Why your search for an investor has to be about more than just money

Success in the world of biotechnology and life sciences requires a level of patience that is foreign to most types of businesses and industries.

On average it takes 10 to 12 years and over $1 billion in capital to get a new drug from the laboratory to the market to be sold to consumers, says Rob Lake, senior vice president and head of Life Sciences at Bridge Bank.

With such great effort needed to get your product out the door, you want partners you’ll be comfortable working with for extended periods of time. When you face challenges, as most growing businesses do at some point, the relationship you have with your financial partner can go a long way toward determining your future.

“Some lenders tend to over steer,” Lake says. “So on top of whatever is already going on at your company, a relationship with an inexperienced lender can make it that much more difficult to manage your business.
“That can be very stressful for a management team and an investor group trying to position your company to work through the issues and get back on track.”

Smart Business spoke with Lake about the real value of selecting a lender or bank that truly understands the challenges your business faces.

What should you consider when looking to raise capital in the life science industry?

You need a lender who understands your business. A standard bank that does commercial and industrial lending is likely to underappreciate the peaks and valleys of a life sciences company, such as navigating through regulatory agencies or the uncertainties of clinical trials.

There is such a thing as ‘greener capital.’ A knowledgeable lender knows how to react to bad news, and how to chart the best course of action to keep things on track. It’s like piloting a small plane. If there is turbulence, you’re not going to want to over steer in one direction or the other to try to stabilize the aircraft.

You want to keep it as steady as you can and it will stabilize once you get through the bad weather. The same applies to working with a lender that clearly understands the issues life sciences companies face and will work through occasional challenges along the way to help the company achieve its goals.

What are some key things to know before you meet with a lender?
You need to think about what you would do if things with your business don’t go according to plan and compare it with the underwriting rationale of the lender. Lenders will typically underwrite to a downside case to explore that scenario.

What if you do not get approval on an expected date and it takes another year to get that approval? How would such a delay affect your company financially? How much more money would you need to raise? What will it take to get there? Do you have the resources to get there?

The base case is a little more optimistic scenario and the downside case is if the wheels completely fall off. The more likely case is a third option in which the wheels don’t totally fall off, but maybe you have a flat tire. How do you fix it and get through that scenario?

It’s helpful to hear the lender’s mentality as they go through the downside process.  There are lenders in the space that offer more favorable terms (i.e., more capital or lower cost); however, it could cost more money in the long run (fees and legal expenses) if they haven’t thought through what the downside looks like.

What are lenders looking for in a borrower profile?

Lenders like business models that are diverse and have novel intellectual property supported by an underlying ‘platform technology.’ Multiple shots on goal help the lender mitigate risk.

They also want to understand the value proposition and see that it makes sense from a commercial viability standpoint. Ultimately, does the product and or service you’re developing address an unmet need?  Improve patients’ lives or clinical outcomes?  Save the health care system money?

Validation is another important attribute lenders like to see. This could come from many sources including the quality and reputation of your investors, strategic partners, a positive reimbursement decision or revenue traction.

Insights Banking & Finance is brought to you by Bridge Bank.

Transparency is key to maintaining strong ties with your bank

Communication is the lifeblood of any strong relationship, including the one that develops between a business and its bank.

One of the keys to maintaining that strength through the ups and the downs is the willingness of the business leader to remain transparent when the times turn tough, says Jeffrey M. Whalen, senior vice president and market manager for Specialty Markets at Bridge Bank.

“Your bank doesn’t know your business as well as you do,” Whalen says. “When a difficult situation arises, you need to keep your bank engaged in what’s happening so you can work together to find solutions. Companies get into trouble when they try to hide problems, putting the bank in a difficult spot.”

Transparency builds trust and boosts your chances of getting the help you need, when you need it.

“If you reach out to your bank when you run into trouble to set up a meeting, a relationship-oriented lender is going to reciprocate by reaching out to you on a regular basis to check in and see what it can do to help you,” Whalen says. “The strength of that relationship is critical for the financial well-being of your business.”

Smart Business spoke with Whalen about how to build a strong relationship with your bank.

What are some key steps you can take to increase the likelihood of securing a loan for your business?
Show your financial statements to the bank, even if your company has not been profitable. The numbers are what they are and you don’t want to hide them. Every company faces challenges from time to time. The key is your ability to develop a plan to turn things around and work with your bank to fine-tune that plan to give it the best chance to succeed.

Within most banks, there are different divisions that might be better suited to helping a company that finds itself in recovery mode. The difference is that some of these groups might be more aggressive in the way they collateralize your loan.

These groups want to see diversification in your receivables to prove that you’re not too reliant on one customer for your revenue.

If you pursue financing through the U.S. Small Business Administration, the bank will likely want real estate as collateral. The key is that you keep your bank engaged and work collaboratively to find solutions.

The more communication you have with your bank in terms of full disclosure, accurate and timely historical financials and an affiliation with a well-known CPA firm is going to increase your likelihood of securing a loan.

What are some signs that you have a problem with your bank?
If your bank is not checking in with you regularly on the progress or success of your business, that’s a red flag. Another concern is when you have to keep retelling the story of your business to your banker or if you have a new relationship manager each year.

Either they don’t trust you or they don’t understand your business. When those things happen, you’re going to want to have all your data ready and available for the next banker because you’re probably going to need to start shopping for one.

What are some common mistakes that can get a business in trouble with its bank?
When a bank extends a line of credit, there are typically four or five covenants that you cannot violate. If you violate those covenants and don’t have a conversation with the bank about how to get back on track, that is going to get you in trouble with your bank.

A line of credit is extended for a specific purpose and when you use it for other expenses, it can hurt your business. It’s also a problem if you take too much money out of the company and cause the net worth to erode. The bottom line is when you maintain a regular dialogue with your bank, you can avoid many of these difficult conversations. ●

Insights Banking & Finance is brought to you by Bridge Bank

The VC market is taking a pause, but the future still looks bright

Valuations in the venture capital (VC) market are either in decline or flattening out, primarily due to inflated expectations, says Michael David, Managing Director for the Equity Fund Resources team at Bridge Bank.

“Startup companies always have nonlinear rates of progress,” David says. “Companies haven’t performed as well as they had been forecasted and the stable of investors has pulled back. Many are looking at this correction cycle as an opportunity to invest in good companies, but they are not going to pay the valuations they did a year ago.”

VC investments reached a 15-year high last year as the sector capitalized on the relative weakness of other markets. But what goes up must come down again at some point and VC investing has slowed down in 2016.

“Companies that are still burning cash, are not yet profitable and are not growing as much as they were are in danger of not receiving funding,” David says. “There is a much more cautious view.”

At the same time, there is still a great deal of capital available to be invested when the right opportunity presents itself.

Smart Business spoke with David about the state of the VC market and what it means for startups.

What factors are driving the drop in valuation?
A number of firms in the market were driving up valuations, including nontypical investors in the segment such as Fidelity and T. Rowe Price. They came into the market and paid very high valuations for high-profile companies.

Since that time, however, these public mutual funds have written down their investments in some of the later-stage companies.

They have created a revaluation of the market, particularly in the so-called ‘unicorn’ companies they had invested in — startups that are valued at more than $1 billion. The reason is that public valuations are not staying in line with what was being paid on the private side.

There was also an expectation that these companies would go public in a relatively short period of time, perhaps within 12 to 18 months. But the public markets have not been receptive to new issues unless you can show a high rate of growth right off the bat.

A number of these companies that have gone public have missed their forecasts, which affected the whole market, as well as the private market.

What effect does the state of the VC market have on the overall economy?
You have the local Silicon Valley economy and the greater economy. They are related, but distinct. Some of the public companies and even a portion of the private companies are still burning cash, but growing. Investment has declined or pulled back and boards are directing companies to get back to profitability. The result is some companies are looking at layoffs.

This correction or right-sizing of companies is not as big as when the dot-com bubble burst, but there definitely is a movement to get cash flow to break even or to be cash flow positive.

Silicon Valley has a robust economy so while there are some layoffs in the tech sector, it’s not affecting unemployment much. It’s just not quite as robust as it once was.

What’s the takeaway at this point on the state of the VC market?
The environment has changed, particularly in terms of valuations. The VC world is looking harder at companies and their subsequent valuations. I don’t think that anyone thinks there will be a robust IPO market anytime soon. Companies will stay private longer and are going to need the capital to get there.

Rather than just focusing on growth on the top line, there is more of a focus on the bottom line. In 2015 alone, VC funds raised close to $30 billion in new investible capital and if a company hits the right target, there will always be capital available. ●

Insights Banking & Finance is brought to you by Bridge Bank

During times of economic volatility, your bank can be a great partner

Financial institutions operate at the heart of our economic system and as such, are hyper-aware of market indicators and trends that can affect the credit quality of their customers.

The more opportunities you have to keep your banker up to speed on what’s going on in your business, the better equipped he or she will be to work on your behalf, says Rob Fernandez, senior vice president and business line manager in the Technology Banking Division at Bridge Bank.

“Remember, information is neither good nor bad, it’s just information,” Fernandez says. “Information allows decision-makers to make necessary adjustments, or derive valid reasons to continue to support the status quo.”

Those who have been in business for a while and have worked with an effective banker know what an experienced banker can do to keep the partnership on an even keel. They can help you respond appropriately when changes arise in your business that could affect the structure of your existing credit facilities.

“While you might be concerned about revealing too much, if there is important new information about your business that could impact your financial condition, it will eventually surface,” Fernandez says.

“When it does, and if it’s a surprise to your banking partner, their efforts to help you and your business could be nullified due to the resulting uncertainty.”

Smart Business spoke with Fernandez about the gains that can be realized by allowing your bank to work as a partner in growing your business.

Take advantage of networking opportunities
When your bank partner invites you to lunch or an evening event, go whenever possible. Neither of you might be really into whatever sporting or networking event is available, but you’ll end up having quality time getting caught up on each other’s business, not just yours. You want to know how your banker is thinking about the world too.

If you haven’t been invited out for a while or you’ve turned them down repeatedly, take the initiative and invite them to lunch, a corporate event, a networking party, etc. Trust is developed through personal relationships.

When you meet with your banker in a relaxed setting outside of the hustle and bustle of the workday, you can talk about those big-picture questions that you never seem to have the time to talk about. It’s an opportunity that can pay big dividends for your business.

Don’t try to hide your problems
If you know that your financial reporting is going to reveal a problem, don’t wait until your banker gets the report and then has to scramble to respond to internal questions. Give them a heads up so they have time to prepare a case on your behalf.

Your banker wants the relationship to work and wants to advocate for your business.

When you don’t reveal information that can help them do that, it’s akin to tripping your team member as they run to the hoop to score. You lose credibility and trust with them, and they lose credibility with their senior decision-makers, which ultimately comes back to haunt you for what can be a very long time.

When necessary, consider your options
If you don’t think your current banking partner has the courage, industry knowledge or capability to advocate for you, it might be a good time to consider options. Talk to your peers, CPA and attorney for referrals and get to know who’s out there.

Every region has a collection of very strong commercial bankers. By and large, business bankers are a passionate lot and are very protective of their clients. Banking might seem boring from the outside, but inside it’s a dynamic and highly relationship-driven environment filled with very educated and smart people. Make it personal and you’ll reap the benefits of a strong alliance. ●

Insights Banking & Finance is brought to you by Bridge Bank

Know your operating cycles and you’ll find working capital easier to manage

Managing the working capital of a business tends to be a balancing act that requires a deft touch in order for the company to operate smoothly, says Michael Hengl, senior vice president and business line manager for Capital Finance at Bridge Bank.

“Working capital tends to be comprised by inventory, cash and receivables,” Hengl says. “Too much or too little of any of those categories can make it difficult to be a profitable company.”

If you have too much cash sitting on your balance sheet, that’s an opportunity cost, he says.

“You’re not investing that cash in a higher yield,” Hengl says. “At the same time, if you have too much inventory, that’s cash that is tied up and you risk inventory obsolescence. You risk not being able to sell the inventory in time and you put a strain on your liquidity that could impede your ability to meet financial obligations.”

When you understand your operating cycle and how money is spent and earned in your business, you are better able to retain control of your valuable working capital.

Smart Business spoke with Hengl about what strong companies do to effectively manage their financial cycles.

How do companies typically get into trouble managing their working capital?
Rapidly growing companies are often susceptible to cash flow concerns because they invest heavily in inventory, only to watch the economy take a downturn that leaves them with a warehouse full of unsold product.

You may also choose to be more conservative with your inventory, but if you cut it too close, you risk missing out on sales when you can’t keep up with demand.

But it’s often that strong growth, which is obviously what every company wants, that can really put a strain on working capital.

A company will say, ‘We’re selling more than we ever have. Why is there such a strain on cash in our company?’ The problem arises when you become too focused on your income statement and your revenue and profits. You also need to look at the balance sheet items and your assets and liabilities. You need to have a balance.

What are some traits common to well-managed companies?
You need to have a strong understanding of your company’s operating cycle from the point that you make an investment or buy inventory to the point that it gets converted back into cash. You need to be knowledgeable about the components and decision points within that cycle.

Work closely with your inventory managers or your product managers to determine how much product is needed. Spend time with accounts receivable and talk about credit terms that are available to clients.

You don’t want to be overly generous where you potentially end up with bad debt and extended receivables. Nor do you want terms to be restrictive to the point where you lose the opportunity to make a sale.

These types of companies tend to be very strong at predicting cash flow and at setting up contingency plans if a client doesn’t pay on time. Do you have a line of credit in place to handle the unexpected? Can you defer a payment to a vendor?

If your company struggles to collect receivables, look for ways to get your clients on a regular schedule. If you’re going to grant extended terms, try to get a concession out of it. Tell the client, ‘We’ll grant you another 30 days, but can you pay 25 percent of it today?’ There are many ways to work with a client.

How can a bank help?
Sit down with a bank’s treasury management department and look at tools that might speed up bill collections or shorten the cash cycle through the use of a lockbox, remote deposit capture or electronic banking.

A bank can also help you identify possible remedies in your reporting or poke holes in faulty assumptions you may have made about your business. Your bank has a vested interest in seeing your business grow and succeed.

Another thing to keep in mind is when you have a bank audit. Don’t be afraid to ask about the results. There may be findings that can help you improve your processes. ●

Insights Banking & Finance is brought to you by Bridge Bank

How to get back on track

Debt can be a useful tool in building a business, as long as you don’t spread yourself too thin trying to repay the debt, says Rob Lake, senior vice president and head of Life Sciences at Bridge Bank.

“You get to a point where it becomes challenging to raise equity,” Lake says. “Now you have all this debt and you have potential equity providers who are leery of working with you because they don’t want their money to just be used to pay back debt.”

Biotech and life sciences companies are big business in today’s economy, but getting off the ground and beyond the early-stage growing pains can be a challenge.

Smart Business spoke with Lake about the consequences of being overleveraged and what you can do to get back on track toward achieving your goals.

What are some clues that your company may be overleveraged?
There are a couple clues that offer evidence that your company may have taken on too much debt.

Typically, biotech and life sciences companies will utilize a venture debt structure that includes an interest only (IO) period that ranges anywhere from 12 to 24 months. During this period, you only pay interest, not principal.

It’s an effective way to reduce the cash burn at least on a temporary basis. And it’s understandable when businesses look to prolong this period to avoid having to pay both interest and principal for just a little bit longer.

If you are struggling to find debt providers willing to refinance your loan and enable you can extend the IO period, however, that’s a sign that you may have taken on too much debt.

Another clue that you may be overleveraged is if you’re at a point where equity providers don’t want to make any additional investments until you restructure or refinance the existing loan in an effort to reset the IO period.

It’s really challenging if you find it difficult to refinance your existing debt and at the same time are unable to attract additional equity capital.

What can an overleveraged company do to turn things around?
If you want to continue to fund the business, you may have to do a very dilutive transaction, meaning you take on some equity at a lower valuation.

Existing shareholders may get diluted because you typically have the next round of equity with a new investor that will look to lower the valuation of the company.

From a lender’s perspective, right-sizing the debt is more art than science. There isn’t a formula that you can put all the numbers into and get an ironclad solution.

Yes, there are financial metrics that can be used to help determine the right amount of debt for a business, but those metrics are still based on variables and data that may not be as reliable as you would like.

As an early-stage company, it’s hard to pinpoint the true value of the company. Determining the appropriate amount of debt based on the current value of the company is not always accurate.

What’s the key to boosting optimism with your stakeholders?
You need to be collaborative and get everyone around the table to explain the situation. Have your investors reconfirm their support for your business. This will help put your lender at ease.

Talk to your debt provider about an additional IO period or a refinancing/restructuring of the loan. This will help put your investors at ease and may entice them to put in additional equity capital.

Lenders like it when a company has a collaborative attitude and is forthright with a challenging situation. Good management teams are able to coral all of the stakeholders, get everyone to work together and get the company out of a precarious situation.

Demonstrate that you have a plan and work with your investors, lenders and business partners to make it happen. ●

Insights Banking and Finance is brought to you by Bridge Bank

A look at what’s in store for the business community in 2016

Two hot topics California businesses will be thinking about as 2016 gets going are a minimum wage increase and a split property tax proposal for businesses that own real estate.

Whether you view these changes as opportunities or challenges depends on your point of view, says JC Timmons, senior vice president, Southern California Corporate Banking, at Bridge Bank.

“This minimum wage escalation and the attendant politicization is only in the beginning cycle, so it’s likely not going to go away,” Timmons says. “But this is clearly a 2016 and beyond item that companies are budgeting for, factoring not only into their profit margins, but also into their supply chains.”

Cost increases along that supply line in California could lead to some difficult decisions on labor and managing to those relationships is important, Timmons says.

“If you’re doing business across state lines with different wage thresholds, those pressures in the supply chain need to be watched carefully,” Timmons says.

Smart Business spoke with Timmons about the split property tax proposal and other factors that will affect businesses in 2016.

What is the split property tax proposal?
California has Proposition 13, which limits the assessed value of properties to no more than a 2 percent increase per year, as long as the property is not sold.

Senate Constitutional Amendment No. 5 (SCA-5) would leave residential real estate untouched, but it would single out commercial and industrial property ownership, opening those properties up to greater annual valuation and tax increases.

This proposal has not been met warmly in California’s business community as it would be a disadvantage for businesses in the state.

It’s easy to think of the massive, well-capitalized Fortune 1000 firms in the state that can roll with this, but there’s another element to it.

Many small businesses sign triple net leases and by the nature of those leases, tax obligations flow back to the tenant. So you’d see monthly lease payments increase by a significant amount in those instances. In short, a split-roll property tax would increase operating costs with negative consequences.

This is an important policy that the business community is going to be watching and certainly making capital budgeting decisions around if it ever gets legs through the legislature.

What about any specific industries to watch this coming year?
In California, we’ve seen nice comebacks the last few years in health care, hospitality and professional services.

Certainly technology companies continue to thrive, as do any providers making or moving a tangible product.
Themes or common traits emerge with the most successful firms. One of the most common themes is that the owners and managers care deeply for their businesses.

Oftentimes a large percentage of personal net worth is tied into these businesses, and if that’s not the case, as an executive, the day-to-day business needs are very time-consuming, thereby important.

Lenders and depository institutions like to serve in as much of an advisory role as is possible and this begins by understanding the ultimate objectives of the company and its management team and creating value within that context.

What are some examples of creating value from a banking perspective?
The most highly pursued answer is oftentimes credit, and in situations where it is applied appropriately, strong value can be created.

For example, if there is a way to generate a loan facility accretive to the objectives of the company, or a structure to create additional free cash flows or other specific deal points personal to ownership, a bank aims to do that.

But a loan is not always the priority. Oftentimes there are solutions determined with foreign exchange experts on international commerce that still get overlooked by the folks down the street. Other times, it’s an introduction to another expert that can help solve a problem, or prevent one from occurring in the first place.

The focus is always on improving business value that even an objective third party would see, and in doing so, a business realizes the maximum benefits of business ownership. ●

Insights Banking & Finance is brought to you by Bridge Bank

SBA loans can help your business in more ways than you might think

Small Business Administration (SBA) loans can be a great resource for businesses that are struggling to obtain funding from traditional lenders, but they should not be viewed as a loan of last resort, says Ken Mannina, senior vice president and regional sales manager at Bridge Bank.

“The participating lenders that provide SBA financing get a credit enhancement from the SBA,” Mannina says. “However, the credit enhancement does not mitigate all risks for an applicant with poor credit, an operating company that has a history of losing money or a property that provides weak collateral support for the loan.”

SBA loans are a great tool for small business owners where debt is typically not otherwise available from conventional institutional sources. However, looking beyond the loan request and evaluating the business and its specific needs, the following should be considered.

“Some capital requirements are best served with debt, others with equity,” Mannina says. “However, most will require a combination of both.”

Smart Business spoke with Mannina about SBA loans and how to best position your business to secure the funding it needs.

What are some common misconceptions about how the SBA can help a business?
One of the most common misconceptions out there in the business community is that SBA loans are actually small.

The definition of ‘small business’ is very broad. Most businesses are eligible based on size. SBA loans go up to $5 million and can accommodate an owner-occupied commercial real estate purchase of up to $15 million.

Another misconception is that you have to be in business for several years to get the SBA loan. SBA loans can be made to startup or recently started businesses, however, there will likely be collateral requirements. Many applicants have only one full fiscal year of tax return reporting at the time they seek SBA funding.

There is also a belief by some business owners that SBA loans take a long time both to approve and to fund. In reality, many SBA loans we work on are funded in 60 days or less.

Business owners should also know that SBA loans can be used for more than just working capital, which should dispel another myth about the program. SBA loans can be used for working capital, but also for the purchase of equipment, business acquisition, debt refinance, partner buyout, or purchase and construction of owner-occupied commercial real estate.

What’s the key to identifying your greatest need and using that knowledge to secure the necessary funding?
The key to identifying your greatest need starts before you apply for the loan, at the time you are initially formulating the reason you need capital and/or are starting your business. You need to determine the best financing option to manage that need. Is it debt or equity?

Business owners want capital so they apply for a loan, but thought and due diligence needs to be applied before this decision is made.

Consider the ratio of debt to equity. What is a good structure that fits your needs and comfort level in terms of the resources at your disposal, the feasibility of your business, how it will have the best possibility of succeeding and how much you expect the business to grow?

Capitalizing the business with adequate equity at the beginning will be a key factor in the early stages of the business. Equity is defined as non-borrowed funds that are injected by the business owners. This could be money that you have been setting aside in a personal account for the express purpose of growing and supporting your business or it could be a gift from a family member.

What do SBA lenders want to see that will encourage them to want to support your business?
First and foremost, SBA lenders want to see repayment ability. They want to see historical cash flow from operations that is adequate to repay the loan.

Beyond that, the SBA lender will want to see management with the technical ability and character to run the business successfully and repay the loan. Lastly, the SBA lender will want collateral to support the loan, i.e. the assets of the business and possibly the assets of the principals of the business. ●

Insights Banking & Finance is brought to you by Bridge Bank.

Why you need to take a long-term view when managing your working capital

Companies that lack purpose in how they manage working capital can easily find themselves responding to one funding problem after another, says Justin Vogel, vice president and business line manager for Capital Finance at Bridge Bank.

“When you don’t have a plan, you manage your working capital on a reactive basis and don’t recognize until the last minute that you’re going to run short on cash,” Vogel says. “You have to find a quick solution to get cash rather than relying on a plan that is more cost-effective and ensures that you’re operating with liquidity at all times.”

Working capital is the lifeblood of your business. When it’s not managed proactively, it can severely limit your ability to grow your company.

Smart Business spoke with Vogel about best practices when it comes to managing your working capital.

What is a common mistake companies make in managing their money?
Some companies will routinely offer discount terms to their customers in an attempt to get paid more quickly.

However, if you annualize those discounts over a 12-month period, you’ll likely find that you end up paying out significantly more money in discounts to customers in your effort to get that cash more quickly. Often, the more affordable option is to get a bank line of credit and pay interest on that.

Typical discount terms are 2 percent if the customer pays within 10 days. If that customer is buying from you every other month, that adds up to 12 percent a year. The discount option may seem like a win-win for both you and your customers, but it usually does you more harm than good.

What can companies do when they don’t have a full-time CFO?
It can be a tough spot to be in when your business is growing, but hasn’t reached the point where you can afford to hire a full-time CFO. Many companies in this situation are not big enough that they need full-time service. One option to consider is hiring a part-time CFO.

Some companies rely on a bookkeeper or CPA, but the way the rules are written, CPAs need to be careful with the type of consultation they provide. A part-time CFO or consultant can check in with you on a regular basis and help you to make better and more informed decisions managing your working capital.

How much can a bank line of credit help a business?
A line of credit can help your business get cash before you get paid by your customers.

Some banks have two different lending tiers: A corporate group that handles more traditional banking needs and a capital finance group that focuses on asset-based lending. From a term, structure and pricing perspective, there is a significant gap between these two options.

The capital finance group is typically going to be more expensive and more structured from a collateral standpoint while the corporate finance group is going to be less in these areas, but more restrictive from a covenant perspective.

How can tax concerns restrict your profitability?
A company may decide to distribute profits to the ownership or management team in an effort to minimize taxes at the corporate level since they tend to be very expensive. But this step can have a negative effect on a company’s equity.

When profits are moved out of the business, they would otherwise flow through to the equity position of the company and onto the balance sheet. Over time, this can put a company that takes this action in the position of being overleveraged.

Most traditional bank financing options will require a debt to net worth ratio of 3-to-1. If the equity isn’t there, the debt component of that ratio can’t be very high at all before you start getting over that number. So you need to ask yourself: Is the tax savings worth the higher interest expense that you’ll have to pay on second tier debt options if you’re not building up that equity component on your balance sheet?

As you manage your working capital, you need to think about the long-term impact and cost-effectiveness of your decisions. The upfront investment you make to develop a comprehensive plan will be well worth it. ●

Insights Banking & Finance is brought to you by Bridge Bank.

How your bank can help you find the right funding strategy for your business

Debt financing can be an effective tool when growing your business, but leaders can be reluctant to pursue it, says Derek T. Almeida, vice president and business line manager for the Capital Finance lending group at Bridge Bank.

“Some businesses are run by their founders and they take pride in not having any debt on their balance sheet,” he says.
“Others don’t realize that they could qualify for debt because they feel they are too early stage or they have talked to people and been told they’re not traditionally bankable because they don’t have enough cash flow. However, there are multiple debt options available that might qualify your business sooner than you think.”

Equity is another option to grow your business, but Almeida says it’s not always the best path to take.

“It can become more expensive from a dilution perspective if you have to raise funds from friends, family or an institutional investor,” he says. “Sometimes you’re able to get bank debt. And even if you need to raise equity down the road, you might be able to push out that need and get a higher valuation so the dilution cost of bringing that capital in later is less.”

Smart Business spoke with Almeida about working with your bank to arrive at the best funding plan for your business.

How should past performance affect a company’s funding strategy?
When your company is on a strong growth trajectory and has tangible evidence to support continued success, you’ll obviously have more funding options on the table. But that doesn’t mean all hope of securing funding is lost if you’ve had a bad quarter, a bad year or even a bad couple of years.

You still need to talk to your bank, meet with potential funding sources including investors, and explore what’s available to help your business. Don’t make assumptions about what you believe banks can do because they can prove to be inaccurate.

When the overall economy is down, business leaders may assume that banks aren’t offering loans or financing to protect their own assets. The fact is, however, that banks can support a quality company with a strong growth plan in place.

And if they don’t believe it’s the right time to move forward with your plan, they can advise you and potentially help you avoid making a costly mistake.

Who should speak to the bank on behalf of your company?
When you provide your bank with more touchpoints and additional perspective about what your company is trying to do, you give it the tools to make a more informed decision as to what you need to achieve your goals.

Your financial team typically knows your company well from a fiscal perspective. If it’s a closely held business, the bank can meet with these leaders as well as the owner and come away with a good sense of where the company is at.

But not all companies operate that way. If it’s a company backed by venture capital or private equity, there may be leaders who aren’t as connected to the day-to-day operations and may be able to answer additional key questions a bank will want to know when you are trying to secure financing.

This dialogue can better familiarize the bank with your business model and either back up your projections or uncover potential flaws in your plan that you can now address collaboratively.

How can a bank help you raise equity?
Many banks can offer support to a company from the time it’s a startup to the period following an initial public offering and beyond. They work with companies that are looking to raise equity and have contacts with various private equity, venture capital and investment banking firms.

The bank can make an introduction to investors that it believes would be a good fit for your business or to an investment banker that can lead the process. A good bank looks beyond the deposit and credit relationship it has with your business and tries to build a partnership with your team to help you make connections and resolve your needs.

Banks can provide financing at multiple stages of a company’s life cycle and if they can’t do a deal for you, they can advise you to when they could and provide you with other options to consider. ●

Insights Banking & Finance is brought to you by Bridge Bank.