Financing In The Brave New WorldFebruary 2, 2011 No Comments
Now that our economy is beginning to pick up some steam, many project developers have become re-engaged in the process of launching new entertainment projects. In actuality, the time couldn’t be better, as a combination of a depressed commercial real estate market, an eager construction industry, and an aggressive supplier-pricing environment provide an exceptional foundation from which to build upon. Still, the looming challenge continues to be the project financing component, a segment that was considered lifeless in 2009 and early 2010. A rising number of bank failures coupled with unstable foreign and domestic investment markets were a recipe for indecision, as most banks and finance companies chose to wait out the storm in favor of clearer skies. And while the forecast is still a bit cloudy, a series of events have occurred that have remarkably improved the financial world’s desire to climb back into the lending business.
Go Where The Money Is
Industry developers often ask the question, “Which banks lend money for entertainment projects?” The fact is that few, if any, specialize in entertainment finance, with the exception of those financial services entities that support the mega-deal segment, which includes theme park chains, casinos and sports stadiums. That leaves the rest of the entertainment segment without a clear choice for financing. Fortunately, some good news has come down the pike. On October 12, 2010, the Federal Government mandated changes to the Small Business Administration’s “504” and “7a” lending programs. These changes permitted both programs to more appropriately support the small business community, including entertainment developers and existing entertainment operators. The most significant change was an increase in the program’s guarantee limits to $5 million from the earlier $2 million level. In essence, the Federal Government will guarantee a loan made by a qualified lending institution to a borrower, provided the borrower falls under the parameters of a small business enterprise.
From October 12, 2010 to December 31, 2010, the Federal Government’s guarantee increased to 90 percent of the primary bank’s exposure (up to $5 million). After 12/31/2010, the guarantee program reverted to 75 percent – still a substantial inducement for a lending institution to support financing requests. While the current program is not as aggressive as that of 2010, it is more than sufficient to keep the funds flowing from local lenders.
Working With The SBA
Every state in the nation maintains district offices for the Small Business Administration. One of the easiest and most efficient methods of applying for SBA-supported financing is through one of a series of lenders in each state that are designated as “preferred SBA lenders.” A preferred lender is familiar with the documentation and procedures required to meet SBA guidelines, and in some cases, can provide direct approvals on behalf of the SBA. The use of a preferred lender means that the timeline to point-of-decision can be markedly reduced. In some cases, a preferred lender can obtain an “interpretation” from the SBA on qualification concerns or recommended transaction structures for a particular project. The net effect is that an SBA-supported lending transaction – particularly for start-up entities – can prove to be the most efficient and effective method in clearing the financing hurdle.
Borrowers often perceive the SBA as the “lender of last resort.” While the SBA’s mission is to support small business, particularly when a lender inducement is necessary, it does so under the same set of credit standards as a traditional banking institution. That means that the prospective borrower needs to establish a solid business case for the lending request. Documents commonly requested by lending institutions working in conjunction with the SBA are:
- Market Feasibility Study
- Business Plan
- Business Ownership Structure
- Schedule of Equity Investment of Applicants
- Schedule of Individual Net Worth of Applicants
- Submission of Business/Personal Tax Returns For Three Most Recent Years
- Background Clearance Relating to Credit History and Felony History (if any)
While it may be possible to obtain SBA support with equity down payments as low as 10 percent, such use of extreme leverage is often discouraged. Anticipate that an equity contribution of 20-30 percent of total project costs will be necessary, and build your business model around this condition.
Many potential borrowers are dissuaded from making application to the SBA on the basis that the process is too time intensive and detailed. In actuality, the SBA process – particularly through a preferred lender – is quite efficient, with many applications processed within 30 days. While the changing of programs in late 2010 resulted in a dramatic wave of applications through the end of the year, it’s quite likely that such volumes will begin to return to normal levels by the end of the first quarter of 2011. From my firm’s perspective, we achieved a total of 11 approvals from the SBA during 2010, a record for us made sweeter by the relative sluggishness of the financial services markets overall.
Prepare Yourself for the Financing Process
Business financing may prove to be the most intensive process you encounter as an entertainment developer or operator. Being prepared for the length and scope of the process is a worthwhile first step in insuring that you’ll see it through to the end. Expect to answer many, many questions about your business model and industry. Expect to receive feedback from analysts who may be critical of your projections, costs, or market opportunity. Expect to reveal personal information, including previous events that may have had a bearing on your credit score. Anticipate that the transaction structure you’ve proposed will be modified, changed, or replaced in favor of an alternate format. Most importantly, expect to be immersed in the process for 90 days or more, often explaining and re-hashing elements within your plan multiple times. Consider the elongated timeline to be a test of your business knowledge and calm demeanor. After all, not everyone will qualify for financing – just those that have done their homework and followed the proven path to success.
(Jerry Merola is Managing Partner, Amusement Entertainment Management, LLC.)