Debt Financing: Funding Your Small Business The Smart Way

1. Introduction: My name is David Haber. I'm the co-founder and CEO of Bond Street. We are an online lender to small businesses. We make loans anywhere from $50-500,000 to help our companies grow. We started Bond Street to basically fill a gap where banks weren't lending to small businesses. Prior to that, I had been working in venture capital firm called Spark. I'd often run across a fast growing physical products businesses or services companies that didn't exactly fit with what we were doing or even really made sense yet for venture capital, but who are still generating real revenue, were profitable, were growing, and either struggling to raise bank financing or were very bankable, but kept telling me how painful and antiquated the process was. Most small business owners do look for some sort of financing to invest in their growth. Obviously, that the best case scenario is that you can immediately get profitable and grow with your customers, but typically many entrepreneurs look to take it to the next level and look for outside financing. The most important thing that people learn and hopefully in this class is how to think about a growth opportunity and how to model out what the return on that investment might look like, and how to evaluate the different financing options that are available to you. We also walk you through preparing a loan application, filling out the loan application, and then evaluating the different options that might be presented to you in terms of a loan offer. Hopefully, this class is useful for any entrepreneur. You don't need to have specifically a finance background. Most of the entrepreneurs that we see are incredibly passionate about their craft or their product or their service, but aren't finance people, and that's okay. At Bond Street, we really try to help simplify that single paid product down into something simpler and something unique. So, hopefully this class is the first step into the helping in better understand the financing side of your business and how does it take your company to the next level. 2. Project: Imagine an opportunity to help your business grow. If you had an extra $50,000 or $100,000, where would you put that to work? Now, you can be a flower delivery company and thinking about investing in a truck to actually help grow the delivery side of your business. What is the cost of that investment? How much revenue do you think that extra truck could help deliver? What is the ongoing cost of maintaining that truck and delivering those extra flowers and ultimately what is the profitability of that investment over call it a one to five year period? So, today we're going to think through a potential growth opportunity for your business and we'll help you walk through how to model out the expected return on that investment, whether it's companies like Gin Lin who were thinking about opening their next office. This was a company that had 25 employees and a thousand square feet, were growing really rapidly and needed the upfront cash to invest in the security deposit and in the build out of a new 5,000 square foot office in Chinatown. This might be companies like Joe Coffee who had a pretty decent size existing business. They had 10 existing stores but we're looking to opens door number 11 and then store number 12. Entrepreneurs like Uprise Art who had an existing small e-commerce business but wanted to refresh on their website because they believe that it can help drive more volume. This exercise should only take 20 minutes to half an hour. I think you don't have to get incredibly detailed with the specific financials of the opportunity. I think it's more important to think about the potential growth opportunities in front of you, what might that look like, how to think about the expected cost, what the revenue might look like and what the profitability of that investment should be in order to evaluate what types of financing options might make sense. Let's get drilled down to the specifics for how to evaluate your different financing options. 3. Do I Need Financing?: Small business owners are typically looking for financing with the following use cases. It might mean opening a new storefront or moving into a larger space, it might mean buying an important piece of equipment for your business, hiring additional employees, refinancing an existing business credit card, buying inventory, or solving a short-term cash flow need in your business. So, you don't want to use any external financing for something that is purely aesthetic if you don't believe that it's going to have a clear return on investment. So, in the flower truck example, if the truck is perfectly operational and your customers aren't seeing it, you may not want to repaint the truck with the loan or selling equity in your business. Buying another truck to help grow at the top line revenue is a more appropriate use of financing. So, anytime you're thinking about raising financing, whether it be equity or debt financing, you should have a pretty clear idea of how that investment is going to help grow your business. If you're raising equity financing, you're selling a piece of your company so it should be a really important opportunity to grow. If it's debt financing, you want to have clear visibility into the likelihood of you being able to repay and making sure that you're borrowing an appropriate amount of capital for that opportunity. Another great example is if you run a digital agency, you may not want to staff up on additional employees unless you believe that they're going to help you drive more revenue in your business. So you always want to be mindful of that opportunity and not borrow or raise equity and sell part of your business unless you have a clear opportunity and visibility into how that might help grow. Now that you've thought through what opportunities might exist to grow your business, let's think through the different options that you have available to you in terms of the types of financing, and that might mean equity or that might mean debt financing. 4. Debt vs. Equity: So, you might be a small business owner who has an existing product or an existing profitable small business and you're thinking about ways to help you grow. One opportunity is to raise outside financing to invest in your growth. There's two options that are available to you. One might mean equity, where you're raising money from a third party investor and you're selling them a piece of your business in exchange for that capital. The other might mean debt financing, and that means borrowing money to help invest in your growth. So, let's start with equity financing. Equity financing might be the right opportunity for your business if you're at the earliest stages of your company, or if you believe that there's more risk in the business. So, if you're just getting started and you don't have existing revenue or you're not yet profitable, equity financing might mean the right or only choice for your business, where you're raising third party capital but selling a piece of your business. The good part about that opportunity is that, you can get capital today and you can help grow even though you're at the most formative stage. The downside of that opportunity is that, you are selling a piece of your company and you only have one pie to give and that's one slice essentially. If I'm an investor in the equity of your business, I'm benefiting from your upside. So, I'm not guaranteed to get a return on that investment, but if you are successful, I will get a piece of that upside in that event. With debt financing, you want to have clear visibility into the profitability of your company or the ability to repay however much you're borrowing. The good side of debt financing is that, you're not selling any part of your business. You're borrowing money that you are expected to repay over a given period of time. If you do that successfully, you will have grown your business and not sold any part of the company. The downside is that there's always risk with borrowing capital, especially if you don't clearly understand the likelihood of your ability to repay. So, within debt financing, there's a variety of different options that are available to you, and all of them serve different needs or different use cases. So, the one you're probably most familiar with is a credit card. That's, typically, essentially a line of credit, where you're borrowing a certain amount of money but you're expected to repay that amount typically within the month, or you're charged high interest rate if you let that balance stay on your card for a longer period of time. A term loan is more like a mortgage, where you're borrowing a full amount of capital upfront and you're repaying that loan in fixed, in our case, semi-weekly payments throughout the life of the loan. That might be anywhere from one to five years. In Bond Street's case, it's one to three years long. A line of credit is, typically, a larger amount of capital that you have access to that you can draw down from as you need it. This is, typically, a harder type of financing to get and you need to be a more mature business to be able to qualify, but it's really helpful if you do have other types of shorter term working capital needs, like stocking up on inventory, smoothing payroll expenses, and it's a cheaper source of financing than certainly borrowing on your credit card. Invoice or receivables financing exist, typically, when you have a working capital gap, when you're selling into a larger company, for example. So, if you're a apparel manufacturer selling into a larger department store, you need cash on hand to be able to produce your product. Typically, that larger department store is going to pay you 30, 60, or 90 days later. How do you have the capital that you need to actually invest in producing the product and being able to wait that long for repayment? So, invoice financing, essentially, fronts capital for that expense at discount to the potential future revenue you're going to get from that department store. A merchant cash advance is a specific type of loan product tailored to businesses that take a lot of credit cards. It's often the most expensive financing that's available to small businesses. So, I wouldn't recommend it for most. However, what it does do is that, you can borrow a certain amount of capital and then the lender will, typically, take a fixed percentage of your daily credit card receipts. Meaning, you can lend a restaurant $50,000 upfront and then they're taking, call it 10 percent of your daily credit card income. So, on your good days, they're taking more, on your bad days they're taking less. So, in some ways, it's flexible. However, it often penalizes the business for growing based on that investment. So, you're paying back the loan much faster if you're seeing more revenue as a result of that investment. So, now that we've talked about the five different types of debt financing that might be available to you, let's go deeper into one of them specifically. Let's talk about term loans. 5. What is a Term Loan?: So, with term loans, you're borrowing a fixed amount of capital upfront and repaying that back in fixed payments throughout the life of the loan. In Bond Street's case, you're paying back every two weeks over a one to three-year period. So, this is really useful if you're thinking about some larger fixed investment, where you believe that investment will generate a return over a longer period of time. Hiring additional employees, it might mean opening a new office to expand your business. If you're an e-commerce company, it might mean investing in a new website that you believe will drive you more revenue. If you're a retailer or a food service business, it might mean opening another location to help increase revenue from your sales. Term loan is typically not the right debt financing option if for shorter term opportunity. So, specifically, if you're a retailer, and you're stocking up on inventory, but you believe that that inventory is going to pay back over a month or three months, borrowing for one to three years is typically not the right opportunity for that use case. You really want to think about, any time you're borrowing, aligning the type of financial product to the type of opportunity, and so, matching the expected return to the duration of the capital that you're borrowing for. So any time you're thinking about raising debt financing and certainly with term loans, you're going to want to have a clear visibility into the financials of your business. So that might mean preparing your accounting and financial statements, it might mean having your tax filings on hand, it might mean having your deposit accounts up-to-date. So now, we've talked about term loan. Specifically, let's walk through how to prepare for applying for financing. 6. Preparing: So keep in mind, you don't need all of the following information to participate in this upcoming project. But here are the things that you might need to prepare for an online loan application. One is having a clear understanding of your personal and business credit histories. Another thing is having your business financials prepared. Having prepared your accounting in Quickbooks or working with a third party accountant. Having your taxes paid but also having your tax filings on hand. Then, the last piece is having your deposit accounts available. Traditionally, at a bank, you might need to print out your physical deposit statements with Bond Street, you can log in to your bank account and share that information. Lenders really want to understand the full holistic view into the financial health of your business. There are a few different components to getting that comfort or visibility. The first is understanding the owner's or the borrower's personal credit history. Chances are, you have a credit card, you have a student loan, you maybe have a car or an existing mortgage. All those different types of finance transactions play into your personal credit score. The most common name for that type of personal credit score is the FICO score, and that's just really a number up to 850 that delineates how successful you've been in repaying those types of existing financial transactions. What's less commonly known is the fact that your business might also have a credit score. So if you're a first time entrepreneur and you haven't incorporated this might not apply to you. But if you're an existing business with revenue or with real profit, you very likely will have a business credit score especially if you have a business credit card, if you borrowed in the past, or even have any trade financing with potential partners, like a department store, even a cable company if you have Wi-Fi for your office. All those things can play into your business credit score as well. There are tools online that can help you get a clear understanding of what either score might look like. So on the personal credit score side, there are sites like Credit Karma, which are free tools that help you understand what your FICO is and specifically, what things in your personal financial history have contributed either positively or negatively to that score. On the business side, there are sites like Creditera, which specifically focus on business credit scores that will similarly help you understand the different financial transactions that have positively or negatively impacted your score. Both of those pieces, whether it's the owner's personal credit histories or the business credit history, play a meaningful role in the likelihood of approval, how much you might be qualified for, and at what rate. Another key component in preparing to apply for term loan is understanding your existing tax history. So hopefully, you've paid both your personal and your business taxes. If you haven't, go do that. Bond Street makes it really easy to just esign a tax authorization form that allows us to pull your full tax history, so you don't have to go looking for those physical documents yourself. That is, again, just another way for lenders to get comfortable with, what is the amount of revenue that you've disclosed to the government? What is the amount of profitability that you've paid taxes on in the past? How does that compare to your self-reported financial statements and quick books? So it's a great check. It's not the only metric that lenders use to gauge the health of your business but it's an important one to have prepared in advance. The last piece that you should have prepared prior to applying for term loans is having your full deposit history available. So what most lenders look for is at least three months of your deposit history. Really, what that means is, how much cash you have in your bank account? How does that cash flow fluctuate on a daily or monthly basis? What is your daily revenue look like, is it choppy, is it consistent, is it smooth? These are all metrics that a lender is going to look at to understand the riskiness of your business specifically. So each of these different financial metrics affect both the likelihood of being approved for a term loan, but also the amount that you might be approved for and the interest rate, and we'll get in specifically to what interest means and what the true cost of the loan might dictate. But generally, what a lender is looking for is what is the financial health of your business and how risky is it going to be for us to lend to this company. So, the higher credit score you have, the more profitable your business is, the more smooth your revenue looks like, the more comfort that a lender is going to have to lend to you and most likely the lower the rate. 7. Applying: Awesome. So, now we're going to walk through actually applying for a term loan and keep in mind you don't need to do this to participate in the class but we want to show you how easy it is to actually apply online. So, for this let's do Skillshare test, type in a password and get started. So, immediately we're trying to capture high level of what you're looking for. So, we've already talked about a specific opportunity that you should have in mind and how much that might cost. So, specifically type in the loan amount you're looking for. Let's assume that it's $100,000 loan for Haber and Company and we are a top digital agency in New York City. It's going to help my business open a new location and because I believe that opening that new office is going to take call it three years to repay, I'm going to apply for a three-year term loan. I heard about this class from my friend who is also a designer. So I'll put word of mouth. Just really quickly you want to type in your full name, you'll type in, maybe I won't put my full personal phone number, type in your street address, type in your date of birth, your annual income and here we're asking for your social security number. Now again, offering your annual income and your social security number might look like a lot of immediately personal information but it's an important way for us to understand your financial history. So, specifically with the social security number A, we're keeping that data safe but B, we're connecting into the Credit Bureaus like Experian and Equifax and pulling what we described earlier which was your FICO score. So, the next phase of the application is actually linking your financial statements. So, if you use online products like QuickBooks, FreshBooks, Sage, Zero, you can immediately login to your account and share that data seamlessly. If you don't, we do give you the option to upload your financials directly. So, if you use Excel or some other sort of software product but you don't use an online one, feel free to export that file and upload it directly. We do ask for which software product you do use because it helps us prioritize our own product roadmap. I'll actually login with QuickBooks because I want to show you how easy that looks. So, you just connect with QuickBooks. I'll log into our demo account and by logging into this account it's giving us essentially all the data that your accountant might have access to. So, your existing cash flow, income statement, balance sheet, without needing to actually go in and prepare all of that data yourself, we're getting access directly to that information from QuickBooks. So, keep in mind we're not actually editing any of this information, we're just getting it for our own analysis. So, you just click "Authorize" and you're logging into QuickBooks the same way that you might login to Facebook or LinkedIn on a third party site. We do business as Haber Designs, we are a graphic design company. We were founded September of 2005. One thing to keep in mind is, what is your business legal structure? If you're just an individual just getting started, you may want to type sole proprietor, you may have already incorporated and if so it's likely an LLC if you're just getting started and if you're a little bit of a bigger company, a C corporation or an S corporation might be most likely. It's important to ask your accountant or ask your lawyer and have that information handy when you're applying for loan application because it dictates the types of taxes that you filed in the past. So we'll type C corporation. Here we ask for your EIN and an EIN is an employee identification number, it's similar to a social security number for your business. So, the same way we described what a FICO is, your business also has a similar credit score and so on the backend again we're hooking into sites like experiment in Equifax and pulling that full business credit history. Then it's asking, did you file your tax returns from that address listed above? I'll say yes. Because we've already logged into QuickBooks and shared that information it's extracted annual revenue which is presented to you here, we pull a lot more information than just that but you want to make sure that your annual revenue is accurate or at least directionally correct. If you have an accountant often it's easier to just share that information directly with us so we can contact him or her to get financials from them directly. In this case, I'll skip that section because I've already prepared all of our financials ourself. Then the last piece on this page we're asking for the ownership break down of the business and the title of this different owners. So, in this case, I own 100 percent of the business but in another case you might have a partner. So, let's say Joe Smith is my partner, he is the treasurer of the business, I own 50, he owns 50 and this is important for us because when we are thinking about the financial health of the business, it's also important to understand the financial health of all of the owners. So, if you add in a second owner of your business, we will be sending an email to them asking them to go through that first half of the application where we ask for personal financial information. Typically, in most term loans and certainly it's true with most bank relationships, there's something called a personal guarantee where essentially you are committing your own assets to this loan and securing it. So, in our case, we typically require at least 60 percent of the ownership to guarantee the loan. Banks often have much more stringent requirements and require up to 100 percent of the owners of the business to guarantee the loan. We're a little bit more flexible but it's something it's important to keep in mind and why you should inform your partners in the business that you're applying for debt financing. So, this is essentially authorizing us to pull your tax information. So typically at a bank this would be a form that you would fill out in person and physically sign and then they would go send it to the IRS to collect your tax filings. Last year the IRS started accepting e-signature and so we've created a integration with Doc you sign which you might be familiar with. There's other companies like hello sign which allow you to just simply e-sign this form and provide us digital authorization to pull your tax filings directly. So, we've already pre-populated a lot of this form with the data we've collected earlier in the application and you just click basically two clicks, you can sign and that gives us the authorization we need to pull up to two years of your tax filings. The last piece of this application is connecting your business accounts. If you noticed up above we've tried giving customers insight into the likelihood of approval and they're expected rate. It's not something you're going to see in most applications but we continue to try to provide visibility as early as we can into the likelihood of approval. Deposits as we described are an important piece of the application because it gives your lender visibility into the cash flow of your business and the volatility of that income or this how smooth it looks. So, we've done integrations with 5,000 banks in the country. So, most likely any bank that you currently have an account with we will support. So, all the major banks you see here. So here you're essentially using your username and password that you want to log in your account. Keep in mind, we don't have access to move any of your finances, this is simply to give us sort of read only visibility into the financials of your account. So, this last part of the bank authorization is collecting your routing and account number. That gives us the information we need so that when we actually approve the loan we know where to send the money. So, specifically you can find your routing number either on a check, your account number is typically in your business bank account online or you can go into the branch and ask for this information. So we're saying in the event I accept a loan offer I authorize Bond Street to fund this account and collect from that account in those semi weekly repayments. That's it, you've connected your bank account. So, the last step is essentially just reviewing the application that you've submitted. So, we make it really simple for you to look back on all the different steps of this application and make sure that the information that we collected is accurate and because it is, I'm going to push submit and that's it. So in a few minutes you've shared all the information that we're going to need to actually make a lending decision and from here on out we send that information to our credit team and typically get back to customers within 48 hours with a decision or we'll follow up with you to collect additional information we might need to approve the loan. 8. Terms & Repayment: So, great. So, now you've finished filling out your loan application and let's talk about what the actual loan offer might look like. Specifically with regards to a term loan, there's a few sort of key components to think about. Certainly, it's the amount that you've been approved for. So, in our case for Haber and company, we'd applied for $100,000 to open our new office, we submitted that application to Bond Street who then got back to us with an approval and a specific interest rate. So, interest is essentially the cost of borrowing that capital and how much in addition to that $100,000 you're going to have to repay over the life of the loan. One of the key data points in any loan offer you should understand is what your repayment period and repayment process looks like. So, with a term loan, hopefully that's at least a year long, can often be up to five, in some cases, 10 years long if you're getting a traditional bank or SBA loan. In our case, it's bi-weekly and in many cases, it's on a monthly basis. So, knowing what that bi-weekly payment looks like and being able to anticipate that cashflow going forward is really important. With regards to the interest rate, interest is one piece of the true cost of the loan. Typically, lenders have an additional fee or costs associated with borrowing. So, in Bond Streets case, but it's consistent with North Banks and others, there's an upfront fee that we charge when we approve a loan. In our case, it's a flat three percent. So, if it's $100,000 loan, we're typically lending, sending $97,000 upfront and you're paying that $110,000 throughout the life of the loan. That additional fee adjusts the interest rate into something called an APR. So, an APR is basically the common metric to clearly benchmark that type of loan offered to any other type of loan product you might see. So, you might be familiar with APR with regards to a credit card. Typically APRs for credit cards are 25% to 30% interest. You want to make sure whenever you're borrowing that you're getting that number from your lender. We are always incredibly transparent with the true cost of the loan and give full detail for what that looks like. Not every lender does this and so, it's really important whenever you're considering applying to ask for that specific numbers so you can fully understand the true cost of loan for your business. Another important thing to understand is the terms or covenants of the loan. As I described earlier in the process, there's different types of loan products that require different levels of security. Typically, the lower the interest rate, the more security that you need for the loan. So, in Bond Street's case, we require both the owners of the business as well as the business assets to be pledged against the loan, and this is true of any typical traditional bank loan product. Credit card financing isn't secured by your personal assets and therefore, the rates are significantly higher. When you get a mortgage, that loan is secured by a home or your, in a commercial mortgage, by your business real estate. So, understanding that security is really important when understanding the terms and covenants of the loan. Lenders in some cases require that you inform them whenever you're considering taking on additional financing, whether it be equity or debt financing. Because they want to understand how that new financing is going to impact the expected profitability of that business. So, if we've looked at your financials and approved you for $100,000, it's because we believe that that investment in your business, it's going to pay out more than the interest rate that we're lending you. Right and that's the Calculus you need to understand for yourself is I believe that borrowing $100,000 is going to pay back more than $110, 000 that I'm paying back over the period. If you're borrowing additional financing in that one to three year process, that can impact your profitability and so your lender is going to want to know that information. On the equity side, if you're selling a big part of the business and there's a new stakeholder in your company, that person should also be informed of what existing debt exists and what their obligation to that might look like. So, the nice thing about a term loan is that you know exactly what your repayment schedule will look like throughout the life of the loan. It's the same in our case bi-weekly payments over that one to three year period. So, you can forecast how much cash you're going to need to have on hand or what the future profitability of that investment should look like in order to pay back the loan. There are other loan products that are a little bit more difficult to sort of clearly calculate the true costs. So, you should be careful of this and try to get clear visibility in evaluating this option. So, this is true of products like merchant cash advance, it's often true of factoring or invoice financing that we described. Specifically, with merchant cash advance, it's hard to know, you don't know the time it's going to take you to pay off the loan because they're taking a fixed percentage of your daily revenue. So, meaning if you're investing in your company and you're doing incredibly well, you're going to pay back that loan much much faster and so, that fee that we described earlier is going to have a bigger impact on your APR which is the Annual Percentage Rate, the annual cost of the loan. There some lenders who purposefully hide that APR because it's a very high number and so, it's especially true in MCAs which, Merchant Cash Advance where the rates start 40%-50%, in some cases, go to triple digits over 100% interests. So, be very careful in looking at and evaluating your different options. In [inaudible] case and in Bond Street, specifically, our rates run anywhere from six percent to the high teens, low 20s. Our average rate today is around 12%. So, whenever you're considering raising any type of financing and specifically, debt financing, it's a pretty considered transaction, so you should make sure to talk to your lender and ask any questions that you might have. 9. Common Questions: So, maybe we'll take a moment to answer a few more questions. By the way, if we don't cover everything you're curious about, feel free to hop into the discussion section and ask any questions you might have, and I'm more than happy to answer them. One thing we often hear from the entrepreneurs in small business owners we see is, how much will I qualify for? People are are typically really passionate about their product, or their service, or their craft, but they're not finance people and that's okay. You don't have to be a finance person. At bonce released, we really try to sort of simplify that process and make it feel more transparent, feel a little bit more human. One sort of simple rule of thumb metric that we use and certainly other lenders use in evaluating how much to lend is this concept of debt service coverage. That sounds like a scary word, but it really just means, what is the minimum profitability your business must have in order to cover the amount of capital that we're lending? If you're applying, for example, for a $100,000 most lenders are looking for at least 1.15 from a DSCR perspective, which basically means 15 percent more than your net income is needed to cover that amount of capital. So, in order to qualify for a $100,000 loan, you need to make at least $115,000 in net income per year. So, obviously, if it's more, then that will allow you to sort of borrow more, and if it's less, then you may qualify for less. With Bond Street and typically with other lenders, you should feel more than comfortable for applying for the amount of capital that you think you need for your projects specifically or that opportunity, and we'll get back to you with an amount that we feel comfortable with. Well, we don't want to ever have happened any envision either, as you don't want to put yourself in a position where you can't comfortably repay the amount of capital that you're borrowing. How long will it take me to repay that amount of capital, and if I wanted to pay it back early can I do so and can I do so without penalty? Right. What most lenders make their income from is that interest payment. So, there is a benefit for many lenders to having you hold that capital for the entire duration of the loan because the interest is accruing for that one to five year period. But if you find yourself having made that investment and you're generating significantly more capital such that you feel very comfortable paying off the loan early, there are many lenders like Bond Street that don't charge you penalty for doing so. So, you can forego that additional cost, that additional interest, by paying off the loan immediately when you're able to, and that's an easy way to sort of take a term loan which typically has a set duration and make it a little bit more flexible to your needs. You can almost treat it more like a line of credit, where you're essentially drawing down from it when you need it. You are still borrowing the full amount up front, but if it's a three year loan and you find out that in a year and a half you can easily pay it off, then it may be a good idea to do so. 10. Setting Yourself up for Future Success: So, if you're not successful actually getting approved for that loan or for debt financing, there's a few ways to build great financial hygiene, so that you can set yourself up for success in the future. One piece of that might mean hiring an accountant or putting your financials into QuickBooks and to have a clear visibility into your revenue, your expenses, and your profitability. In some cases, your existing financial transactions might be inhibiting you from getting future financing because you made late payments, you haven't filed your taxes. So, making sure to go to sites like Credit Karma and checking out you know what your your personal credit score looks like, there's a lot of ways you can improve that score and they definitely have a lot of literature to help you think through that. But certainly, paying off any existing debts, if there is any outstanding tax liens or issues with the government, certainly taking care of those is really important. Then the last piece, it just might not be the right time for borrowing, right? If your business is not yet profitable, you may want to consider raising equity until you can get to profitability and have a clear line of sight with how much you can comfortably borrow. Again, whenever you're raising debt, you want to have be very comfortable that you're going it easily pay off that loan amount. So, thinking through ways to either increase revenue or decrease expenses and improve your margin or profitability, are really helpful tools and certainly at Bond Street our mission isn't just to be your lender, it's to really be your financial advocate. So, even for customers who we don't approve, we really try to provide feedback and help these companies continue to grow. 11. Crunching the Numbers: So now that you guys have thought about a specific growth investment for your business, let's walk through a couple of examples and understand the economics and how to model out that investment opportunity in practice. So let's assume that you're an individual designer running your own agency and you're thinking about bringing on an additional employee. Let's walk through how to think about that additional costs and what the return on that investment might look like and whether a loan might be the right tool to help you accomplish that sort of growth. So you're an individual designer, you're currently breaking even in your business and you want to bring on additional employee. Let's assume that that additional employee salary is going to be $80,000. Now you know that salary alone isn't the total cost of bringing on that new employee, you also have to pay for healthcare and payroll tax and maybe new equipment for that person. So the additional expenses with regard to that new hire are $20,000. so this is salary, this is additional expenses. So the total cost of bringing on that new employee in a given year is going to be a $100,000. So you're looking to borrow a $100,000 to essentially cover the total cost of the loan. Lets assume that equals total loan amount and let's assume that that lender approves the loan and it's going to cost you, 10% in interest. You're paying that loan over the course of one year. So keep in mind as you if you borrow $100,000 you're paying back a percentage of that amount let's say every two weeks or every month throughout that year. So interest is only going to accrue on the amount of principle remaining at any given time. So the total cost of the alone isn't simply going to be a $110,000. It's going to be slightly less. So let's assume that it's $105,200. Another really important thing to think about obviously the whole point of bringing on a new employee is that you believe that they're going to help you generate more revenue. So given what you're able to produce today, you assume that that new hires going to be able to generate a similar amount of new clients in additional revenue. So let's assume that that's $250,000 in revenue to the business that that new hire can generate. You have a $100,000 in expenses, $150000 in profit and the true cost alone is about $105,000 and one important ratio that every lender tries to measure is the ratio of profit to the true cost of the loan and most lenders have a minimum what they call debt service coverage ratio of 1.15. So long as this ratio of $150,000 over $105,000 dollars is greater than 1.15, you're likely to get approved. So the actual ratio of this is about 1.4, which means you're in the green and this loan is likely to get approved. Awesome. Let's try a different example now you're an existing production studio that's been in business for a few years and you're already generating revenue and profit. So you're currently generating let's say $100,000 in profit per year. So things are going really well, but you want to invest in new production equipment because you believe that's going to help you land higher quality clients and generate more revenue for your business. So let's think through the return on that investment and whether a loan is the right tool to help accomplish that growth opportunity. So you want to buy let's say a handful of LED cameras, you want to buy new Apple computers, potentially some lighting. It's not going to be cheap, it's going to cost you $150,000. So the amount of capital you're going to look to apply for is $150,000 equals loan amount. Now we already talked about your business generating revenue. So let's look at what paying back that loan over a two year period might look like because you believe that you're going to generate enough revenue over two years to build a payback that loan and because we already talked about your business generating revenue in both year one, year two. It's already generating profit right it's $100,000 in existing profit with your current team, current equipment today. You know an important thing to ask yourself is how much additional revenue is this new equipment going to let me generate. I'm going to be able to take on new hires or excuse me new clients, bigger projects more revenue. So now all that's going to come immediately right it's going to take me time to market this new equipment that I have. So I'm going to generate let's say $50,000 in additional revenue in year one and because in year two everybody is going to know that I have these awesome new cameras I'm going to make a $100,000 in year two. Now I also know that it's going to cost me some money to maintain this equipment or I may need to hire some contractors to come in whenever we are doing the shoots to man the lighting and man the cameras. So that's going to cost me roughly $40,000 an year in additional expenses. So this is new revenue and this is expenses. Now when I apply for $150,000 the lender is going to look at my existing profitability, the owner's personal FICO scores, the business credit history, the cash flow of my company to generate what they believe is the right risk and interest rate associated for that loan. So to keep things simple let's assume that it's a 10% interest rate. The true costs a loan is going to be about a hundred $165,000. Now it's important to understand how much profit am I going to generate by bringing on that additional equipment and this additional expense. So we already make $100,000 here in profit. We have $50,000 in the first year in new revenue, $100,000 in the second and $40,000 in expenses. So I have $150,000 in gross minus $40,000 in expenses. I want to make $110,000 in net profit in year one and I'm making more in year two. So it's $200,000 minus $40,000 it's $160,000 in year two and because I'm not paying off this total amount immediately we can divide the true cost alone in two. So let's assume that it's $82,500 in year one, $82,500 in year two. So as we talked about in the last example the key ratio that most lenders are looking for is, what is the relationship between profit and the total cost of the loan on an annual basis? Most lenders are looking for a minimum, what they call debt service coverage, of at least 1.15. So if I look at just the ratio of these in the first year it's 1.33 and in the second year we're doing much better. So it's 1.93 and most lenders will take the average of those two numbers and let's say it's just around 1.6 for debt service coverage and because 1.6 is greater than 1.15 we have very good likelihood of this loan being approved. 12. Key Takeaways: One thing that I've seen as a former venture capitalist and now building Bond Street, where we provide lending capital, is that entrepreneurs are often really quick to market the fact that they've raised equity capital and taken on investment. They'll put it on Twitter. They'll put it on Facebook, but the reality is what you're saying is you've just sold a big chunk of your company. It's really prestigious to raise venture capital money or have a prestigious angel investor, but the best scenario is that you want 100 percent of your business and then it continues to be profitable and growing. On the other hand, debt financing is often viewed with a negative light. It's something that you only maybe do in times of need or when you're struggling, but the reality is that a loan can really be viewed as a tool to help you accomplish something amazing. And so, it's my belief that there's different options for different phases of your business, but that debt capital or a term loan specifically can be a really valuable vehicle to help your business grow and let you maintain ownership over your business indefinitely. Well, thank you so much for sitting in on this class. We've talked about the various options for financing your business. Whether that's equity financing, where you're selling a portion of your company to investors or debt financing, where you're borrowing capital to invest in your growth. Specifically within debt financing, we talked about term loans, which is what we do at Bond Street and how to understand the economics of borrowing with a term loan and how to use that as a tool to invest in some growth opportunity in your business. So, now what I'm really excited to see is all of your ideas and the ways in which you're going to invest in growing your company. So, please feel free to submit all of your ideas in the project gallery and don't hesitate to ask any questions in the comments section. I'd be more than happy to clarify anything from the video. Thank you so much for your time and I'm really excited to see you guys grow.