"C" Your Way Through It

Part 2: Important elements lenders look at before they hand over the cash
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This story appears in the August 2000 issue of Startups. Subscribe »

Q: Since money folks are financial types, all I need is a good set of numbers, right?

A:This is part two of my answer to this question. Lenders and investors look at five basic "Cs"; last month, I covered character, capacity and conditions, and now I'll take a look at collateral and capital.

Collateral comes in two forms: loan collateral and investor collateral. Loan collateral includes identifiable business and personal assets, such as your land and building, vehicles, and machinery. Investor collateral is created by people having control of your company. If you can't pay, the banker can take your assets and sell them. If you don't hit your growth milestones, the investor can take over your company.

Venture investors tend to select one of two ownership control concepts. They either take a minority interest in the company that can increase if profitability targets aren't met, or they start with a controlling interest that declines as financial targets are met.

Capital is risk-sharing. Equity capital measures how much the owners have risked in the company. Equity is a cushion to absorb losses. Debt capital must be repaid in good and bad times. The more debt a company has relative to equity, the riskier the loan.

New companies are expected to have more capital. It is nearly impossible to get bank financing if, after the loan, there is $4 of total debt for every $1 of owners' equity.

Not all dollars are equal to investors. You've spent dollars and sweat equity in product development, but if you can't get to market without investor money, your dollars are without value. Investors argue their dollars should buy a larger share of your company than your dollars. Sixty percent of investments fail over this issue.

George M. Dawson is a business consultant and author of Borrowing to Build Your Business: Getting Your Banker to Say "Yes" (Upstart Publishing, $16.95, 800-235-8866).

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