convertible debt or ownership equity

Funds used primarily for moving from concept to production Entrepreneurs need a business plan, compelling story and a convincing exit strategy

Angel Investment Assistance

Great Lakes Angels

Expressed resurgence under the leadership of David Weaver

www.glangels.weebly.com

Angel Investment Assistance

New Enterprise Forum

Provides consulting, including connection to funding sources. Not limited to Ann Arbor – they assist company throughout the Midwest.

www.newenterpriseforum.org

Angel Investment Assistance

Grand Angels

Provides consulting and investment in businesses in Michigan with a preference for those located in Kent, Ottawa and Muskegon counties.

www.grandangels.org

Poll Question #4

Angel investors prefer to maintain a low profile and invest alongside other angel investors.

a. Trueb. False

Factoring Used by business to business sales companies

Used by companies with limited track record or rapid growth

Advance 75% to 90% of invoice for immediate cash

Bridge A/R collection and A/P payment gap

Can be used in conjunction with current bank facility

This form of financing has been used since the 15th century to help businesses grow

Asset-Based Finance Asset-Based Line of Credit

Used by established B2B sales companies

Used to restructure current bank debt or as succession financing to factoring

Leverage asset classes to maximize cash-accounts receivable, inventory, machinery and equipment or real estate

Stepping stone to traditional bank relationship

Learn more at www.cfa.com

Equipment Finance How It Works

Asset-specific finance vehicle

True lease and capital leases

Leverages 100% of asset value

Ability to ‘bundle’ and finance the cost of related software and services

Flexible terms (step payments, end-of-lease options, etc.)

Equipment Finance

Best suited for companies with: • Multi-year track record• Demonstrable ability to pay out of cash flow (or guaranty)• Strong collateral value

Equipment finance has a low barrier to entry.

SBA Lending Available to all business stages • Start-up• Limited Track Record • Existing (2+ years)

Two typically used loan programs: 7a and 504 • 7a can be used for commercial real estate purchase/expansion/ground- up, equipment purchase, business acquisitions, debt refinance, working capital (no lines of credits) • 504 can be used only for commercial real estate purchase/expansion/ground-up and equipment

SBA loan sizes can start at $10,000

Conventional Bank Lending

Companies with established track record of sales and performance (at least 2 years)

Full relationship with multiple bank products in addition to loans

Lower rates and looser terms than earlier term financing

Long-term relationship

Poll Question #5

Which form of financing has the earliest origin?

a. Conventional bank loansb. Equipment leasing c. Venture capital d. Factoring

Poll Question #6

Due to the focus on the assets that provide the collateral to secure the loan, which of the business segments below would qualify for an asset based loan?

a. Service b. Distribution c. Manufacturing d. All of the above

Poll Question #7

If an entrepreneur has a bank loan, it will prohibit him/her from obtaining an asset based line of credit to fund growth financing needs.

a. Trueb. Falsec. Maybe

Preparation Financial Documentation

• Historic balance sheet and income statement (3 yrs).• Current period balance sheet and income statement.• Projections including cash flow and income statements. • Proforma balance sheet, if applicable.• Accounts receivable and accounts payable agings.• Contracts or purchase orders.• Customer list.• Personal financial statements and resume (s).• Inventory reports, building or equipment appraisals.• 2 years personal and business tax returns.

Communication Treat as personal and business interview.

Confident but not combative.

Describe opportunities and recognize challenges.

What else should the lender / investor know now that they will probably find out on their own?

If no, ask for advice and use as opportunity for next presentation.

Tips for Finding Funding #1 Understand the financing landscape and where your “ask” fits in the spectrum of players.

#2 Leverage professional advisors for mentoring and coaching.

#3 Be prepared and explain your needs and business in a concise but complete manner.

#4 If turned away, ask for direction and steps required for a “yes.” Don’t be defensive.

#5 Network, network and network.

Poll Question #8

In order to obtain the best possible financing, it is important to conceal business’s weaknesses to showcase the company in the most favorable light.

a. Trueb. False

Due Diligence

Due diligence is the verification of data submitted, for whatever source you are submitting it to.

Due Diligence Due diligence consists of: • Business in good standing • Personal credit • Business and personal litigation • Criminal background check • A review of any business liens • Personal and business references • Vetting of customer relationships and forecasts • Field examination • Appraisals • Review of important contracts • Discrete inquiries (non-supplied references)

Negotiating with Lenders/Investors What is most important to you?

Availability of funds?Cost? Freedom from restrictions? A trusting relationship?

Maintain Options

Negotiate with multiple parties Keep “Plan B” alive

Negotiating with Lenders/Investors Choose your battles wisely Fight for what is most important Don’t’ create hypothetical “horribles” Empathize with the other party Make a business case to support your stance

Settle when possible

Recognize the value of a bird in hand Can you adjust to make the agreement work? Will your partner re-visit the issue and what will change their position?

Thank You Toby Dahm

Senior Vice PresidentHennessey Capital

248.658.3208tdahm@hennesseycap.com