BUSINESS SENSE
“The Terms” – Week 9
Nancy Larsen, Enterprise Facilitator of SEFP

Know what you want, what you can afford and what you are willing to give up. Debt financing is extended for the life of the asset being financed usually. Receivable and contract financing are less than 12 months, equipment normally one to five years, real estate and other long-term assets 5 to 20 years.

New equipment or other acquired assets take time to begin paying for themselves therefore think about an initial period of paying interest only or skip payments to offset your lack of cash flow. The rate you pay for the funds you need can directly affect your profitability. With a fixed rate of interest, you know where you are. With adjustable rates, you are betting on the future. Rates vary as you add or subtract risk.

Most funding sources charge points and fees from 1% to 10% depending on what you are looking for and the degree of risk. Beware of those sources that must have your money before you see theirs’. Never do so without consulting your attorney!

Funding sources spend time, energy and money picking deals to invest in. Once they lend or invest, they want to stick with it. Pre-payment penalties are one way to insure you will leave the funds in place. Try to negotiate these away, or limit them to one or two years. Blanket or specific liens, personal guarantees, covenants or conditions are other specifics to consider in your deal.

What percentage of ownership do you offer another? You must define it, support it and defend it. While most lenders will not ask, most investors will demand. Be prepared from the start. Do your homework on your potential funding sources and know what your company or idea is worth.

Remember – “No business opportunity is ever lost. If you lose it, your competitor will find it.”

Next weeks topic is: “USE of Funds”

[ back ]