Silicon Valley Bank committed to lend or invest at least $100 million to technology and life science companies based in Arizona over the next five years, yet many experts say lack of money is preventing the state’s tech sector from exploding.
“One area we still need to improve is in the area of capital availability,” said Steven G. Zylstra, president and CEO of the Arizona Technology Council. “Arizona lags behind our competitors in terms of access to capital.”
So what are banks looking for in up-and-coming companies in order to decide if they are worth the risk?
“There is a misconception about business lending, particularly with start-ups, that the application — all of the factual data surrounding the request, the projections, financial statement of the owner and business plans — are the most important things,” said Tim Bruckner, managing director and regional manager of commercial banking for BMO Harris Bank. “Though these items are important in underwriting, we are really looking for entrepreneurs that also show the ability to adapt to a changing environment, demonstrate knowledge and passion for their business and show solid understanding of where their business fits in its competitive environment. Too often, business owners overlook a banker’s interest and understanding in these areas.”
With that said, it is very difficult for a traditional bank to finance a start-up or new business, according to Mike Brown, Arizona regional president at Washington Federal.
“However, the ones that make sense have a well-developed and thought-out business plan, coupled with a strong guarantor,” Brown said.
Ed Zito, president of Alliance Bank of Arizona, the largest locally headquartered bank in Arizona, said Alliance looks at a start-up’s firm capitalization, cash position, “cash burn” rate and cash flow margins.
“Start-up company financing is a risk to be borne by the equity investors,” Zito said. “That said, accounts receivable, support by the ownership or equity investors can mitigate start-up risk.”
So when can a start-up do to increase its chances of getting financed in today’s heavily regulated and competitive economic climate?
Before you get started, Bruckner said to seek counsel from someone who has done it successfully.
“It is always good to hear the success stories, but these individuals will also have great insight into the stumbling blocks and things they would have done differently if they knew then what they know now,” Bruckner said.
Bruckner said first-time borrowers should also demonstrate that they have planned for contingencies, such as a cash shortfall or potential loss of a key customer.
“A start-up’s best chances at securing a loan is having an experienced management team or ownership, knowledge of the industry, proprietary product, service, technology, a demonstrated marketplace acceptance of the product or service and the ability to sustain the start-up until the company is cash-flow positive are crucial factors to consider,” Zito said.
Brown said that it’s imperative for new companies to have well-crafted business plans with reasonable targets to achieve.
“Make sure all financing sources are covered, because everybody has their particular niche or focus and your plan might fit that focus,” Brown said. “Look at traditional sources like banks, but engage all non-traditional sources like independent finance companies.”