FUNDING YOUR BUSINESS Presented by: Todd Karl Relationship Manager - US Bank Small Business Development Center

Who am I? Colorado Springs native UCCS alumnus (Go Mountain Lions!) 7 years in banking industry

Who is U.S. Bank? U.S. Bank is the 5 th largest U.S. commercial bank Serves 17.2 million customers in 3,002 retail branches Locally, 16 branches (traditional and in- store locations) Commercial Banking, Private Client Banking, Government Banking, Personal Trust Management at Downtown location.

Objectives of Workshop Differentiate Between Equity & Debt Financing Identify Sources of Money: –Internal (non bank) and external (bank) Understand the Lending Process – 5 C’s Be Able To Organize a Loan Proposal Review the Basic Categories of a Business Plan

Risk Management Start up Businesses –Can be higher Risk –Volatility –Projection based Existing Businesses –Lower Risk –Proven history –Funds used for expansion or growth

Equity vs. Debt What is it? Which is better?

Equity Financing Cash or Assets invested by the owners –Corporation may sell stock –Sole-props and partnerships receive owner investments. Advantages –No obligation to repay –Strengthens balance sheet ratios Disadvantages –Dividends are not tax deductable.

Internal Sources Your Investment Savings Home Equity Family and Friends Life Insurance Loan Retirement Plan Loan Credit Cards

Debt Financing Money borrowed from Lenders Advantages –Interest is tax deductable –Fund expansion or growth –Shawn has a job Disadvantages –Regular payments of P&I –High leverage can increase risk of bankruptcy.

Types of Debt Financing Term Loans (greater than one year) –To fund long term assets: equipment, leasehold build-out, real estate, etc. –Fixed payments of P&I, fixed rate. Lines of Credit (one year or less) –To fund short term assets, working capital. –Secured with short term assets: inventory, receivables. –A revolving balance with payments of interest only or interest and minimal principal. Balance due at maturity. –Variable rate.

What Lenders Look At The 5 C’s –Capacity & Cash flow – ability to repay the loan Business profitability and your personal income –Collateral What secures the loan in case of default. –Character – Your personal credit score Anyone with 20% interest in the company Score of 700 or above –Capital – the cash you have available 25% of total cost for expansion/ start up. Cannot be “borrowed money” –Conditions – economy, your market, trends

Government Assistance Government –Small Business Innovation Research Program –Catalog of Federal Domestic Assistance – –SBA – more information to follow Corporate & Foundations Colorado Grant Guide –Available at the Library

Venture Capital Definition: Venture Capitalist –An individual who invests on behalf of others as Investment Managers. VC’s take a majority % of ownership in exchange for their investment. Peak Venture Group – provides networking venues that bring together entrepreneurs and emerging companies. Peakventure.org

Regional Loan Programs Loan programs funded by grant money from the Federal or State government to a County or City government. –For a specific industry –For a specific class (minority, female, etc.) El Paso County Revolving Loan Fund –Administered by Pikes Peak Regional Development. –1 job created/retained per $25,000

Micro Loan Programs Short-term loans –Up to $150,000 to small bus. & not for profit child care centers. –Working Capital or purchase of inventory, supplies, equipment, etc. Prohibits funds to pay existing debts or purchase real estate. SBA guarantees loan. Colorado Enterprise Fund in Denver –(303)

SBA Financing Small Business Administration (SBA) –Financing program in which the government guarantees partial repayment of a loan. The loans are always administered through a 3 rd party source, typically a bank. –The SBA does not originate or fund the loan. –The SBA does not dictate lending decisions. –The SBA does not set interest rates/ closing costs/ etc. –There is an SBA guarantee fee. Major programs – 7(a), 504, and Express

SBA Guaranteed Business Loans Primarily made by private lenders with SBA guarantee. Guarantees a percentage of the loan to the bank. Different programs have different guarantees. Max. guarantee is 75% of $5 million.

SBA 7(a) Loan Program Used for real estate purchase or equipment, machinery, furniture, leasehold improvements etc. No Revolving Lines of credit Maturity of up to 10 years for business assets or 25 years for real estate secured. Up to $5 million.

SBA 504 Program Long term, fixed rate for purchase of real estate, machinery, equipment, expansion, modernization. No Revolving Lines of Credit Must create or retain one job for every $35,000 of SBA debenture proceeds. Partnered with a Certified Development Company – 5 in Colorado. -Colorado Lending Source – Denver – Pikes Peak Regional Development – Colorado Springs –(719)

SBA 504 Loan Program

SBA Express Loan “Express” means that banks don’t have to submit applications to the SBA for approval. They can speed up the process by underwriting in-house.

SBA Express Loan Who qualifies? - Anyone Loan Size up to $250,000 Guarantee: 50% Collateral –$0 - $100,000 = bank policies –$100,000 - $250,000 = SBA policies Term loan or Revolving Line of Credit

SBA Express Loan Community Express –Who qualifies? Businesses located in low income or underserved communities only. –Loan size: Up to $250,000 –Guarantee: 75% –Collateral $0 - $100,000 = bank policies $100,000 - $250,000 = SBA policies –Term loan or Line of Credit

SBA Express Loans Patriot Express –Who qualifies: 51% or more owned/ controlled by: Veteran (other than dishonorable discharge) Active duty military to retire within 24 months, or to be discharged within 12 months. Reservist and National Guard members. Current spouse of service member or veteran or a widow of any above mentioned.

SBA vs. Conventional Financing SBA –85% to 90% LTV – means less cash down. –Longer Amortization –Mitigates insufficient collateral. Bank –75% to 80% LTV –Lower loan fees –Easier terms –Quicker turn around time Both require sufficient cash flow to service the debt.

Organizing Your Loan Proposal Application Financial Statements –Personal –Business Tax Returns – 3 years –Personal –Business Appraisal of Collateral –(bank ordered on real estate) Business Plan

Financial Statements Balance Sheet –A one day “snap shot” of your company’s assets, liabilities and equity. Income Statement (P&L) –An ongoing statement of profit or loss. Reports revenues, expenses, income, etc.

Financial Ratios Leverage: Debt held against the business –Debt ratio = Liabilities / Tangible Net Worth Liquidity: Cash sources available to pay short term debt. –Liquidity Ratio = Liquid assets/ monthly operating expenses. –Current ratio = Current assets/ Current liabilities Cash Flow –FCCR (Fixed Cost Coverage Ratio) = (EBITDAR – distributions – 50%depreciation) / (P&I + rent)

Financial Ratios Profitability –Gross Profit Margin = Gross Profit / Sales –Operating Profit Margin = Op Profit / Sales –Net Profit Margin = Net Profit / Sales Banker looks for consistency from year to year or improvement. If not, explain why and changes made to correct negative trend.

A Business Plan Plan Highlights & Use of Loan Description of Business Marketing Plan Financial Plan (start up cost breakdown and 3 years projections) Qualifications of Business Owners / Managers.

Negotiating the Loan Terms Interest Rates Conditions Loan Covenants

Your Team Small Business Development Center –Free Counseling from experienced professionals. –Low – Cost Business Workshops & Resources Professionals – Accountant, Attorney and Insurance Agent Your Banker