Commercial and Start Up Business Lending Requirement
Private funding is a non-traditional means of financing a transaction. The funding sources are non-bank asset based lenders who will fund a transaction that traditional lenders such as banks will not fund with an equity or debt solution. The Lenders provide financing subject to collateral and cash flow to any industry. Without collateral to secure funding one alternative would be to use the profitability of a company to provide unsecured financing.
A loan application is required for equity or debt financing a start up business requesting funding or angel investors who will finance a business or an operating business in need of working capital or real estate transactions.
Collateral is typically accounts receivable, inventory, equipment or real estate or some combination thereof, intangible assets such as patents, trademarks and proprietary technology.
Unsecured Financing is based on the good personal credit of the principal or the ability to cover the monthly debt service.
Secured Financing is one that has collateral against which the lender can perfect a security interest in that collateral.
Bridge loans must be secured by collateral because the pending transaction may not happen in which case the lender looses.
The borrower must have funds available to contribute towards the hard cost or soft cost of the transaction or a capital raise
A generally accepted practice for commercial lenders to incorporate prepayment premiums or penalties into loan documents in order to counter act any potential lost interest or other costs resulting from the early payoff of a loan.
Declining Prepayment penalty
With this structure, the borrower may repay the loan prior to the balloon by paying a penalty equal to a certain percentage of the loan amount, and this percentage declines over time.
Debt Service Reserve Fund (DSRF)
A fund in which funds are placed to be applied to pay debt service if pledged revenues are insufficient to satisfy the debt service requirements.
Deposits from a loan proceed to assure the timely availability of sufficient funds for the payment of debt service requirements usually up to 1 year
A business valuation is the process of determining the economic value of a business or a company. A business valuation can be used to determine the fair value of a business, commercial lenders primary use the valuation to determine the enterprise value which can be used as collateral to lend up to 50% LTV.
A financial statement is comprised of two parts, the balance sheet and the income statement.
There are three types of accountant prepared financial statements 1] compiled a compilation of the numbers given to the accountant by the borrower, 2] reviewed where the accountant performs certain tests to verify the accuracy of the numbers presented and 3] audited statements where full due diligence is performed verifying the accuracy of the statements.
Recourse or Non Recourse Financing
In both types of loans, the lender is allowed to seize any assets that were used as collateral to secure the loan. In most cases, the collateral is the asset that was purchased by the loan
Recourse: funding secured by collateral, if the borrower defaults the lender can seize the collateral and go after the borrowers other assets
Non-Recourse: funding secured by collateral, if the borrower defaults the lender can seize the collateral but cannot seek out the borrower for further compensation even if the collateral does not cover the full value of the debt
An acquisition of a an operating or non operating business requires a purchase of 100%; a percentage or stake of a business cannot be funded, the borrower must have funds to contribute towards the acquisition.
Commercial Properties: An acquisition of a commercial property requires cash contribution from the borrower to cover the hard cost or soft cost in all transactions including 100% financing when possible.
“Success is sometimes an ounce of preparation”