CHAPTER 8 - TERMS OF YOUR DEAL
Know what you want, what you can afford and what you
will give up.
This should be based on your financial pro forma or
the useful life of the asset being financed.
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.
Amortized versus Interest Only
Most ventures take some time to begin making money.
New equipment or other acquired assets take time to
begin paying for themselves. Think about an initial
period of 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. On the other hand, if by
paying 50% interest, you yield 100% profitability,
you are way ahead of where you began.
Fixed or Adjustable
With a fixed rate of interest you know where you
are. With adjustable rates you're betting on the
future. Anybody remember Jimmy Carter interest
rates? Normal is Prime plus one to three percent or
LIBOR (London Index) plus three to five percent.
Rates vary as you add or subtract risk.
Points and Fees
Most, if not all, funding sources charge points
(percentage of amount funded) and fees (costs of
putting your transaction together). These can run
from 1% to 10% depending on what you're looking
for and the degree of risk. Fees are sometimes
payable 50% at commitment and 50% at closing. Try to
get 100% at closing or at least deposit the 50% into
a trust or escrow account. Beware of those sources
who must have your money before you see their's.
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'll leave the funds in place.
Try to negotiate these away, or limit them to one or
Blanket & Specific Liens
Blanket means "all". Specific is just
that. Blanket liens will restrict your ability to
raise cash in the future. Always attempt to have
How committed are you? If you won't sign
personally, then you may not get any money. This is
a gut check. If you don't believe in your
success, why should anyone else? As you and your
company perform, you should be able to get these
Covenants & Conditions
Be very careful. These spell out just what you can
and cannot do. No management or ownership change,
quarterly filing requirements, no borrowing from
anyone else, deposits maintained, collateral
pledges, etc. Read and evaluate the fine print.
% Ownership You Will Offer
What's fair? 80%, 50%, 20%… I can't
tell you. You must define it, support it, and defend
it. While most lenders won't ask, most investors
will demand. Be prepared from the start. Do your
homework on your potential funding sources.
Stock Repurchase Agreement?
What happens if you hate your investor? Are you
locked together forever? Try to negotiate escape
clauses that will allow you a way out if you need it
or can afford it. Be able to buy your stock back at
a predetermined price, if possible.
Most entrepreneurs are in business to make decisions
for themselves. Some investors want almost a
partnership. Once again, pre-plan and know what you
are looking for and what you are willing to give up.
Will you risk it all? If you don't believe,
neither will anyone else?
Marketable Securities, CD's,
OP (Other Peoples )
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