How companies at various phases of development can benefit from bank financing

Larry LaCroix, Senior Vice President, Bridge Capital Finance Group, Bridge Bank

As companies progress through their lifecycles, they have different financial needs depending on their time and position in the market. Those variables also influence what types of financial products are available to them.
To put your company in the best position to get access to credit, Larry LaCroix, senior vice president, Bridge Capital Finance Group, Bridge Bank, says that first and foremost, you need to know your business inside and out.
“It’s critical to have a well-thought-out business plan in the early stages so that you have a financial road map and metrics to track to,” he says.
Banks look at a company’s track record of financial performance and how it has corrected for any deviations from its plan. Underlying collateral that could support the loan, such as receivables, inventory, equipment and intellectual property, will also be considered. But what’s really important is the quality of management, as the key to any success is people.
Smart Business spoke with LaCroix about how companies at various stages can position themselves to benefit from bank financing.

What are the stages of a company’s lifecycle?

Companies enter the market as startups, at which point they may or may not have raised capital. They’re starting to generate revenue and have taken their business plan to market. They then begin raising money, typically through angel investors, friends and family. In this third stage, they execute their plans and gain traction in the market. They may raise Series A rounds and venture capital funds before moving into growth mode but likely still have negative cash flow. In the fourth phase, they begin to see positive cash flow as they win market share. The fifth stage is the more sustainable, in which a company goes public or possibly sell to another company. These businesses have proven they are cash flow positive and have real enterprise value.

What types of financial products are available to startups?

In the initial stage, the need for any kind of capital, whether it be equity or senior debt, is significant. Startup companies may have very little revenue but need to get their operations going. The challenge, in terms of financing, is that they’re relatively unproven.
However, there is a product that might fit a startup company that doesn’t have much capital. Invoice financing or factoring, which use a verifiably good customer and the accounts receivable as the basis for the loan, are possible options, depending on the strength of the company’s customer or the company’s accounts receivable. Banks have different ways of determining strength of these customers or accounts receivables. If it’s a public company, they look at financials. If it’s privately held, rating and credit agencies can provide information. However, if it’s an unknown company, invoice financing may not be a viable option, as the bank needs assurance that the customer will have the ability to pay back the loan.

What types of loan products are available to companies in the second phase?

Companies with decent cash positions and sophisticated investors can begin looking at asset-based lending facilities. These often contain different covenants, agreements between banks and borrowers that set benchmarks such as the ratio of tangible net worth to debt that, if broken, would result in default. Asset-based loans can be difficult to obtain at this stage because of a company’s limited history, but banks have some flexibility through the use of covenants to award these loans. And much like invoice financing, banks look at a company’s customers, which become the source of repayment and, in effect, its assets.

How can companies in the third phase get funding?

If it seems as if the company is going to turn cash flow positive, banks might start looking at growth capital lines at this stage. These lines allow a company to go to the next level and are generally in the form of a term loan.
In a negative cash flow situation, a bank will set up financial covenants because it can’t debt-service a growth capital line. Banks will then look at a company’s available cash from recent venture capital investments to cover some of that growth capital to ensure the business has enough assets in the pool with receivables, cash or future cash from investors that would allow it to satisfy the loan.
Also available at this stage is vendor acceptance, which provides letters to vendors that say the bank will pay for goods as ordered, giving the vendor ‘assurance’ it will get paid. This product is a good fit when a company is growing very fast and also works well with large spot orders for which companies need to get more credit from their suppliers.

What products are available to companies with positive cash flow to continue their growth?

Financing in this stage builds on to the existing working capital facilities but offers more term debt and acquisition financing. It’s essentially expansion capital. When a company is pre- or post-IPO, it might move itself out of the asset-based and capital finance product set and into corporate financing, where there are fewer controls and covenants. The loans mentioned previously can also be made more flexible to shape the capital structure.

Where can companies turn for help with navigating these financial products?

Brokers can help companies find the best financing, but they collect a premium for their services. The best thing is to educate yourself and, if you can afford it, find a good controller or finance executive who has experience working with banks or other debt providers. Most important, take your time evaluating your options — in particular your bank options. Get references from your referral network, friends or anyone who can offer a valuable perspective. Referrals should help a lot, especially for startup companies.

Larry LaCroix is senior vice president for Bridge Capital Finance Group, Bridge Bank. Reach him at (408) 556-8338 or [email protected]

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