As your company experiences increasing global commercialization of products, services and technologies, you may face new tax challenges and uncertainties.

“Even the smallest of companies are experiencing some interaction with global suppliers or customers,” says George Koutouras, partner, international and transaction tax, at Moss Adams. “So that means they have the need to consider certain tax aspects associated with global transactions, on one end of the supply chain or the other.”

With a U.S. tax system based on global income, it may make sense for a company — transforming from predominantly domestic to global — to keep earnings offshore to reinvest in new growth for foreign jurisdiction subsidiaries, as opposed to taking U.S.-sourced capital and committing it to offshore operations, he says. However, you must have an economic or legal justification to organize your business that way, as solely tax-motivated transactions are not available in today’s environment.

Smart Business spoke with Koutouras about businesses experiencing increasing growth globally and the potential tax problems.

When migrating capital offshore, why are bank debt covenants important?

When a company decides to go offshore, setting up operations or buying facilities, the first question is not what does that do from a tax perspective, but what are the restrictions on your bank covenants? Lenders may place restrictions on a company’s ability to use lent funds offshore, recognizing the difficulty associated with returning that capital to the U.S.

Review your bank’s financing restrictions. If they limit your ability to migrate cash or capital, determine if you can re-negotiate some of the bank notes, which is not always easy. A company may need to replace certain financing with other debt financing — it’s not a matter to be taken lightly.

Ultimately, whenever sending capital offshore, businesses and their advisers need to understand the intended end result. Do they need to repatriate it at some point to service debt, or do they intend to keep that cash offshore indefinitely to finance offshore growth? The answers will influence the structure that is created from the outset.

How seriously should a company consider local financing options?

If a company migrates some activities offshore, you might need to obtain local financing to expand operations. However, certain jurisdictions, particularly in Europe, are experiencing a credit crisis and, as a result, bank financing is not readily available. Without local financing, question whether there is any ability to service U.S. bank debt, or will you need a mechanism for intercompany financing? Often cash-rich companies use intercompany loans to more freely transfer extra cash between jurisdictions.

But an inevitable hurdle with related-party transactions is the need for a secondary analysis to ensure those transactions are at arms length. Otherwise, the jurisdictions involved, such as the U.S. and Ireland, may attempt to re-characterize or re-price payments to be more consistent with market turns, creating some unanticipated tax consequences.

What intellectual property (IP) will you need within a foreign region?

IP is a relatively broad category of assets that not only consists of patents and trademarks but can also include know-how and processes, and companies should match the commercialization of IP with the development of the IP.

Often businesses take U.S.-developed IP and parse it up among various global commercial centers. However, if IP is being sold in Europe, there may be a need to manipulate or develop that IP in a European-centric way. Companies should identify centers of activity for offshore endeavors, including the development of IP. Areas, such as Ireland for Europe and Singapore for Asia, have a skilled work force, good technology infrastructure for research and development, and a relatively low tax rate when compared to the U.S.

IP is an area where the U.S. is vigilant about establishing policies to restrict companies’ ability to migrate assets offshore, so outright sales of IP offshore aren’t without their accompanying tax costs. Often, property, including IP, in its earliest stages of development and/or recently purchased is the easiest to convey offshore without the inclusion of taxes. To the extent IP and other U.S.-owned assets are needed offshore, consider both sides of related-party pricing to avoid unsupportable accumulations of income or loss in the relevant jurisdictions.

How should you quantify the support needed from domestic management, sales force, technical help or home office systems?

The cost for headquarter-support services needs to be chargebacked by the offshore entity. Companies that aren’t charging for management services and/or systems that go offshore are vulnerable. For example, the U.S. might assert that the foreign entity should be paying more back to the U.S. for the use of the U.S.-based management, thereby creating more potential U.S. tax income. This is something that needs to be reviewed periodically; the management chargebacks existing today might not be the chargebacks needed in a year’s time.

What tax considerations are important for how you sell goods within a region?

Pay attention to how your company conducts sales within the jurisdiction. Sending your domestic sales force into a foreign country will extend the taxable presence to that other jurisdiction. To avoid that, a company can compartmentalize sales by setting up a separate company or using a third-party, such as distributors, already within the country’s marketplace. Another mitigation is to avoid signing sales contracts within market and thereby creating a taxable presence. Ideally, in such cases, all sales are negotiated and executed remotely, and the salesperson is merely demonstrating the product with no authority to sell on behalf of company.

Also, when selling inventory, the placement of property within a jurisdiction could create a taxable presence. The U.S. will tax the income, and the foreign jurisdiction may assert tax liability for sales within its borders, creating the possibility that the same dollar could be taxed twice.

George Koutouras is a partner, international and transaction tax, at Moss Adams. Reach him at (415) 677-8212 or

Insights Accounting is brought to you by Moss Adams

Published in Northern California

The way business owners can raise private capital is undergoing an unprecedented expansion.

Pursuant to the Jumpstart Our Business Startups (JOBS) act, the Securities and Exchange Commission (SEC) has proposed new rules that would permit general solicitation and general advertising for certain private placements.

Comments were due by Oct. 5, with the final rules due out shortly.

“It should certainly spur investment,” says Peter J. Smith, a member at Semanoff Ormsby Greenberg & Torchia, LLC.

“The average small business owner might have a $10 million per year company and want to raise a million dollars for an acquisition, a new product line, division or plant, or want to hire or need to grow,” he says. “They may not know the kind of people who can write those checks, and if they don’t, they can now advertise for


Smart Business spoke with Smith about how private placements work and what the future holds.

What is a private placement? 

Under the Securities Act of 1933, the sale of securities must be registered or meet a ‘safe harbor’ exemption.

These exemptions are primarily contained in Rules 504, 505 and 506, although Rules 504 and 505 are not often used. Rule 506 provides that a company can sell an unlimited dollar amount of securities to an unlimited number of ‘accredited’ investors, and up to 35 nonaccredited investors.

An individual accredited investor is someone who meets one of the qualification criteria, including:

  • Net assets in excess of $1 million, excluding private residence.

  • An individual annual income of $200,000 per year or a joint income of $300,000 per year for the last two years and anticipate reaching that level again in the current year.

Entities have to meet different criteria to be considered accredited. Under current rules, companies can take up to 35 purchasers who do not meet the accredited investor test. If you are issuing securities to nonaccredited investors, however, you will want to provide adequate disclosures.

Additionally, there are prohibitions on general advertising and solicitation. This significantly restricts who you can solicit.

Why might a business owner utilize a private placement to raise capital?

Growing companies in need of capital and not in a position to borrow could benefit from a private placement. In this lending environment, banks are extremely conservative in their underwriting criteria. So, if a company is growing quickly, capital is generally not available to it through traditional means if it doesn’t have the collateral.

Smaller, privately held companies can’t afford a public offering’s cumbersome registration and reporting requirements. By doing a private placement, the business can raise additional capital through the issuance of equity. Owners give up a piece of their company, but theoretically, are growing the company, so the owner has a smaller piece of a larger pie.

By retaining an experienced attorney, you can structure a private placement in a way that meets your long-term business goals and is attractive to potential investors.

The attorney can assist the business with preparing a private placement memorandum, describing who they are, what they do, why they’re raising capital, the uses of the funds, and includes their business plan, projections, financial statements and risk factors.

This information becomes part of the solicitation materials used to attract potential investors and also protects the company from liability.

What are the new rules for private placements?

The new SEC proposed rules will permit the use of general solicitation and general advertising to offer and sell securities so long as you meet specific criteria, including:

  • The securities can only be sold to accredited investors.

  • The issuer of the securities has an obligation to take reasonable steps to verify that an investor is in fact accredited. For example, if a purchaser claims his net worth is in excess of $1 million, the issuer should ask for a personal financial statement and supporting documentation to demonstrate that net worth.

The intent is to open up additional avenues of capital for small business in order to stimulate the economy and job growth.

How much will the solicitation rule change private placements? 

Most small businesses don’t have a group of high-net-worth individuals waiting to invest.  It’s hard to go to your friends and family and ask for a million dollars. There are a lot of companies with good stories to tell and solid financial statements, but without the right kind of investor contacts. So, if they could go to an attorney or investment banker, put together a package, advertise and openly solicit accredited individuals and companies, it’s going to significantly increase the flow of funds into small businesses.

What are the risks regarding general solicitation and advertisement?

It does create an environment where there is more opportunity for fraud and misrepresentation. Investors will have to be careful and do their due diligence to assure they are making good investments in good companies. The documentation and disclosures will become that much more important. If we weren’t coming off a very difficult recession and sluggish economy, it’s unlikely this rule would have been implemented. For now, it is a way to get capital to small businesses to spur growth. Banks can say they have money to lend, but they’re not lending it. There are many companies that are struggling to get capital; they’ve had lines of credit reduced and borrowing bases limited. It’s very difficult for a growing company to get enough capital to continue on its growth cycle. This new rule should help.

Peter J. Smith  is a member at Semanoff Ormsby Greenberg & Torchia, LLC.  Reach him at (215) 887-4132 or

Insights Legal Affairs is brought to you by Semanoff Ormsby Greenberg & Torchia, LLC

Published in Philadelphia

Cameron Mitchell has a challenge that will not go away: having enough capital to keep his diverse portfolio of restaurants operating and expanding.

Mitchell’s constant concern for funds in a capital-intensive business has taught him that there are lots of ways to keep the momentum going, but one approach is a sure solution:

“Constant finagling,” he says. “It depends on the situation. It’s like we might have to hold a part of the distribution to make things work. Or we might re-up with the bank, increase our line of credit at the bank, or we might demand a landlord give us tenant improvement dollars sooner versus later. It just depends on all sorts of things.”

The sure thing is that Mitchell continues to set his sights on expanding his current concepts and developing new ones. The company has 18 units with seven individual themes as well as a catering company and a sister company, Rusty Bucket Restaurant & Tavern. Plans are to introduce the Ocean Prime concept into several major cities in the U.S., including New York, Chicago and Houston.

“The situation is all driven by development,” says Mitchell, president, and who founded Cameron Mitchell Restaurants LLC in 1993. He’s a classic example in the restaurant business of going from the dish room to the board room. His first position was as a dishwasher at a Columbus steakhouse. From there, with a degree from the Culinary Institute of America, he worked his way up and became head of his own restaurant company. Mitchell has received numerous awards from organizations to recognize his success.

Keeping the status quo is not on his mind, even though it means steering through a sometimes stormy sea in terms of the restaurant industry.

“You may have multiple developments at one time. So just the way the timing is may make it tight. It just depends, you can’t always dictate when your new locations are going to open, so you might have three restaurants in a year to do and they all open within three months of each other.

“Sometimes you might end up OK this month, and then next month you are tight,” he says.

Maybe not exactly what you’d expect to hear from someone who in 2008 sold two of his most popular themes, Mitchell’s/Columbus Fish Market and Mitchell’s/Cameron’s Steakhouse — a total of 22 restaurants — to Ruth’s Hospitality Group for $92 million.

But Mitchell didn’t rest. He has spent the years since that sale reinvigorating Cameron Mitchell Restaurants, developing new concepts and new locations.

Even though annual sales are $70 million, the thought of deciding he had reached his goal hasn’t entered his mind.

“I think it is impossible to get to that point because I might be where I want to be but the company has 2,400 employees now, and they have dreams, goals and aspirations — people are building their careers with the company,” Mitchell says. “And if I say, ‘Hey, I’ve had enough. I’m fine,’ well, that kind of messes them up. I can’t do that. So we continue to grow and develop the company for the betterment of all our people, our partners and our communities in which we do business.”

Here are some of Mitchell’s tips on the challenges of getting and managing capital to keep your business operating and on an expansion journey.

Prepare your case

Market entry strategy, mergers and acquisitions, organic and inorganic growth — you’ve heard all of the buzzwords about expanding your business. And in this age of the entrepreneur, you’ve heard about vision, passion and energy.

Combining those ideas can result in a motivational quotient that can’t be beat. The only missing ingredient is capital.

Shopping around for lenders or investors who are favorable to working with your market area is a good start.

“Some lenders have different tactics, standards and loan profiles,” Mitchell says. “Some are comfortable doing particular industries and some are not. Find ones that are comfortable in your field.”

Likewise, evaluate how comfortable you are with them. Look for indications that would open the door to a transparent relationship, where you feel free to discuss all aspects of your business necessary for your success.

“You want to keep them abreast of your information,” Mitchell says. “Let them know if you are running into potholes, let them know first, and why. Just be upfront with them. Better to ask for permission than ask for forgiveness.”

Before you make your pitch, there are five things you want to have prepared: a good story to tell, a good plan in place, a strong development plan, answers to all potential questions and solid economic models.

While all these steps are important, the first step should be to tell a good story, one that relies heavily on your character. Lenders want to hear about honesty, dedication, ethics and your values.

“Hopefully you’ve built some integrity and a reputation over the years, that you do what you say you were going to do, and your word is good, and I think that starts with that,” Mitchell says. “It starts with character.

“Before you get a loan, a bank likes sound numbers and absolutely that’s going to be important. But if they don’t feel you’re a good character, they might not want to lend you any money. So it starts with that, the good story, good track record and a good plan.”

You also have to be concerned about the costs involved with a bank loan. Rates and terms can vary widely. Banks are usually the cheapest but they are the toughest. When things go wrong, they want to know about it.”

Banks have to decide who gets a loan and who doesn’t and borrowers who have borrowed one or more times and have paid back one or more loans on time will get preference.

Venture capitalists, on the other hand, usually make high-risk loans and aren’t really interested in the profit prospects of your business. Low-risk and low-profit ventures are music to a banker’s ears rather that the dissonant sounds of high risk businesses or those with no record of successfully paying back loans.

If the bank loan route doesn’t seem to be the one for you, try limited partnerships, either with investors or private equity firms. There are trade-offs with each. Both are in it for the money which they hope to earn by investing in your business.

“Investors are in for the long haul, usually don’t have control and they don’t have recourse, but they want a much bigger return,” Mitchell says.

You may want to try a private equity fund, which is normally a limited partnership with a set term of five to 10 years.

“It’s the most expensive form of capital but yes, it is an option,” he says. Mitchell says this is his least favorite choice, and he has not taken that route over his years in the business.

“The thing with that is you usually give up a piece of control for that,” he says. “And they want to be on the board, and they want to have control, and they want to bring their guys to help run the company. It just gets to be a little bit trying. They may want to get out after five years. They typically want to have a sale transaction then. You may not be ready for that.”

Manage the capital that you have

If you can’t get an infusion of capital or it will be some time in coming, your alternative is to manage what you have. While that may involve the “finagling” Mitchell mentioned earlier, another method is to let your foot off the gas, but not step on the brakes.

“The best way to manage your capital is by your throttle,” he says. “By reducing developments, and slowing down developments, you let the business catch up if you’re behind.”

Putting a freeze on new expansions is effective, but it may come with a price.

“It’s not always a good option to stop growth and stop development,” Mitchell says. “In my opinion, it should be kind of the last option. But it’s definitely a good option if you need to raise cash.”

A better position to be in is building your identity and company culture to withstand the challenges of rapid growth. That way, there is less danger of expanding too fast.

“Maybe some people lose their way, but not us,” Mitchell says. “We hold our brand and our culture very, very dear to our heart. We work on them every day, and take care of them every day. It helps to strengthen the business.

“I wanted to write our philosophy and create the culture and values of the company that I wanted to build. So once I got that written, I went about the process of building a company around that culture. I’m still doing that today.”

How to reach: Cameron Mitchell Restaurants, (614) 621-3663 or

The Mitchell File

Born: Columbus, Ohio.

Education: Culinary Institute of America, Hyde Park, N.Y.

What was your first job?

A dishwasher. I was a junior in high school, and I was about 16. It was at the Cork ‘n Cleaver steakhouse. It’s not around anymore; it was an old chain from years back. I learned to fall in love with the business, and I worked my way up.

Whom do you admire in business?

I’ve had lots of mentors and people but Herb Kelleher of Southwest Airlines is probably one of my big heroes, as is the late Dave Thomas of Wendy’s. There are just a lot of great people out there; also Jim Collins, author of ‘Good to Great.’

What is the best business advice you ever received?

Surround yourself with great people. Get the right people on the bus.

What is your definition of business success?

Building a company that is able to give back to the community. Help others build their businesses. Have your people build their careers and be successful with you. And reward your partners.

Published in Columbus

The number of small businesses is increasing, and as owners focus on growing their companies, many are overlooking available tax incentives.

“Capital is so important to a growing company to facilitate growth and ensure stability,” says Jeremiah E. Thomas, an associate with Kegler, Brown, Hill & Ritter. “However, small business owners often get focused on running their business and miss out on opportunities to qualify for programs that can ease tax burdens and reduce capital restrictions.”

He says it’s important to know what’s available so that you can maximize your access to money for the benefit of your business.

Smart Business spoke with Thomas about how to uncover government programs that can help ease your company’s tax burden.

Are funds readily available to small businesses?

There are many programs and incentives available, but some can be hard to obtain. While businesses may have the impression that there are easily accessible grants available, many of them are designed for very specific purposes and the average startup likely wouldn’t qualify. However, that doesn’t mean there aren’t other opportunities to lower costs through tax credits and intelligent tax planning on the federal, state and local levels.

What types of tax incentives are available for a new business?

The most easily available tax incentives may be federal tax incentives because, in many instances, they are automatic. Knowing which federal incentives you qualify for and accounting for them on your annual tax return allows you to access ‘easy’ money.

For example, there is relief on capital gains taxes if you own qualified small business stock. There is also the ability to immediately deduct from taxable income certain expenses for starting a business, and small businesses are able to use tax credits for providing health care, energy efficiency improvements, and research and development expenditures.

In contrast, a lot of state and municipal tax programs require some negotiation, for instance, with county representatives to get an abatement for real estate taxes. These credits are valuable, but they take extra steps and costs to receive the benefits.

How are some tax incentives ‘automatic’?

Receiving the benefits of a tax credit can be as simple as knowing the credit exists, factually qualifying for it and checking the appropriate box on your return to get the benefit — there’s no application process.

Also, some of the existing tax software can help automatically identify tax benefits by asking questions to determine if you qualify. However, squeezing every benefit out of a particular tax incentive is more complicated than reading the form. Consulting with attorneys and accountants is a great way to identify the applicable credits, especially with more complex ones.

Are there other incentives that are more valuable or more easily accessed?

Well, there are certainly other programs. There are Small Business Administration loans, with which businesses can take advantage of lower rates to borrow capital to grow, but those programs are pretty complex and take time to apply and qualify for. At the state level, another more complex option is the Technology Investment Tax Credit Program, which provides investors with a tax credit for the money they invest in technology companies. Small companies advertise to investors the ability to get 25 percent of their investment back from the state in the form of a credit. But in order for it to benefit the company, they have to find an investor and understand the credit. Then the investor has to apply and the company has to qualify to receive the benefit, so there are many moving parts.

The state also provides some loan programs and tax credits based on job creation. The state may lay out a number of milestones during negotiation that a company must reach for it to receive a tax credit or qualify for low rate loans.

Are there options for more mature businesses?

On the federal level,  large and small companies can both benefit from good structural planning. However, there are certain federal tax incentives that are only available to small businesses, which can be outgrown.

At the state level, broadly speaking, it’s easier for a more mature business to take advantage of the tax programs that exist, as Ohio is more interested in backing companies that can create more jobs, while startup companies might only be looking to hire one or two employees and may need to rely on a narrower band of incentives, such as those focused on technology.

What is the key to finding incentives that work for your business?

The real key is thinking holistically. A business is subject to different taxes. The property you own is subject to real estate tax, but programs such as the Enterprise Zone Abatement Program allow municipalities to establish local development areas where qualified companies can locate and take advantage of real estate tax abatements. There are also a number of ways companies can minimize their sales tax responsibilities, such as Ohio’s research and development sales tax exemption.

It is important to think creatively about the sources of tax and have good advisers on the accounting and legal side to keep you apprised of changes in the law. You can also talk with your local development entities to uncover state and local incentives; these programs are great marketing tools for governments to show how successful small businesses are performing in their area.


Jeremiah E. Thomas is an associate with Kegler, Brown, Hill & Ritter. Reach him at (614) 462-5447 or

Insights Legal Affairs is brought to you by Kegler, Brown, Hill & Ritter Co., LPA

Published in Columbus

The crowdfunding component of The Jumpstart Our Business Startups Act (JOBS) is designed to help startup and emerging growth companies raise capital through new securities exemptions.

“It’s a promising platform for companies that are already doing small-dollar raises of capital,” says Jeff Roberts, a director at Kegler, Brown, Hill & Ritter. “With the high cost of capital from venture and angel funds and the general unavailability of bank funding, small businesses, startups and emerging growth companies are looking for different ways to raise funds, so they are very excited about the possibility of crowdfunding. It’s worth the hype because currently, raising capital is expensive and investors are hard to locate.”

Smart Business spoke with Roberts about how to benefit from crowdfunding.

What is crowdfunding?

Crowdfunding concepts have been in the market for quite some time with companies like Kickstarter providing a platform for businesses to raise money through donations. With the passage of the new JOBS Act, businesses will soon be permitted to issue equity to investors based upon a securities exemption that allows companies to raise up to $1 million annually from non-accredited, small-dollar investors such as friends and family, and those who want to place their money somewhere other than the stock market. Funds will be raised through regulated online crowdfunding intermediaries.

Investors will be limited in the amount of money they can invest. According to the JOBS Act, investors with an annual income or net worth of at least $100,000 can invest up to 10 percent of their annual income or net worth. Those with a net worth of less than $100,000 can invest the greater of $2,000 or up to 5 percent of their income or net worth. The dollar amounts at risk on the front side are small, which helps alleviate the fear of some skeptics who think some investors may spend their life’s savings on a fraudulent venture.

What kinds of companies should consider crowdfunding to raise capital?

Local restaurants (or other small businesses with dedicated customer followings) that need to make certain capital improvements can go out and raise the money for those projects through these online intermediaries. Any startup company that doesn’t generate a lot of income up front could also take advantage of the crowdfunding platform, though such companies may have more difficulty in generating a buzz.

The financial disclosure requirement for raising $100,000 or less is not as great as raising between $100,000 and $500,000. In the latter case, you have to provide reviewed financials, and in raising more than $500,000, companies have to provide audited financials. The cost of providing those financials has been a roadblock for some small startups. When their accounting bill can be $10,000 to $20,000 before they raise a dime, it can be prohibitive to their market access. Given the cost profile, companies with less than $100,000 in financial needs may be best served by this new platform.

What are the potential legal risks associated with crowdfunding?

Companies seeking to raise funds though this exemption need to be more concerned about compliance with state laws that govern corporations, limited liability companies and other entities because, given the relaxed federal regulation, greater emphasis will likely be placed on state law fiduciary duties.

If Ohio can come up with some sort of regulatory scheme that makes it efficient to raise capital this way, then it could become the Delaware of crowdfunding. A lot of the governmental bodies and politicians like that idea and are behind it, but it’s still early. And since federal regulations will trump state law, how this will be regulated between states is still up in the air.

What could change about crowdfunding regulations?

Crowdfunding won’t become a reality until the end of the year because the SEC has 270 days from the date of enactment to put its regulations in place. While some specifics are included in the JOBS Act, there are still some open questions and equity cannot be raised through the crowdfunding securities exception until the regulations are released. What worries me is that the SEC, in an attempt to hurry up and get something out there, might throw out proposed regulations that are not really well thought out, which may create additional road blocks that effectively eviscerate the purpose of the JOBS Act, which is to make it easier and cheaper to access money.

What can companies do now?

Put it on your radar as an opportunity. Some companies considering doing raises in the next six months are operating under the old SEC rules and might put off those investments until they can see what happens with crowdfunding. But otherwise, not much can be done until we know what that landscape looks like.

If a company is interested in crowdfunding, where should it start?

Seek out legal counsel because this is such an unknown area. Issuers of crowdfunding equity are going to have questions about which intermediary to use. Should they go through a licensed broker/dealer instead of a crowdfunding intermediary? How much money should they raise? What are they going to have to provide in the way of financial disclosures? Hopefully, as the market develops, the process will become more efficient and well defined and the cost of fundraising will decrease.

The ability to go to nonaccredited investors online and the ability to reduce transaction costs by not expending substantial amounts of money on securities compliance is a step in the right direction, but time will tell how successfully crowdfunding can be implemented and what type of demand it generate.


Jeff Roberts is a director with Kegler, Brown, Hill & Ritter Co., L.P.A. Reach him at (614) 462-5465 or

Insights Legal Affairs is brought to you by Kegler, Brown, Hill & Ritter Co., LPA

Published in Columbus

When a business is new, its owners may not know where to turn for help raising capital. Is funding from a bank a better option, or is private equity a better fit? And how do you decide?

Your banking partner can help you evaluate your needs and options, then steer you in the right direction, even if the bank isn’t the best solution, says Michael Field, executive vice president, technology banking division, Bridge Bank.

“Your banker can look at all the factors and determine whether it can put together funding to meet your needs,” says Field. “But even if the bank isn’t comfortable, your banker may be able to provide a solution to enhance the debt side of things or the equity.”

Smart Business spoke with Field about what to consider when looking for funding and common mistakes to avoid when doing so.

What should start-ups consider when looking for access to growth capital?

The first thing is debt versus equity. If you have no product, just an idea and a business plan, debt is probably not the right solution. That’s more of an equity play with investors who support and finance research and development.

The bank then steps in to finance growth, after you’ve developed a product, or raised sufficient capital so there is an ability to execute the plan. But it can help you at any stage. For example, if are looking for equity, the bank can help introduce you to the right players.

What are the factors to consider when determining whether bank funding or private equity is a better fit?

First, look at cost. Equity is much costlier than debt, and you have to give up a percentage of your company. With debt, you may not have to give up any of your company.

Also consider flexibility. Debt has more restrictions, whereas with equity, the money can be used with more freedom.

What do banks look for when judging a young company’s ability to repay a loan?

Banks look for sources of repayment. They look at cash burn — how long will the cash you have currently and the bank’s cash last you? They look at cash flow and measure balance sheet strength and how liquid you are, what kind of investor support you have and whether future rounds of funding are expected, and whether you have a lead investor who is supporting the company or if you are bootstrapping with friends and family.

What common mistakes do start-up firms make when seeking capital?

Companies don’t realize they can leverage their balance sheet using debt versus raising equity. Why would someone use debt versus equity? Often, it’s to get to the next stage and increase the value of the company before going for equity. In addition, they’re not giving up as much of the company. Leveraging debt to get to the next stage really allows you to get a better deal from investors.

Also, sometimes people get greedy. They may have a really good investment on the table from an investor, but they don’t take it and then the opportunity goes away. They get greedy because they think they can obtain a better deal by continuing to shop. Sometimes there is a good deal on the table, and you should just take it, whether it’s from the bank or from equity.

Business owners also make the mistake of viewing funding as a transaction rather than a partnership. Is the person you’re working with on the same page as your management team and investors? Are your goals aligned? Is everyone working in the same direction? If the relationship is purely transactional, that can get a company into trouble.

In addition, companies sometimes fail to balance sources of capital. All equity or all debt may not be the best solution. Sometimes spacing it out by taking some equity and some debt can help you on price, as well as diversify your sources of capital.

How can a banker help you identify the best solutions for your needs and provide opportunities for growth?

The banker will ask about your business, your investors and your plans for capital. He or she will look at financial projections, as well as history, to assess where you are and where you are going. As far as banks go, products are products. It’s how your banker applies them to your individual situation that makes a difference. That’s where that expertise comes into play, whether it’s with debt, or with equity solutions, even though the bank is not providing the equity itself.

People often don’t realize the benefits of associating with a bank that knows the market. The bank can provide introductions to service professionals and equity investors. It can assist your company as it grows, providing widespread solutions.

The bank can also help as you look to expand internationally. In the early stages, a company may not have the management team to understand the international side of things. Relying on the expertise of a bank with international experience can help you get to the next stage.

When should a business begin to establish a banking relationship?

Starting that relationship early, even if it’s just with a checking account, makes the bank aware of you, and as you grow, it can help guide you through the process and into the next stages.

Think not just about the transaction but about your relationships with different providers. There are providers who will become partners, and there are others that are just transactional. Finding those partners is key to your success.

Michael Field is executive vice president, technology banking division, at Bridge Bank. Reach him at or (408) 556-6501.

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Published in Northern California

If your business has recently experienced challenges, or is relatively new, you might not have access to capital through traditionally structured loans. Many banks simply can’t offer credit under these riskier circumstances.

So how can you get the money that you need to grow your business and move things forward?

“Asset-based loans provide companies with financing solutions that they otherwise may not be able to obtain through traditional financing,” says Lee Shodiss, senior vice president and manager at Bridge Capital Finance Group. “Generally, this is a more flexible financial product, with fewer restrictions and fewer covenants than a traditional banking product.”

Smart Business spoke with Shodiss about how an asset-based loan can help your business succeed.

What kinds of business can benefit from asset-based lending?

Generally, these loans are a great fit for startups, companies that are looking for high-growth opportunities, companies that are doing mergers and acquisitions and those that may have had an inconsistent financial performance as a result of the economy and that are now beginning to recover.

Either they don’t have the historical profitability and sustainability that banks offering traditional lines are looking for, or they may not have any equity because they are brand new startups. It could also be the case that the business and its owner are not able to meet restrictive covenants that are typical of a general commercial loan and therefore don’t qualify for a traditional loan.

How can an asset-based loan offer a company flexibility?

With asset-based lending, the bank is more focused on the actual collateral than it is on ownership’s personal net worth, the company’s net worth, its profitability, or its ability to maintain restrictive covenants. The bank is more interested in the source of the collateral and the ability of the collateral to be collected. As a result, it does more due diligence on the collateral and less on the principals and the profitability of the business.

Collateral is the primary source of repayment on the loan, so the bank will focus more on that one source and secure that one source more clearly than it would in a traditional loan in order to mitigate the risk.

Is this type of loan more costly than a traditional loan?

Yes. As part of the bank having less reliance on the net worth of the guarantor, equity and four or five covenants related to the loan, the pricing is higher. But it’s a moving scale to risk. Just because a company wants to do an asset-based transaction doesn’t mean the pricing is always three times what it is with traditional banking. There is a sliding scale related to various risk profiles that is used to determine the proper pricing.

But as a company improves its performance and its profitability, it can migrate toward a more traditional structure, with the cost being modified accordingly. If the level of risk changes, the price structure can be modified. So if you’re not quite qualified for a traditional loan, but after a year things have changed, you can migrate to a more traditional structure.

How do you start the process of getting an asset-based loan?

Your banker should be asking you a lot of questions about the industry you’re in, what size line you need, the terms of how you are paid and what collateral there is to fund the loan. The banker should also be asking about accounts receivable, inventory, purchase orders and other areas of your business to help you identify and fine tune your real needs.

In the first meeting, you should be ready to discuss where you have been financially and to talk about your company and what your needs are. If both sides determine there may be a fit and the business wants the bank to move forward and provide a proposal, then you’ll need to provide the company’s financial statements, accounts receivable agings, financial forecasts, capitalization tables and other documentation to the bank.

How can a business identify the right bank for its needs?

Businesses need to make sure they understand who their lending partner is and get to know them, because that relationship is going to be critical. Make sure that your lending relationship provides flexibility and isn’t going to restrict you down the line.

There are a lot of lenders that can provide you with one product, but the problem becomes, as your business morphs and grows, you have to go out and find another banking relationship. And that is challenging.

Your bank should get to know you, and be comfortable with you, because if it’s not comfortable with management, the deal will not be done, no matter what the collateral is. Conversely, you should be comfortable with your bank and view your banker as a partner in your business. Your banker should visit your company, try to understand your business, see how products are made or services are rendered, and get comfortable with your company and with management.

If you can find a partner that can help you through all the stages of your business, it’s a much easier process. Find a bank that can come in early in the life cycle of your business and help you grow, a bank that can take you from startup to going public and beyond.

Lee Shodiss is senior vice president and manager at Bridge Capital Finance Group. Reach him at or (408) 556-6502.

Published in Northern California