High-Tech Company with Low Access to Capital

Author: Caitlin Bortolotto Krebs

November 2009

In an uncertain economy, the regional focus on growing the advanced technology, advanced manufacturing, and information technology sectors has not ceased.  While the desire to help your business grow widely exists, the challenge of gaining access to capital may still be difficult.  In fact, there is a strong interest from area lenders to finance technology companies.  However, like the time it takes to develop or improve your technological product or service, so too does cultivating a plan to finance your enterprise.  

The simple fact is that you must prepare your company to demonstrate how your product has proven to be profitable to show an investor or lender that you can repay them.  Business owners should expect that they will need to bring their own investment into virtually any project.  Additional sources of equity can come from family and friends, or through business partners and investors.  In the early stages of the business life cycle, it is more common for funding to come from these equity sources rather than traditional or even alternative financing.  

Utilizing different tools, expertise, and strategies will help you realize success.  Many successful business owners keep a strong advisory team close to them to help counsel them on how to meet their short-term and long-term goals.  A good banker, accountant, and attorney are all assets to helping you achieve your goals. Financial services provide more than just debt services—they provide you the depository services, lines of credit, other services that you need for your daily operations. Strengthening these relationships set a good foundation for when you need to take on debt to make capital investments into your company.

With demonstrated profitability and demand for growth, you are likely thinking about how to access the cash you need to expand your business.  When it comes time for your business to finance those fixed-asset investments, there are conventional lending products and alternative, incentive-based financial services that are available to businesses in the Dayton region.  Now more than ever you need to know your options.  

In the conventional lending realm, educate yourself on the SBA 7(a) guarantee loan program for both current and fixed-asset financing.  The State of Ohio has some programs that run directly through conventional lenders as a loan guarantee program, like the 7(a), many state programs work in tandem with conventional lenders.  To learn more, visit the Ohio Department of Development’s Office of Incentives at www.odod.state.oh.us.

Local and federal incentive programs also exist, many through nonprofit organizations called Certified Development Companies, such as CityWide Development Corporation.   Incentive financing is typically provided as one piece of the financing puzzle.  Loan programs like the CityWide SBA 504 and the CityWide Direct Loan Program help to fill a 30% – 40% gap in the total financing package.  These programs are offered in partnership with conventional lenders, investors, and the businesses themselves.  Program benefits include long-term, fixed rate pricing.  Interest rates are typically lower than what is available on the commercial market.  For companies with at least two years of profitable history, they can expect to contribute lower equity amounts, for many as low as 10%.

Additionally, CityWide houses a unique program called Enterprise Ohio Investment Company (EOIC).  EOIC is a Small Business Investment Company and has the flexibility to engage in more creative financing structures.  Companies can engage EOIC for mezzanine financing or debt securities, in addition to gap financing.  Small Business Investment Companies do not always look to make the incentives available based on pricing; rather they get involved in deals that could be the tipping point in getting the deal done.  This is a great financing tool for technology companies looking to expand into a new market, add a new line of business, or make investments into their infrastructure—projects that will take your company to the next level.  

You may be thinking, “Sounds great, but what do I need to access these programs?”  Preparation on the part of the business is essential to lending.  Your advisory or management team provides the strategic plan, and the accountant and attorney can provide the technical information you need to prepare a package for your lender.  Your banker should be able to help you structure an appropriate financing package.  Incentive-based financial service providers enjoy the opportunity to work with all lenders, and require the same information that you typically provide to your banker.  You are providing your lender a roadmap; the information helps them to understand whom you are, where you are going, and how you plan to get there.  The fewer roadblocks the lender has to navigate the quicker everyone gets to their final destination.  Here are some tips on a few areas to focus your preparation:

A.  Be sure to have a well-defined project scope, including cost estimates and a timeline before approaching your lender; this is typically defined in your business plan or your plan for expansion.  One common pitfall is to think too small or too large.  Sometimes, planning your growth in phases can ease that pitfall.  Your business will only be able to afford what it can comfortably cash flow based on the rates and terms and size of the deal.  Be encouraged to have educated facts on the needs and costs of a project, but be open minded on how to approach your project’s financing solutions.  

B.  Business financials are necessary: typically, three years historical financial information in the form of tax returns and internal or audited financial statements is what is expected.  Financial projections never hurt to include, if you have them.  Businesses in the early stages—two years or less of profitable history—should provide at least three years of financial projections.  Incentive financing is commonly tied to public policy goals.  With your financial projections, it is helpful to provide an estimation of how many people work for you, their average pay rate, and how many employees you will need to add over the course of the coming three years.  Other public policy goals can include: helping businesses become more competitive in the marketplace, expanding exports out of the State and globally, geographic location, veteran, minority, or women-owned businesses, improving the value of real estate, and reducing energy consumption or promoting renewable energy.  Define how the project helps improve the competencies and financial success of your business.

C.  A lender will look at both the business financials and the personal financials of its owners globally.  There is always concern for how a business will affect the personal situation of its ownership—will they be able to cover their personal obligations?  In addition, how will the business owner affect the financial position of the company?  Come prepared with a personal financial statement (i.e. a personal balance sheet) and the last three years of personal tax returns.  If your business has any affiliate or subsidiary businesses, the lender will want to see that information too.  

D.  Credit history is important.  If blemishes exist, you will want to be prepared to explain what happened and how the problem was remedied.  Credit alone is not a deal breaker, but it can be a hurdle.  It goes back to the roadmap: the more prepared you are to anticipate the questions the better the outcome could be.  It is like giving your lender a detour for the roadblock.  If personal credit is an issue, you should work with a nonprofit credit-counseling agency to resolve your credit issues.  Admittedly, some issues are irreconcilable, but for many it is just something that if given time and attention can secure a resolution.

Although financing your business is just one aspect in your strategic plan, it should not be a last-minute thought.  Capital is usually available for businesses that have been thoughtful in demonstrating their ability to repay the debt.  Timing is important and it is up to you to decide the time it will take to prepare—are there aspects that could require weeks or months or years to achieve?  Taking the time for planning and preparation is surely not easy considering all the demands on a business already, especially in a time when we are operating leaner and meaner than ever! But the more time you can invest into preparing yourself financially, the more likely you will be pleased with your return on that investment.