YALE CASE MAY 15, 2020

On the Nature of Debt

Terms and conditions that matter most and why
Mark Agnew 1
Brian O’Connor 2
A. J. Wasserstein 3

Entrepreneurs often encounter capital structure opportunities and challenges when either
purchasing or growing a business. How an entrepreneur chooses to finance their business is a
crucial decision that sets the foundation for strategic and operational implications. This note
exclusively focuses on debt financing and how small- and medium-enterprise entrepreneurs
might consider and evaluate debt financing opportunities. We review how entrepreneurs
could evaluate and understand loans in the $5–$25 million range.

Young, first-time, and inexperienced entrepreneurs often believe sourcing the cheapest debt
available—the instrument with the lowest interest rate—is the goal of raising debt capital.
Although the cost of capital is worth considering, we believe the cost of debt is a single
dimension that should be evaluated in aggregate. We assert that interest rate is one of the
least important features in a credit partnership.

Several features, detailed below, must be considered when selecting the best debt partner,
whether a regulated bank or a non-regulated entity (a mezzanine debt fund, hedge fund, or
private investor), who will purchase the debt security sold by the entrepreneur’s company.

Sometimes entrepreneurs believe debt is harmful and should be avoided. Debt is a tool. Much
like fire, debt can be detrimental or useful. Fire can warm you, protect you, and cook your
food. Fire can also be dangerous, or even lethal, if used inappropriately—the same is true of
debt.

Though we embrace using debt on the aggressive side of prudence, we do not encourage
students to be cavalier about it. Nevertheless, debt is cheaper than equity and will require
rigorous, precise, and disciplined use.

If equity prices for small, entrepreneurial businesses fall in the 20%–35% range, debt is usually
substantially cheaper, at 5%–15% (and even cheaper when accounting for the tax deductibility
of interest for tax purposes). When more debt is used in a capital structure, the weighted
average cost of that capital (WACC) attenuates, and positive capital arbitrage begins at a
lower starting point. Debt is not dilutive, like equity, and it typically comes with less onerous
provider oversight. Finally, the cost of debt is easier to understand than the cost of equity. If a
business overperforms, equity might be more expensive than initially anticipated. We think of
using debt as a form of equity avoidance.

Entrepreneurs should judiciously engage debt in their capital structure. Consequently,

selecting the right debt partner and understanding the features of a debt relationship are
essential.

A debt relationship has eight critical dimensions. These are typically presented in a creditor
term sheet (see Exhibit 1 for an illustrative example). All term sheets deserve scrutiny; an entrepreneur
must understand how the debt decision will affect the overall capital structure and needs of their
business.

 Cost of Debt: The stated periodic interest rate associated with the security, origination
fees, and prepayment penalties comprise the cost of debt.

 Amortization Terms: The scheduled and mandatory repayment of principal and the
variable repayment of principal (often through a formulaic cash sweep).

 Covenants: The rules and dynamics that contractually govern relationship compliance.

 Relationship Dynamics: The entrepreneur’s subjective assessment of how well they and
the debt purchaser will work together, even in the event of a default.

 Loan Term: The time frame in which the debt matures and all outstanding principal is
due in full.

 Capacity of the Facility: How much capital can be borrowed and how incremental
capital is accessed.

 Personal Guarantees: The presence of a guarantee, who is typically provided by the

entrepreneur–CEO beyond the company’s assets if a default requires a collateral cure.

 Collateral: The assets the creditor can claim if a default requires a collateral cure.

There is no one way to evaluate debt options, and an entrepreneur’s needs and goals will determine the
most appealing debt solution. By understanding all the dynamics involved in a debt relationship, an
entrepreneur might find compelling features less obvious than those considered when initially
contemplating credit partners.

Cost of Debt (Rate)

We do not believe that rate is the most important feature in a credit relationship. Despite this, we will
commence with cost of debt because many entrepreneurs focus on interest rate as the most crucial
element in a debt security. Before we evaluate the merits, or lack thereof, in rate, we first define its
components.

Rate is the stated interest rate of a credit facility. Rates can be fixed or variable; variable rates make
computing the real cost of capital more challenging than fixed rates. We prefer fixed-rate debt—
entrepreneurs face enough uncertainty with their businesses that adding rate risk might seem an
unnecessary dimension. Entrepreneurs will need to evaluate the incremental cost of fixed-rate debt
over variable-rate debt as term extends. In addition, entrepreneurs might encounter creditors who only
offer variable rate instruments. In this case, an entrepreneur can synthetically change a variable loan to
a fixed loan through a swap instrument. The stated interest rate is only the beginning of the actual cost
of debt. Creditors have multiple ways to increase the effective rate that entrepreneurs will pay; these
are creditor pitfalls a savvy entrepreneur should at least understand and possibly attempt to avoid.

Most loans also have origination fees or a cost to initiate a loan. Origination fees of 1% or 2% are
common. The origination fee, coupled with the stated rate, allows an entrepreneur to calculate the
effective cost of debt. For example, a $10 million loan, loan A, with a stated 5% interest rate that fully
amortizes over five years and has no origination fee has an exact 5% cost of debt (see Exhibit 3 for all
loan calculations and Exhibit 4 for Microsoft Excel formulas). However, the same loan, loan B, with a 1%

2 ON THE NATURE OF DEBT

($100,000) origination fee has a higher implicit price than loan A; effectively, the $100,000 origination
fee is interest paid on the first day of the loan. In other words, it is like an entrepreneur getting a
$9,900,000 ($100,000 less than $10 million) loan but being required to pay interest as if the debt
investment comprised the full $10 million. This results in an effective interest rate of 5.4%, making that
seemingly innocuous origination fee quite material.

Loans also frequently have prepayment penalties. These compensate the loan purchaser if the debt is
outstanding for a shorter period than anticipated. A typical prepayment schedule might be 5%, 4%, 3%,
2%, and 1%, where the percentages represent the penalty fee on the then-outstanding balance by year.
For example, if the loan were repaid in year three, the prepayment penalty would be 3% of the then-
outstanding balance. This is a real cost, and if an entrepreneur does not anticipate having the debt
outstanding beyond the prepayment period, the penalty must be factored into the effective cost of
capital.

The additional fees attached to a loan can significantly affect the effective interest rate. A $10 million
loan, loan C, with a 1% origination fee and a 3% prepayment penalty of the then-outstanding balance in
year three ($4,301,490) would have an effective interest rate of 6% *, 20% higher than the stated 5%
rate.

Yet another way a creditor can amplify the cost of debt involves using compensating balances. A creditor
requiring an entrepreneur to maintain a compensating balance at the lending institution is akin to
making a smaller loan. For example, if a debtor borrows $10 million with a $100,000 compensating
balance requirement, this is effectively a $9,900,000 loan because $100,000 is unusable and must
remain on deposit with a bank. Despite this, the creditor will charge interest on the full $10 million loan.
If we assume a 6% interest rate and ignore all other fees, the annual interest obligation is $600,000, but
the capital available to borrow is only $9,900,000 (not the full $10 million). So, the effective interest rate
is 6.06% and not 6.0%.

An additional opportunity for creditors to enhance the effective rate is through an undrawn funds fee. It
is common for creditors to offer debtors, for example, a $10 million loan with perhaps $7,000,000
structured as a funded term loan and an additional $3,000,000 committed but unfunded and available
for a future draw under certain predetermined circumstances. The creditor might charge a modest fee
(such as 0.50%) on the unused portion of the loan. In this case, if the explicit interest rate is 6%, the
annual interest charge on the drawn funds is $420,000. Nevertheless, there is an additional fee on the
unused portion of the credit facility of $15,000 (calculated at 0.50% × $3,000,000). Therefore, the
effective interest charge is $435,000, and the effective interest rate is 6.2%. Of all the fees an
entrepreneur can potentially pay a creditor, we are most enthusiastic about undrawn funds fees. This
committed but undrawn capital creates optionality and flexibility that is always desirable for an
entrepreneur in a fledgling business. These fees are comparatively cheap when an entrepreneur needs
incremental capital to bolster a business or use funds for desirable growth: they gratefully pay these
fees with a smile.

If we bring all the features of rate together in loan D, we can see how the stated rate and effective rate
materially diverge. Let us consider a $10 million loan with $5,000,000 unfunded. The $10 million has a
1% origination fee, and the $5,000,000 has an undrawn commitment fee of 0.50%. The loan amortizes
on a ten-year schedule and has a 3% prepayment penalty in year three. The compensating balance

*Remaining Loan Balance: FV = PV (1 + r)n − (PMT ((1 + r)n − 1)/r). $10,000,000 (1 + (5%/12)) − ($188,712 ((1 + (5%/12)) − 1)/(1
+ (5%/12) = $4,301,490, where PMT = (r * PV)/(1 − ((1 + r)^−n)) = ((5%/12) * $10,000,000)/(1 − ((1 + (5%/12))^−60)) = $188,712;
then, rate is solved for.

3 ON THE NATURE OF DEBT

requirement is $100,000. If this loan has a stated rate of 6%, the effective rate is calculated at 7.9% * if
the loan is extinguished in year three. The effective rate is a full 190 basis points (bps) higher than the
perceived rate, which illustrates why entrepreneurs should completely understand how a loan price can
scaffold up.

Aspiring entrepreneurs often seek to lower their WACC by building a debt stack with multiple layers of
capital, with disparate features and costs, funded by different firms. Although this indeed can lower the
WACC, it comes with the intangible costs of complexity, multi-party negotiations, complicated inter-
creditor legal documents, and the time to arrange and close a multi-participant debt stack. Although we
do not discourage entrepreneurs from using junior debt, we do caution young, first-time, and
inexperienced entrepreneurs from getting too convoluted without completely understanding the true
costs and benefits.

When thinking about the cost of debt, entrepreneurs should resist the temptation to exclusively focus
on the stated rate of the debt and holistically consider the true cost, including origination fees,
contingent early termination fees, compensating balances, and undrawn fund fees.

Common mistakes to avoid when thinking about rate include not fully understanding the effective rate
and thinking that the lowest cost of debt is the most attractive debt.

Amortization
Amortization is the rate at which a debtor must repay the principal to the creditor. This is an essential
feature of a debt relationship.

A loan that requires a high rate of amortization will consume a business’s free cash flow more rapidly
than a loan that requires a low rate of amortization. This is significant because every dollar that must be
repaid to the creditor is a dollar the business is unable to deploy for growth. A rapidly growing company
with an opportunity to use cash to facilitate that growth would not be able to grow as quickly if free
cash was required for mandatory scheduled principal payments to extinguish the debt.

Amortization in a loan can be set at fixed levels, such as $100,000 per quarter. Or it can be calculated as
part of a principal and interest payment due monthly or quarterly, similar to a home mortgage loan. One
consideration for how amortization is set is whether the loan is completely liquidating. For example, a
$10 million loan, loan E, at 5% rate with a five-year term would require monthly payments of $188,712 †
to completely extinguish all principal at the end of 60 months. If the debtor complies with this schedule,
no terminal balance is due at the end of the loan. This type of structure requires a considerable amount
of cash to service the debt.

Alternatively, a creditor might set up a loan with a five-year term on a ten-year amortization schedule.
This means the credit is due at the end of five years, but the debt is serviced and calculated on a ten-
year schedule. This dramatically reduces the monthly cash flow required to service the debt obligation.
For example, the same $10 million loan, loan F, with a 5% rate amortized over ten years but due in five
years has a $106,066 ‡ monthly payment ($82,646 less than the completely amortizing five-year
obligation). Because the creditor requires lower mandatory principal payments, the debtor has more

* Remaining Loan Balance: FV = PV (1 + r)n − (PMT ((1 + r)n − 1)/r). $5,000,000 (1 + (6%/12)) − ($57,594 ((1 + (6%/12)) − 1)/(1 +
(6%/12) = $3,799,846, where PMT = (r * PV)/(1 − ((1 + r)^−n)) + (annual undrawn funds fee/12) = ((6%/12) * $5,000,000)/(1 − ((1
+ (6%/12))^−60)) = $57,594 + (($5,000,000 * 0.5%)/12) = $57,594; then, rate is solved for.
† PMT = (r * PV)/(1 − ((1 + r)^−n)) = ((5%/12) * $10,000,000)/(1 − ((1 + (5%/12))^−60)) = $188,712
‡ PMT = (r * PV)/(1 − ((1 + r)^−n)) = ((5%/12) * $10,000,000)/(1 − ((1 + (5%/12))^−120)) = $106,066

4 ON THE NATURE OF DEBT

available funds to deploy in the pursuit of business growth. This is good news, except that at the end of
the five-year term, the debtor will not have completely extinguished the debt and a principal balloon
payment of $5,620,487 * will be due.

Creditors can also require contingent principal payments through a cash sweep feature. This feature
allows a creditor to claim a certain percentage of free cash flow after a company has satisfied its
regularly scheduled interest and principal requirements, taxes, normal capital expenditures, and
working capital requirements. A cash sweep is a way for a credit to de-risk its loan if and when the
debtor has cash available.

We think pursuing a loan with as low amortization as possible is advantageous to an entrepreneur for
several reasons. First, the entrepreneur can deploy excess cash into business growth. Any return on
equity higher than the cost of debt is positive arbitrage. If an entrepreneur thinks they can create 20%
return on equity and the cost of debt is 5%, they will choose to retain as much cash as possible to
redeploy into the business instead of returning cash to the creditor for principal repayment. Second,
most young, inexperienced, and first-time entrepreneurs are better served by not having initially
burdensome creditor obligations. Having lighter amortization requirements is more forgiving, potentially
allowing the entrepreneur to make some mistakes without ending up in a debilitating position.

Common mistakes to avoid when thinking about amortization include misunderstanding that an
entrepreneur’s goal is to extinguish debt as rapidly as possible. Rather, an entrepreneur should choose
not to pay a creditor back and retain as much capital as possible to redeploy into the business for
growth and equity value creation. An entrepreneur’s ideal situation is a loan with no or less strict
amortization requirements with the option of making discretionary principal payments without any
penalties.

Covenants
Covenants are the rules and laws that govern a credit relationship. They are used to determine if a
debtor is in compliance or default with the terms and conditions of the loan. The loan covenants
proposed by the creditor should be carefully scrutinized. The entrepreneur does not want to be in a
technical or payment default position with a creditor. There are three ways to avoid being in default: 1)
the entrepreneur doing exactly what they are supposed to do, 2) the entrepreneur performing at a
sufficiently high level, and 3) setting the covenant bar sufficiently low that the entrepreneur can easily
walk over it. These rules can be quantitative and qualitative.

Some covenants involve instructions that the debtor promises to follow. For example, the following are
negative covenants that the debtor must adhere to:
• No new debt in any fiscal year without lender consent.
• No sales of equipment in any fiscal year without lender consent.
• New leases or increases to existing leases in any fiscal year that will exceed 5% of the existing,
aggregate lease amount will require lender consent.
• No payment of dividends without lender consent.
• Subordination of all present and future debt to stockholders, related parties, mezzanine funds,
or sellers. Payments on subordinated debt will not be allowed if covenant defaults exist or if
such payments result in a covenant default.
• Capex limited in any fiscal year without lender consent.

* Remaining Loan Balance: FV = PV (1 + r)n − (PMT ((1 + r)n − 1)/r). $10,000,000 (1 + (5%/12)) − ($106,066 ((1 + (5%/12)) − 1)/(1 +

(5%/12) = $5,620,487, where PMT = (r * PV)/(1 − ((1 + r)^−n)) = (5%/12)/(1 − ((1 + (5%/12))^−120)) = $106,066

5 ON THE NATURE OF DEBT

 • Accounts receivable and contract audits to be performed by lender auditor or a third party
acceptable to the lender at inception and with each subsequent renewal of the acquisition line,
but at a minimum frequency of 24 months, at the agent lender’s expense.
• All facilities are cross-defaulted and cross-collateralized.

The following are affirmative covenants that the debtor must adhere to:
• On an annual basis and within 120 days after the borrower’s fiscal year-end (FYE), the borrower
will provide the lender with accountant-prepared federal corporate income tax returns and
audit-level financial statements.
• On an annual basis in each FYE, the borrower will provide a reconciliation of EBITDA * to net
income, with all add-backs to net income verified by the current CPA firm or another CPA firm
acceptable to the lender. Such a schedule will be included as a supplemental schedule to the
borrower’s FYE audited financial statements.
• On an annual basis and within 120 days after the calendar year-end, the individual guarantor
shall provide the lender with an updated personal financial statement and their federal income
tax returns.
• On a quarterly basis and within 30 days after each respective quarter ends, the borrower will
provide the lender with management-prepared financial statements and a Covenant
Compliance Certificate.
• On a monthly basis and within 15 days of month-end, the borrower shall provide the lender with
an accounts receivable aging report.
• The lender reserves the right to request and receive from time to time any additional financial
information deemed commercially reasonable.

Perhaps the most important covenants, and the ones that often befuddle debtors, are the specific loan
testing covenants. Figure 1 illustrates loan covenants typical for a cash flow loan.

Figure 1: Illustrative Loan Covenants

• Maximum Senior Funded Debt to EBITDA as follows:

 3.75x at test date 1
 3.60x at test date 2
 3.40x at test date 3
 3.25x at test date 4
• Maximum Total Funded Debt to EBITDA as follows:
 5.00x at test date 1
 5.00x at test date 2
 4.75x at test date 3
 4.50x at test date 4
• Minimum Operating Cash Flow/Senior Debt Service of 1.25x (EBITDA less cash taxes paid plus
non-recurring expenses deemed appropriate by the lender divided by current maturities of long-
term debt plus interest expense).
• Minimum Fixed Charge Coverage of 1.00x (unadjusted EBITDA divided by current maturities of
long-term debt paid plus interest expense paid plus unfinanced maintenance capital
expenditures).

*
Earnings Before Interest Taxes Depreciation and Amortization

6 ON THE NATURE OF DEBT

 • Thirty-Day Clean-Up Provision on the Revolving Line of Credit: the line must be paid down to
zero for a minimum of 30 consecutive days in each twelve-month period.
Definitions matter. A debtor can add slack and leverage to the credit relationship by focusing on words
as much as a number. Most debtors wanting more leverage or looser covenants will use the typical
approach of pushing back to the creditor on the numeric indicators in the covenants. What can be
equally effective but might not receive much underwriter scrutiny is the language used to define EBITDA
and other key terms used in the covenant testing. For example, is EBITDA a trailing twelve-month
calculation or a trailing three-month annualized calculation? For a growing business, the difference is
significant. Is EBITDA defined in a strict generally accepted accounting principles (GAAP) convention, or
are certain add-backs permissible? If so, what are they? This can result in a substantial swing in the
computations. Finally, if the debtor is acquisitive, how is pro forma EBITDA from acquisitions treated in
the calculations? Is the acquired EBITDA ignored until recognized, or is it given full pro forma credit at
the time of closing?

Common mistakes to avoid with covenants include not completely modeling the loan structure and the
pro forma covenant implications, not paying attention to and entirely understanding covenant
definitions, and signing up for tight covenants with low rates. We encourage entrepreneurs to seek
loose covenants to provide as much slack as possible and to work as hard on the definitional covenant
terms as the mathematical covenant terms. Investors, board members, and lawyers fluent in debt
formation can be excellent resources in understanding market terms and conditions when sourcing
debt. Fellow entrepreneurs can also share valuable perspectives on covenants.

Relationship Dynamics
We have explored some numeric and quantitative issues associated with debt instruments, which are
important dynamics and considerations when exploring a potential debt relationship. However,
qualitative dynamics also substantially matter. In a credit relationship, it is important for entrepreneurs
to consider who they are partnering with. We intentionally use the word “partner” because a creditor is
indeed a partner—and a crucial one. Because we prefer more debt in the capital structure than equity,
in some ways, the creditor relationship even trumps the equity relationship.

When contemplating a lender, entrepreneurs should attempt to assess how their potential partners will
behave when their business is going well and the loan might need to be modified (e.g., expanding
capacity). How your partners will act when the business does not go well is even more important. We
speak from experience as operators and investors and, to be candid, most companies inevitably
experience a streak when things do not go well.

Creditors can take a draconian position when things head south, or they can attempt to meet their and
the debtor’s needs in a mutually beneficial way. The best way to build a positive creditor dynamic is to
deeply invest in the relationship, especially when things are going well. How a creditor reacts when
things are uncertain will be partially determined by how the debtor behaves when things are going
smoothly. To help assess what the relationship dynamics might be like, an entrepreneur should request
creditor references for both successful and not so successful loans. Entrepreneurs should not be shy
about asking a potential creditor questions during the debt search process. See Exhibit 10 for suggested
questions.

Creditors, especially regulated banks, tend to involve four key people in any loan relationship. The loan
officer is the relationship lead; they are the credit advocate within the lending institution. They perform
an initial assessment of the loan and advocate for a structure. A credit analyst typically underwrites the
loan, making sure it is in institutional compliance. In the relationship, the loan officer is the gas and the

7 ON THE NATURE OF DEBT

credit analyst is the brake. A credit officer makes the ultimate approval decision on whether to lend. An
executive might also touch the relationship at a high level. We encourage entrepreneurs to treat all four
players with appreciation, respect, and deference. These partners can help accelerate and grow the
entrepreneur’s business. Entrepreneurs want them on their side. There are several ways to specifically
engage creditors.

An entrepreneur should treat a creditor like any investor. Distribute any board or shareholder materials
to the creditor when they are shared with other investors, allowing the creditor to see their email
addresses in the same distribution list as the board and shareholders. Schedule semi-annual or quarterly
meetings with all four key players in the credit relationship. Walk them through where the business is,
where it is going, what is going well, and what is not going well. Be honest, candid, and forthright. Do
not spin credit partners, and resist the temptation to be in sales mode. Creditors mainly care about what
can go wrong, so there is no need to be a Pollyanna. When meeting with credit partners, share swag,
send prompt and grateful thank you notes, and make them feel like a vital part of the team and journey.
Complete all the compliance components of the credit relationship (audits, financial statements,
covenant tests, and attestations) in a timely manner and ensure the accuracy of those components.
When communicating with creditors, keep in mind that they do not enjoy the upside economics that
equity investors have. So, make sure that the message the creditor hears is about downside protection
and the company’s ability to meet its credit obligations. The creditor might be rooting for the
entrepreneur to be a wild success for bragging rights, but the creditor primarily wants to be paid interest
and principal due in a timely manner.

Some creditors, specifically unregulated entities, might request board observation rights in conjunction
with providing credit. This is typically a non-voting role and an opportunity to deepen and strengthen
the relationship. Regulated entities usually avoid any governance rights owing to lender liability laws.

If things do take a turn for the worse, immediately inform the creditors and articulate the best plan for
remediation. In a credit partnership, nothing is worse than being clandestine or cagey about trouble or
having lenders figure out that things are going south before the entrepreneur does. This is a fast track
way to destroy all previously established goodwill.

Embrace the creditors. Send them prospects, act as a positive reference, speak at their events, and ask
them to speak at company events. In general, be a colleague. This behavior will serve entrepreneurs
well, make the relationship more fun, and earn the best possible credit terms in the ordinary and
acceptable market range.

A wise entrepreneur might develop a handful of creditor relationships as their company grows and
evolves. Although the entrepreneur might not be in a formal credit arrangement with lenders beyond
the primary lender, they can regularly share company information with other potential creditors. This is
a way of keeping additional lenders warm and in the loop if a new creditor is required.

Some final thoughts on relationship dynamics: do not entirely rely on the individual credit partners. The
credit relationship is with an institution and is documented in a contract (the loan documents). The
contract ultimately governs the relationship. Creditors get acquired, loans get sold, and individuals get
promoted or terminated. The loan documents will determine what happens with the debt. So, deeply
invest in personal relationships with credit partners, but also read and study the loan documents as
closely as the lawyers will because these documents are the ultimate source of governance. When
thinking about credit partners, it is worthwhile to consider how a partner will behave and weather a
storm—not the entrepreneur’s idiosyncratic storm but a systemic storm such as the 2008–2009
recession or the 2020 COVID-19 pandemic. Some creditors will receive government support and some

8 ON THE NATURE OF DEBT

will not; those outcomes could trickle down to entrepreneurs. These are unlikely risks and events but
should be contemplated as part of a selection process.

Common mistakes to avoid in the credit relationship include thinking that a credit partner is
unimportant or fungible, not investing the time and energy to nurture the relationship, and not being
completely honest with credit partners. A good credit partner can help an entrepreneur accelerate a
business and provide flexible and cheap (at any price compared with equity) funding. This crucial partner
should be nurtured and appreciated. The simplest way to get the best market pricing is to deeply invest
in the relationship with time and information. A creditor will respect and appreciate an entrepreneur
more for being forthright and for avoiding verbal obfuscations.

Loan Term
Simply put, a loan term is the timeframe in which a loan matures and any outstanding principal is due
and payable.

If a loan has a five-year term, at the end of the sixtieth month, it matures and all outstanding principal is
due and payable. If the loan was set up as a completely liquidating loan, the principal due would be zero.
If the loan was amortizing on an extended schedule, some principal would be due.

If a loan has a shorter term than the amortization schedule, an entrepreneur will be required to find a
new creditor at the end of the loan term or refinance the loan with the incumbent creditor. Both
options take time and effort, potentially distracting the entrepreneur from operating and growing the
business. Creditors often desire a shorter rather than a longer term. A shorter term gives the creditor
the opportunity to reassess the loan because it is due and payable. If the creditor is not optimistic about
the credit, they can demur and not refinance, and if the creditor is enthusiastic about the credit, they
can simply roll the loan forward in a refinancing (often with fresh origination fees).

Entrepreneurs should seek loans with a longer term. If business is challenging, the loan is locked in for a
longer term, removing the possibility of it not being renewed. A longer-term loan allows the
entrepreneur to focus on business operations and growth and not on creditor negotiations. A longer-
dated loan provides predictability and some degree of certainty in an entrepreneurial venture that is
filled with variables and uncertainty. Because creditors often reload their origination and refinancing
fees each time a loan document is touched, less frequently touching the document (by having a longer
term) can reduce financing costs. In addition, a loan originated in an aggressive and a vibrant credit
market might mature in a soft and weak market. This would result in a significantly greater challenge for
an entrepreneur to renew or refinance the loan—through no fault of the entrepreneur.

Common mistakes to avoid involving loan term are undervaluing a longer-dated debt instrument. A
longer-term loan provides more certainty and less refinance risk.

Capacity
Capacity represents the funds a creditor makes available for the debtor’s use. It essentially is the
maximum credit extended by a lending entity. Credit capacity can be stated and explicit on a credit term
sheet, or it can be the amount by which the credit relationship is capable of growing under certain
conditions. For example, a creditor might issue a term sheet to a potential debtor indicating a $5 million
funded term loan with an additional $3 million available for capital expenditures and acquisitions. In this
case, the total capacity available for the debtor is $8 million: a $5 million draw and $3 million available
on a contingent basis.

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Furthermore, capacity can be considered as the potential total amount a creditor would lend to a single
debtor—the house limit. This is the theoretical capacity and not the committed capacity. For example, if
a regional bank with $25 billion in assets extends a term sheet to a debtor for $15 million but is willing
to fund up to $40 million on its own balance sheet before syndication, the debtor knows there is some
headroom before the loan needs to be syndicated (shared by multiple banks) or moved to a larger
institution.

Capacity is significant because if a company relies on credit to finance its growth, it does not want to hit
the maximum amount of capital the creditor can fund. This would curtail growth and prevent further
creation of equity value (without introducing equity or another more junior form of debt). Larger banks
tend to have higher house limits than smaller banks. So, part of the calculus an entrepreneur must do
when assessing a credit opportunity is whether the creditor can grow with the company by providing
additional funds. Preventing syndication or refinancing with other institutions is preferable because
refinancing or syndication is time-consuming and expensive. Note that larger companies might require a
credit partner that can lead a syndication because the necessary loan size is so large that no single
institution would be willing to hold the entire credit.

Common mistakes involving capacity include not partnering with a creditor who has the ability to
expand the loan size as a company grows. Selecting a very small creditor might solve a short-term need
but present a long-term problem when the creditor’s willingness to lend more capital is limited.

Personal Guarantees
Creditors commonly request or require debtors to provide personal guarantees on funds borrowed in
small business loans. A personal guarantee means that in a default situation, the creditor has the right
to pursue not only business assets but also personal assets (home, stock, bonds, and other investments)
for collateral and repayment. If an entrepreneur provides a personal guarantee, the creditor can choose
to cure a default by immediately pursuing personal assets and ignoring corporate assets. This is
important to understand and, hopefully, avoid.

Personal guarantees are common and unfortunate. Debtors should be prepared for this and should do
everything possible to avoid providing a personal guarantee. For some lending institutions, however, no
guarantee means no loan. If a personal guarantee is required, the debtor should request a limited
guarantee capped at the loan amount or at some amount below the total loan amount. Furthermore,
the debtor should attempt to negotiate a decreasing guarantee that lands at no guarantee over time,
given satisfactory company performance.

When the creditor feels more comfortable with the scale, performance, and sophistication of a
business—usually as a company grows or when the shareholder group includes more than a single
entrepreneur—personal guarantees become unnecessary.

The Small Business Administration runs a popular loan program called 7(a) that can be used to finance
small business acquisitions. The loans cap at $5 million and tend to have longer terms and lower rates
than comparative loans. These features make them desirable for aspiring entrepreneurs. The major
shortcoming of a 7(a) loan is that a personal guarantee is required for all owners with more than 20%
ownership interest in the business. This can preclude using a 7(a) loan when investors are involved but
can make this loan a fit for self-sponsored entrepreneurs. 4

Common mistakes with personal guarantees involve prioritizing avoidance too early in a company’s
evolution. Creditors often relax guarantees with time and performance.

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Collateral
When a creditor lends capital to a debtor, the creditor retains a security interest in some of or in all the
debtor’s assets. This is the collateral the creditor can access if the debtor is unable to pay the interest
and principal due. Given the company and loan sizes we are considering in this note, we can safely
assume that the most senior creditor in the debt stack will have a first lien on all the company’s assets.
The cash flow the company generates, accounts receivable, and all equipment, desks, computers, and
furniture: everything belongs to the bank if the debtor is in default and the creditor pursues its full
rights. In addition, the first-position creditor will likely require a stock pledge as part of its security.

If there are multiple layers of debt on the company’s balance sheet (e.g., mezzanine debt below
regulated bank debt), an inter-creditor agreement will state the rules between the creditors in a default
scenario, including the priority that indicates which creditor has access to what collateral and in what
order.

We tend to think of collateral in a somewhat straightforward manner: the creditor gets everything if the
company defaults. So, it is best not to default.

Common mistakes with collateral involve thinking that the senior-most creditor will not get a first lien
position on all collateral.

Which Creditor is the Best?

There is no right answer to questions about which credit partner is the best for an entrepreneur.
Different contexts will require optimizing around different dimensions in the credit proposal. After
performing a complete quantitative analysis that evaluates how a proposed loan would fit into a specific
business plan and strategy, we suggest developing a weighted matrix for a high-level analysis (see
Exhibit 3 for a sample). By placing a weight on each toggle explored in the note, an entrepreneur can
begin to see what matters most in a specific situation and which creditor and loan will provide the best
fit.

The weightings we assign are not scientific; they reflect what matters most in a credit partnership
according to our business experience. Of course, we encourage entrepreneurs to use whatever weights
best reflect their priorities.

We think the cost of debt is relatively unimportant, and we will demonstrate the reason for this. We
want to emphasize that the rate is not nearly as important as what an entrepreneur might think about
the initial assessment of a credit proposal. When operating a business, we encourage entrepreneurs to
optimize around equity value and not around reducing the cost of debt. Equity value is predominantly a
function of nominal EBITDA (although EBITDA growth is rewarded too). All factors being held constant, a
$5 million EBITDA business is worth more than a $1 million EBITDA business because businesses are
valued on multiples of EBITDA. If a company trades at 7x EBITDA, each dollar of EBITDA is magically
transformed into $7 of enterprise value. Unfortunately, a dollar of debt is worth precisely one dollar—
extinguishing a dollar of debt creates only $1 of equity value. So, given the choice of growing EBITDA or
reducing debt, we would always choose to grow EBITDA.

Let us examine how capital structure can affect EBITDA, debt, and equity value.

We will examine three scenarios. In each scenario, an entrepreneur acquires a target company for
$11.25 million. What differs is the interest rate, the rate of growth, and the principal amortization.

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In our first example (Scenario 1 in Exhibit 5), we show the results for an entrepreneur who is laser-
focused on reducing the cost of debt. The entrepreneur sourced a 5% loan with a heavy amortization
requirement to acquire a $2.25 million EBITDA business for 4.5x EBITDA. The capital structure comprised
$7.75 million of debt and $3.50 million of equity. Because of the low interest rate—the creditor did not
want risk in a non-amortizing security—nearly all the operating free cash flow in the business went to
debt service. The business organically grew at 10% per year, and EBITDA increased to $3.29 million in
year five, when the business was sold for $16.47 million at 5x EBITDA. The loan balance ($3.05 million)
that needed to be extinguished at the exit was modest because more than half of the debt was
previously extinguished through scheduled, mandatory payments. This resulted in a net equity value of
$13.82, a 32% internal rate of return (IRR), and a 3.9x multiple of invested capital (MOIC): a desirable
outcome, indeed.

In our second example (Scenario 2 in Exhibit 6), we see an entrepreneur who is decidedly less focused
on the cost of debt. The acquisition cost and terms were identical to those of the entrepreneur in
Scenario 1, except this entrepreneur was willing to pay 10% interest. However, the loan did not require
any amortization—the debt balance was constant. Because more free cash flow was available, the
business was able to grow at 20% per year, and EBITDA improved to $4.66 million in year five, when the
business was sold for $23.32 million at 5x EBITDA. The entire $7.75 million debt balance needed to be
liquated at the exit and the net equity was $19.94 million with a 42% IRR and a 5.7x MOIC. The EBITDA,
IRR, and MOIC are higher than those in Scenario 1 because the cash available (from not amortizing the
loan) was used to grow the business at a higher rate. Despite the interest rate being twice the amount in
Scenario 1, the outcome in Scenario 2 is more desirable.

We extend the theory one step further. In Scenario 1, the loan balance attenuates over five years; in
Scenario 2, the loan balance is constant over five years; and in Scenario 3, the loan balance will grow
over five years. In this example (Scenario 3 in Exhibit 7), we have an aggressive entrepreneur who wants
to grow the business through acquisitions and is willing to use all free cash flow to service interest
requirements. The initial base acquisition cost is the same as that in Scenarios 1 and 2, but in Scenario 3,
the entrepreneur uses $5.00 million of equity and has an initial loan of $6.25 million. Furthermore, an
additional acquisition is purchased in years two through four for $11.25 million. To finance these
incremental acquisitions, the entrepreneur locates a debt partner willing to provide all the capital (in
debt) for each incremental deal. This results in growing debt balances. The entrepreneur pays 15%
interest for the privilege of having more capital available for acquisitions and, similar to Scenario 2, no
requirement for amortization. Running this program out over five years results in EBITDA growing to
$14.78 million and debt ballooning to $51.25 million. In this example, we assume a slightly higher exit
multiple, 6x, because the asset is substantially larger. This results in an $88.68 million enterprise value
and a $39.41 million net equity value, producing a 51% IRR and a 7.9x MOIC: an outcome that handily
bests those of Scenarios 1 and 2.

Figure 1: Summary of Scenarios with Varying Interest Rate and Amortization

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The above scenarios are illustrative, and each one has a very different risk level. We are not advocating
that Scenario 3 is the right strategy for all entrepreneurs—it is very precarious. Instead, we want to
illuminate the impact of rate and amortization on equity value, IRR, and MOIC. If an entrepreneur does
not agree with our assumptions and calculations, we encourage them to use whatever inputs they feel
are appropriate. Instead of using the interest rate as the optimization point, use the net equity value,
IRR, and MOIC. Paying a higher rate is fine if the capital structure provides an entrepreneur with the
opportunity to create more value through additional capacity, lower amortization, or looser covenants.
Rate is just one of the several dimensions in the credit partnership, and we believe it is not the most
important. In fact, we encourage entrepreneurs to negotiate and push harder on amortization and
covenants than on rate. Allow the creditor to win on rate, and entrepreneurs can win on everything
else—this will create more value for the business and the entrepreneur.

Conclusion
Understanding the various components of a debt relationship is important for entrepreneurs, especially
the young, inexperienced, and first-time entrepreneurs. Resist the temptation to overemphasize the
cost of debt as the salient feature in a debt security. When thinking about cost, be sure to include all the
fees and features that amplify the effective rate. We believe mandatory and variable amortization, loan
term, capacity, covenants, guarantees, collateral, and relationship dynamics might matter just as much,
if not more, than cost. We encourage entrepreneurs to optimize around EBITDA growth, IRR, MOIC, and
equity value creation, which all can be enhanced using more expensive debt with other looser
dimensions. There is no direct line from the cost of debt to equity value creation. Cost is just one of
many elements.

To evaluate the best credit partner for an acquisition or a debt refinancing, develop a framework such as
the one we present in Exhibit 2 to understand, given unique needs and context, which criteria matter
most. If an aspiring entrepreneur does not agree with our weightings, they should develop new ones
that are fit for their goals and context.

Once a debt partner is selected, do everything possible to nurture and develop the relationship with
them. The creditor is an integral part of an entrepreneur’s capital structure, and the more information
and energy an entrepreneur puts into the relationship, the more the creditor is likely to reward the
entrepreneur with the best market terms and conditions.

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Exhibit 1: A Sample Bank Term Sheet

Summary of Terms & Conditions

$6,000,000 Senior Secured Credit Facility

This document is not meant to be, nor shall be construed as, a binding commitment or an attempt to define all
terms and conditions of the transaction described herein. This Summary of Indicative Terms and Conditions (“Term
Sheet”) represents a proposal, which is non-binding and which we may be willing to recommend for approval to
senior management, provided that, among other things, all due diligence deemed necessary is completed to our
satisfaction. The terms and conditions outlined herein are not intended to be all inclusive but rather set forth a
general framework from which a mutually satisfactory transaction may be structured. This is a summary and does
not contain all the terms that will be in the final credit documents. Any such financing would be subject to
negotiation of a definitive term sheet, appropriate due diligence, credit approval on the part of ABC Bank, and
signing of a Commitment Letter.

Borrower: XYZ, Inc.

Administrative Agent: ABC Bank (“Bank” and, in such capacity, the “Administrative Agent”)

Credit Facility:

$6,000,000 senior secured credit facility comprised the following:

i. $5,000,000 Term Loan

ii. $1,000,000 Revolving Line of Credit (the “Revolving Line”)

Use of Proceeds:

i. The Term Loan will be used to support the acquisition of 123 Corp.

ii. The Revolving Line may be used to support working capital and other general corporate purposes.

Letters of Credit: A carve-out for Letters of Credit may be provided under the Revolving Line.

Closing Date: Upon the Borrower meeting all conditions precedent, which shall be usual and customary for a
transaction of this type, but no later than January 20, 2020 (“Closing” or “Closing Date”).

All costs, including but not limited to Bank’s attorney fees, will be paid by the Borrower.

Maturity: 5 years from the Closing Date.

Mandatory Repayment:

i. Term Loan: Year 1: Interest only

Year 2–3: 10% per annum

Year 4–5: 15% per annum

Outstanding balance due at maturity

ii. Revolving Lines: Interest only, payable monthly in arrears; 100% of the outstanding loans due at maturity.

Pricing: LIBOR + 450 bps; LIBOR shall mean the prevailing LIBOR rate (to be defined by Lender).

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Availability: The Term Loan and Revolving Line shall be available upon Closing. Borrowing, repayment, and re-
borrowing under the Revolving Line shall be permitted as long as the Borrower is in compliance with all terms,
conditions, and covenants, financial and otherwise, of the Credit Facility.

Origination Fee: 1.5% on the total Credit Facility ($90,000), to be assessed and collected at Closing.

Financial Covenants: The following Financial Covenants will be tested quarterly, beginning with the first quarter
end after closing:

i. Total Leverage: Qtrs 1–4 < 3.0x

Qtrs 5–8 < 2.75x

Qtrs 9–19 < 2.50x

ii. Fixed Charge Coverage: >1.20x

Negative Covenants: Negative covenants will include, but will not be limited to, the following (subject to
customary exceptions/baskets to be mutually determined): limitations on additional indebtedness other than Rate
Contracts, liens other than purchase money security interest debt or with respect to Rate Contracts, mergers, the
transfer of assets, loans and investments, and fundamental changes in business.

Cash Management: Bank’s commitment will be contingent upon the Borrower maintaining its principal operating
and deposit accounts with Bank.

Security: First priority security interest in all current and future, real and personal property of the Borrower and its
direct and indirect subsidiaries (if applicable).

Conditions Precedent to Closing: The Closing and the initial extensions of credit under the Credit Facility will be
subject to satisfaction of the conditions precedent reasonably deemed appropriate for financings in general and
for this transaction in particular, including, but not limited to, the following:

i. Satisfactory completion of all legal due diligence on the Borrower and other reports usual and customary
for transactions of this type.

ii. Bank’s final internal credit approval.

Other conditions precedent to lending that are reasonable and customary for facilities of this nature.

Financial Reporting: The Borrower will furnish, or will cause to be furnished, to the Bank:

i. Audited financial statements on a consolidated basis within 120 days after fiscal year-end. All financial
statements will be prepared in accordance with GAAP, consistently applied, and will be accompanied by an
unqualified statement from an independent certified public accountant (such independent certified public
accountant shall be reasonably acceptable to the Bank).

ii. Unaudited financial statements on a consolidated basis within 45 days of quarter-end.

iii. Annual budget 30 days after the beginning of each fiscal year, including assumptions made in the build-up
of such budget.

iv. All financial statements in i and ii above shall be accompanied by 1) a compliance certificate signed by the
Borrower’s Chief Financial Officer and/or Chief Executive Officer, demonstrating that the Borrower has complied
with the terms and conditions of the credit agreement, and 2) an MD&A report.

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Exhibit 2: Creditor Evaluation Matrix

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Exhibit 3: Loan Calculations

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Exhibit 4: Loan Calculations in Microsoft Excel Formulas

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Exhibit 5: Scenario 1 with Heavy Amortization

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Exhibit 6: Scenario 2 with No Amortization and Constant Debt Balances

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Exhibit 7: Scenario 3 with No Amortization and Growing Debt Balances

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Exhibit 8: The Creditor’s Perspective

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Exhibit 8: The Entrepreneur’s Perspective

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Exhibit 9: Entrepreneur and Creditor Bios

Entrepreneur 1: Lysandra Alves, CEO, Sullab Diagnósticos

Lysandra earned her bachelor’s degree in aeronautical mechanical engineering at the Aeronautics
Institute of Technology, ITA, Brazil, and her M.B.A. at the University of Chicago Booth School of Business.
Having led high-growth businesses across different industries, Lysandra, combining the experience and
knowledge of the broader investor group she has assembled, seeks to partner up with a promising
business in Brazil. Prior to working at Meissa Capital, Lysandra was a management consultant at Roland
Berger Strategy Consultants, head of business intelligence and city manager at Groupon, and national
sales manager at Vivareal, a real estate online marketplace. Her managerial experience encompasses
sales, operations, marketing, and human resources, whereas her consulting expertise includes due
diligence, market entry, and business model development.

Entrepreneur 2: Gabe Barkley, CEO, MHW, Ltd.

Gabe is a former entrepreneur-in-residence at NextGen Growth Partners and is the current CEO of
MHW, Ltd., a leading company that provides outsourced services to the beverage alcohol space. Gabe
partnered with NGP with the goal of finding a great business in which NGP would invest and he would
take an operating role. This was successfully completed in August 2017. Prior to working at NGP, Gabe
was the director of operations at VinConnect, a direct-to-consumer wine sales platform for top
international wineries, where he was also the first U.S.-based employee. During his tenure at
VinConnect, Gabe drove growth from zero customers in the U.S. to over 2,000 customers within two
years as well as increased the vendor base from 2 to 33 suppliers over the span of three years. Before
working at VinConnect, Gabe served as the director of marketing and operations at La Cave Warehouse,
a wine retail and private storage firm based in Dallas, TX, where he was responsible for revenue growth,
customer service, and cost-cutting initiatives. During his time at La Cave, Gabe led growth and
operational improvements that increased EBITDA by 39% in two years. Gabe was also a senior
consultant of strategy and operations at Deloitte and a consultant at Accenture, where he focused on
financial process improvement strategies. Gabe received a B.A. from The University of Dallas, where he
graduated first in his class in the College of Business, and an M.B.A. from Chicago Booth, where he
graduated with honors.

Entrepreneur 3: Keith Burns, President, Apex Physics Partners

Keith Burns is the former president of Krueger-Gilbert Health Physics, LLC, where he directed the
company’s strategy, operations, finance, and administration. Prior to this, he was in the compliance
department at Goldman, Sachs, & Co., and he has several years of experience as a corporate attorney
with Jones Day and Latham & Watkins LLP.

Entrepreneur 4: Tim Meng, CEO, One Source Communications

Tim is a passionate technologist and experienced strategist; he is the CEO of One Source
Communications and has been an advisor for several Fortune 50 companies. Prior to joining One Source,
Tim was a practice area expert on telecom, media, and technology at The Boston Consulting Group. He
holds a B.A.Sc. in electrical engineering and an M.B.A. from the University of Chicago.

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Creditor 1: Peter Hicks, Senior Vice President, Webster Bank

Peter is the senior vice president of the Manager Emerging Growth Banking Group, Sponsor and
Specialty Finance, at Webster Bank. He is also the director of Connecticut United for Research
Excellence. Peter previously served as president of the board of directors for the Crossroads Venture
Group and vice president of commercial lending for Citizens Bank, a position he held for eight years.
Peter has a bachelor’s degree in economics and U.S. history from Vanderbilt University.

Creditor 2: Karen Liesching, Managing Partner, Prides Crossing Capital

Karen has spent her career sourcing, structuring, and monitoring debt and equity investments in private
companies. Prior to co-founding Prides Crossing Capital in 2013, she spent 13 years as an investment
principal at Housatonic Partners, a Boston-based private equity firm. While at Housatonic, Karen co-
founded, built, and managed Housatonic Debt Investors, a debt fund. She previously spent 12 years at
State Street Corporation underwriting and monitoring loans in a variety of recurring business services
industries. Karen holds a B.A. in economics from Tufts University. She has served on the boards of
several private companies. Currently, Karen serves on the Women’s Leadership Council of Lahey Health
and is a trustee of Concord Academy and Belmont Day School, where she previously served as treasurer,
vice chair, and chair of the school’s board.

Creditor 3: Seth Alvord, Managing Partner, Balance Point Capital

Mr. Alvord is the founder of and managing partner at Balance Point Capital. Prior to joining Balance
Point Capital, he held various positions in the investment banking industry, including the Investment
Banking Division of Morgan Stanley. Mr. Alvord holds a B.A. from Connecticut College and an M.B.A.
from Cornell University, where he was awarded the A. Donald Kelso Award. He is a former trustee and
vice chair of the Northfield Mount Hermon School, where he served on the Investment Committee and
as chair of the Financial Policy Committee. Mr. Alvord lives in New Canaan, CT with his wife Sara and
twin boys, Jackson and Carter. He enjoys spending time with his friends and family on the coast in the
summers and on the slopes in the winters.

Creditor 4: Chuck Withee, President and Chief Lending Officer, The Provident Bank

Chuck is The Provident Bank’s president and chief lending officer, positions he has held since 2013. Mr.
Withee joined The Provident Bank as senior lender in 2004 and has nearly 30 years of commercial
banking experience in Massachusetts and New Hampshire. He has been a director of The Provident Bank
since 2013.

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Exhibit 10: Potential Creditor Questions

1. What is your favorite type of loan?

2. What size loan is your sweet spot?
3. How big a loan can you provide?
4. What is most important to you in a loan (price, covenants, amortization, guarantees, fees, and
term)?
5. Who will decide if credit is extended?
6. Who will manage my loan?
7. Do you hold the loan or sell all or part of the loan?
8. If I need a lot more money, can you syndicate the loan?
9. What can I do to make my company as attractive as possible to you?
10. Can you provide references for five companies with whom you have a great relationship?
11. Can you provide five references for companies who are no longer a credit customer?
12. Why do loan relationships go sideways at your bank or firm?
13. How long will it take to know the status of my loan (approve or deny)?
14. What can I do to make this a great relationship?
15. What else can I ask you?

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Exhibit 11: Additional Resources

How to Negotiate a Term Loan. Harvard Business Review 82201. Jasper H. Arnold III.

Negotiating With Banks. IESE Business School. Javier Santoma, Juan Carlos Vazquez-Dodero, and Jesus
Maza.

Note on Bank Loans. Harvard Business School 9-291-026. Susan L. Roth and Scott P. Mason.

Note on Acquiring Bank Credit. Harvard Business School 9-391-010. Philip Bilden, Amar Bhide, and
Howard Stevenson.

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This case has been developed for pedagogical purposes. The case is not intended to furnish primary data, serve as an
endorsement of the organization in question, or illustrate either effective or ineffective management techniques or strategies.

Copyright 2020 © Yale University. All rights reserved. To order copies of this material or to receive permission to reprint or all
of this document, please contact the Yale SOM Case Study Research Team: email [email protected].

Endnotes

1
Adjunct Assistant Professor of Entrepreneurship at The University of Chicago Booth School of Business
2
Adjunct Assistant Professor of Entrepreneurship at The University of Chicago Booth School of Business
3
Eugene F. Williams, Jr. Lecturer in the Practice of Management
4
Types of 7(a) loans. (n.d.). Retrieved April 21, 2020, from https://www.sba.gov/partners/lenders/7a-loan-
program/types-7a-loans

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