Local executives urge personal relationship between the two sides
Like other young businesses looking for bank financing, startup technology
companies need to consider getting creative with their collateral as well as
being prepared to showcase a clear path to revenues.
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Richard Tomeo, acting district director of the U.S. Small Business Administration’s Rhode Island District Office, said tech companies need to find a bank they can grow and prosper with. In high technology, Tomeo said the caveat is finding a bank familiar enough with the industry so that they can be comfortable with backing a business plan.
Cliff Dutton, who sits on the advisory board of the Rhode Island Technology Education Council, said with a still mostly uncertain economy, startups from all industries need to be aggressive in seeking debt financing. As with any early stage company, banks are usually less excited over the higher-risk profile a non-established technology business has to offer.
Dutton, a vice president of Ibis Consulting in Providence and the company’s chief technology officer, has started and run several small companies in Rhode Island and said the key for any entrepreneur is to find a bank willing to take a more “creative” approach to asset-based lending.
Finding a bank to look at broader-based collateral as a source of subordinated-debt, is one strategy Dutton suggested for a startup. Subordinated-debt, is either unsecured or has a lower priority than that of another debt claim on the same asset or property, can supplement equity financing while acting as a term loan. The money is provided to the company in one lump sum and repayment is made from the cash flow generated once a company begins doing business.
However, Dutton cautioned that within Rhode Island, he has yet to see “that kind of creativity emerge” on a consistent basis. Regardless, with venture capital still hard to come by, entrepreneurs have to be willing to back their companies with personal assets, he said.
According to an Ernst & Young and Venture One quarter-by-quarter study, U.S. venture capital funding was down through 2003 and both the number of deals and the amount of money being invested is sharply down from its height in late 1999 and early 2000. While the amount of deals and dollars has at least stabilized over the past year, most industries with tech ties have seen significant drop-offs during the seed stage of investment.
Tomeo said that many banks, as a rule, won’t deal with startups at the outset, a time period which can range anywhere from one to three years, though he said most banks will deal with companies who have an SBA-backed guarantee. Before ever approaching a bank, Tomeo said a startup needs to consider how much money they will need to begin operations and prepare a business plan tailored to whatever type of financing or product they are seeking.
“Things can be difficult if a company doesn’t have faith in the bank working with them and if the bank doesn’t have faith in the company’s ability to manage the business,” Tomeo said.
He said that instead of a young company asking the question, “Where’s the money,” they should be asking, “Does the future bode well for me here?” Finding a bank where a relationship is possible can often mean much more to a company’s future than a line of credit.
“I can’t stress enough how important that personal relationship is,” Tomeo said. “To have a feel-good feeling throughout the entire process and a mutual knowledge and faith in each other – that’s always what you’re going to want to try and find.”
Dutton said a tech startup needs to understand that banks essentially deal in financing debt, and that a business needs to demonstrate its ability to pay financing, hopefully through revenues. He said tech companies still suffer from the stigma of the dot-com industry’s late-1990s flameout and like Tomeo said, should be prepared to meet a bank’s excess caution with a detailed business plan.
And when seeking a bank, Dutton said an entrepreneur should be willing to guarantee a note issued to a company with a guarantee through personal assets. And entrepreneurs, in the early stages, should consider cutting or eliminating their own salaries entirely.
In many cases, Dutton said a technology company should look for a bank that offers them guidance toward getting financing and makes it clear what path businesses should take if they are not approved. He said getting an early indication of whether a deal can be made is extremely valuable to a startup, which often doesn’t have the manpower to waste on an effort that will likely be fruitless.
“Efficiencies for startup tech companies can be in everything from interest rates and collateral decisions to whether a bank can get to a ‘yes’ or a ‘no’ quickly,” Dutton said.
Other basic tips when seeking out bank financing is to hire an accountant
to back up a business plan with numbers, conduct meetings at the site of the
business and get employees involved in presentations as well as make sure the
credit ratings of top executives are clean.
