Lesson #126: What Startups Need to Secure a Bank Loan

Back in Lesson #49, I talked about How to Get a Bank Loan.  And, as you remember, I was quite bearish on the prospects of early-stage startups securing financing thru traditional banks, given their stringent lending criteria.  But, for those of you that can meet those requirements, there are traditional and non-traditional banks that could be a good source of capital for you.  In this post, I will summarize what it will take to secure bank financing through both of these channels.

To help me with this post, I reached out to my colleague Mike Kohnen, the head of the Midwest Region for Silicon Valley Bank ("SVB").  SVB is a "non-traditional" bank, with deep expertise in serving startups, particularly in the technology space that many of us operate.  As you will read, SVB is very "startup friendly", and often can do loans for rapid growth, high margin companies, even if they are losing money and without requiring personal guarantees or other forms of collateral or restrictive convenants.  This was a breath of fresh air to learn.

Below are the key things you need to think about to secure loans from both the SVB's (non-traditional banks) and traditional banks of the world (biasing your local community banks over the big national banks where you may have a higher odds of success):

Industries.  SVB specifically focuses on technology and life sciences.  But, traditional banks are often generalists, for most any company's needs.  Traditional banks can often prefer the retail, restaurant and asset intensive companies, that the traditional VC's don't like to fund.  The reason being they have tangible assets to secure their loans.

Management Team.  Any bank is going to be looking for a strong management team.  Preferably one with deep experience in the company's industry and a proven track record of startup success.  SVB is particularly strong in assessing team's best-suited for startups, given their sole focus here.

Outside Investors.  Outside investors are not required.  That said, having funding, or the potential of funding, from big name venture capital firms certainly doesn't hurt.  Especially if those firms have a long history and proven track record of working with the bank.  At SVB, outside investors are typically required for longer-term loans, but not for everyday working capital needs or near term growth capital, provided there is a clear path to repayment down the road (e.g., high odds of venture financing down the road or a likely path to a cash flow positive operations).

Age of Company.  SVB doesn't care how old your company is, they are investing in your credible projections for high growth in the sectors they focus in (e.g., technology, life sciences).  But, all traditional banks will most certainly want to see a couple years of history and financial statements, before approving a loan, since they are going to be looking for sustainable cash flow to repay that loan.

Revenues.  As I mentioned, SVB is looking for material, recurring and defensible revenues to be credibly acheived in your projections, but does not require a big base of historical revenues.  Most community banks are going to be looking for $1-$3MM of recurring revenues first.

Growth Rates.  SVB is looking for hypergrowth (25%-50%+ per year) from high gross margin businesses (50%-90%), where the technology is already built and execution of the growth plan has begun.  Most traditional banks are afraid of too rapid a growth plan, given the additional risks that imposes on the predictability of revenues and cash flow streams, with which to repay loans.

Profitability.  At SVB, profitability doesn't matter for early stage businesses, as they understand investing in growth may require material startup losses.  Profitability becomes more of an issue for them for later stage startups, to ensure the unit economics of the business are solid, and the company is starting to produce a profit as it scales.  All traditional banks are going to require a history of profits to ensure their loans get repaid.

Debt Ratios.  At SVB, they are not focused on debt ratios in early stage startups, but do start to focus on them for later stage startups.  Most banks will want to keep your debt-to-capital ratios below 50%.

Coverage Ratios.  For later stage startups, most banks are going to want to see a plan where you are driving at least 1.25-1.50x of EBITDA in excess of your debt service costs (e.g., any principal and interest payments owed).

Personal Guarantees.  SVB does not initially lead with requiring a personal guarantee.  Personal guarantees will only be asked for, if your credit approval is "on the fence" and the personal guarantee will help to approve the loan.  Most traditional banks are going to require a personal guarantee from the founders, to back up the loan in case the business cannot meet its obligations.

Securable Collateral.  SVB does not require loans to be secured by assets, although adding collateralized assets can often be used to help make the credit decision easier.  They understand the enterprise value of its tech startups is often tied up in its intellectual property.  But, most traditional banks are going to look for whatever assets they can secure (e.g., accounts receivable, real estate, equipment).  Banks will traditionally lend up 80% for accounts receivable, 50% for inventory, 60-80% for property/plant/equipment and 50-80% for real estate.

Interest Rate.  Interest rates vary based on the types of the loan.  Lines of credit can be 5%-7% (prime plus 2%-4%) for interest only loans.  Traditional banks can be a bit more aggressive here, since they have all the personal guarantees and securitized assets to protect them.  Longer term loans (e.g., 3 year notes) can be a little higher than this, given the higher principal repayment risk.  As a comparison, non-regulated venture debt funds (e.g, Western Tech, Hercules, Oryx Capital) can be in the 10-15% range.

Timeline to Repayment.  Lines of credit are typically set up for 1-2 years in length (the riskier your business, the shorter the term).  And, term notes are typically in the 3-5 years length (remembering term loans will require outside venture capital at SVB).  But, once you raise capital, getting a term loan on top of the equity, can be a unique way to turn a $3MM equity financing into a $5MM debt and equity financing, without diluting yourself for that extra $2MM raised from the bank.

There are many nuances to the above (e.g., variances between term loans, lines of credit, asset-based lending, factoring, equipment leasing), so don't read the above as set in stone.  But, hopefully it helped you assess whether or not your business is even close to being credit-worthy in the eyes of both traditional and non-traditional banks.

If you have any questions from here, Mike Kohnen at SVB has made himself available to learn more.  Mike can be reached at 312-704-9517 or mkohnen@svb.com.  But, please don't contact Mike unless you reasonably believe you have met the above criteria.

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