Startups and a Bank Line of Credit

One of the goals of the most recent quantitative easing strategy (QE2) is to replace investment assets in banks, like T-Bills that make interest, with cash that doesn’t make interest. With cash on hand that isn’t income producing, banks are more likely to loan the money to businesses or consumers, as well as increase the money supply through the money multiplier effect. For technology startups, lines of credit and bank loans are especially difficult as almost all loans are done against hard assets like real estate or equipment. Even the recent increased guarantees by the SBA still don’t account for knowledge industries that are asset-lite.

Here are a few items startups should keep in mind when thinking about a bank line of credit or loan:

• Typically banks will do a line of credit for 75% of current accounts receivable (meaning, if you have $120,000 owed to your business, with $100,000 current and $20,000 overdue, a bank will loan you $75,000)
• Certain banks like Silicon Valley Bank and Square 1 Bank specialize in banking venture-backed startups and provide sizable bank loans based on the reputation of the venture investors (but the VCs don’t co-sign on the loan) as well as loans against a small percentage of recurring revenue
• A new class of investor that provides a loan in exchange for a percentage of future revenue is emerging (see TechCrunch’s article on RevenueLoan)

My recommendation is to build a relationship with a community bank or startup-focused bank, establish a line of credit, and know that the best time to ask for money is when you don’t need it.