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I I I I I I I I I I I I DH~S 85 ) 12 Review Jut~e 10 1985 direct loans. Under the guarantee program, the SBA insures a lender against loss on up to 90% of the loan, subject to a maximum legal limit. In most cases, personal guarantees to both the SBA and the lending institution will be required. Commercial finance companies primarily offer secured loans requiring a lien on the company's assets. Collateral is usually accounts receivable, inven- tory, machinery and equipment, or real estate. The advantage of dealing with' commercial finance companies is that they are willing to grant loans to businesses that might not q.ualify for bank financing. The biggest disadvan- tage is the high effective interest rate associated with these loans. Venture capital is a form of private financing that provides both capital and management assistance to promising companies. Most venture capitalists will take an active role if it appears that the company's objectives are not going to be achieved. In fact, some arrangements allow the venture capitalists to replace the management team. An entrepreneur should therefore consider whether the company will be able to function in such an environment. Small 8usiness Investment Companies (SBICs) are privately-owned and operated firms licensed by the SBA to provide equity capital and 10ng-term loans to small businesses. They operate in the same manner as do venture capitalists, but traditionally place more emphasis on long-term loans. An ad- vantage of the SBICs is that a combination of financing vehicles can be ob- tained from the same source. Additionally, many SBICs will initially defer {oan payments until the liquidity position of the company improves. Pub/lc offerings may require a trade-off between certain personal consid- erations and the benefits of the financing obtained. The offering may pro- vide increased liquidity, diversification opportunities, status, and equity incentives for management. But, it can also mean emphasis on short-term considerations, pressure for increased growth and demanding public exposure. If the entrepreneur does not want outside investors, another source of capital is an Employee Stock Ownership P/an (ESOP). ESOPs have the poten- tial to borrow large sums of money based on the employer company's guaran- tee of the loan. The stipulation that the plan invest primarily in qualifying employer securities is actually its chief advantage since it may thus be used for corporate financing. Disadvantages associated with ESOPs are: the com- pany must comply with the regulations of ER ISA; the value of the company's shares must be ascertainable; and the shares might have to be repurchased. A judgment must also be made as to whether having the employees as owners will be good for the company. These are just some thoughts to consider. Your business and tax advisor, attorney, and prospective lender can provide more detailed information and should be consulted before any action is taken. The Thought Failure is the opportunity to begin again, more intelligently. DH+SReview is published bi-weekly by Deloitte Haskins & Sells, 1114 Avenue of the Americas, New York, N.Y. 10036. Editor: Joseph E. Eimlinger, Phone: (212! 790-0626. Reproduction is permitted with credit given 1o Deloitte Haskins & Sells. Deloitte