Post on 01-Nov-2014
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Overlooked & Misunderstood Capital Sources
Kevin Laborde President
Cash Flow Resources, L.L.C.
Today’s Objec;ves
• Cash versus Profits
• Equity Investments versus Debt (Loans)
• Tradi<onal Sources of Capital
• Non-‐Tradi<onal Sources of Capital
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Se<ng the Stage
• First a LiEle Background & Context – Drivers of Funding Needs – Basic Financial SoluAons – How They Differ – ExpectaAons of Stakeholders
• Capital – TradiAonal Sources v Non-‐TradiAonal Sources – Non-‐TradiAonal Sources You Need to Know
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Cash versus Profits • So I sell my product or service for more than its cost: – I generate a profit – I have liOle or no Cash
• Where is the cash from my profitable opera<ons? – Inventory – Receivables – Work-‐in-‐Process – New Equipment – Debt Payments
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Cash Opera;ng Cycle
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Cash is King
• What is a Good Customer? – Capable and Willing to Pay
• Credit Terms for Customers – Are they worth it?
• Trade Credit from Vendors & Suppliers – Can you get it?
• The Balancing Act • Based on What You Have, What Do You Need?
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Equity vs. Debt (Loans)
• You Need Capital to Operate • Poten<al Capital Sources: – Equity (Investment in Ownership of EnAty) – Debt
• Think Both Ends of the Spectrum • Both Inject Capital into a Business • Both Have an Expecta<on of Return • You Must Understand Those Expecta<ons
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Equity vs. Debt (Loans)
• One has a Fixed Return (Debt)
• One has a Poten<ally Infinite Return to Investor (Equity)
• One Leverages Returns (Debt)
• One Dilutes Your Ownership (Equity)
• Which is Best for Your Business? 8
Equity Investments
• What do Equity Investors seek? – Percentage Ownership – Control? – Competent Management – Growth Opportuni<es – Scalable?? – An Exit Strategy
• The Sky is the Limit – Infinite Poten<al !!
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Tradi;onal Bank Financing • Who provides Credit? BANKS!
• Loans and Lines of Credit
• What makes a Loan a Loan? – Fixed Contract to Repay – Primary and Secondary Sources of Repayment *** – Leverage Owner Returns with OPM
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Tradi;onal Sources of Capital -‐ Debt
• Underlying En<ty Must be UnderwriEen For Debt
• How the En<ty Is UnderwriEen: – The 5 Cs of Credit: • Character, Capacity, Capital, Collateral, CondiAons
– The 4 Ps of Credit: • Purpose, Payment, ProtecAon, People
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Tradi;onal Sources of Capital -‐ Equity • Underlying En<ty Must be UnderwriEen For Equity Contribu<ons -‐ Think “Shark Tank”
• For Investor to Provide Equity: – Market Opportunity • Considers CompeAAon, Barriers to Entry, DifferenAaAng AOributes, Scalable?
– Core Competencies of Management • Ability To Execute
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Capital Availablity • If Credit Availability is Too Low or Unavailable
OR • If Equity Investor Requirements Do Not Fit
OR BOTH
IT MAY BE TIME TO LOOK ELSEWHERE
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Non-‐Tradi;onal Financing
• Non-‐Tradi<onal Financing Provides Entrepreneurs with Tools to:
– Validate Business Model
– Grow Businesses to Create a Larger Cri<cal Mass
– Provide Demonstrable Results to Poten<al Investors and Lenders
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Non-‐Tradi;onal Financing
• Some of the Underwri<ng, Evalua<on Methods and Requirements are the Same as for Tradi<onal Sources
• The Difference Comes in How this Same Informa<on is U<lized
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Non-‐Tradi;onal Financing
• U<lizes the Balance Sheet Strength of Another Party to Make Things Happen
• Products Offered Typically Do Not Require the Same Client Characteris<cs of Tradi<onal Sources
• Providers are Generally Seeking Returns Higher than Tradi<onal Sources
• Providers are Taking More RISK 16
Non-‐Tradi;onal Financing
• Non-‐Tradi<onal Programs Work Because Capital is Employed Using Different Approaches to Control Risk
• Transac<on Specific Factors Take the Place of Tradi<onal Underwri<ng Principles:
– Largely independent of the underlying enAty
– Specific to the asset/transacAon being funded
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Major Forms of Alterna;ve/ Non-‐Tradi;onal Financing
• Factoring A/R-‐ (Think Visa/MC versus Cash Sales or A/R)
• Purchase Order (P.O.) Funding -‐ on CommiEed Product Sales and Manufactured Products
• Both of These Accelerate a Company’s Cash Flow Cycle
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• Merchant Advances on Credit Card Sales
• Hard Asset Lending Against Real Property
• Equipment Leasing
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Other Forms of Alterna;ve/ Non-‐Tradi;onal Financing
Factoring • Basically Means the Sale of a Commercial Invoice
• Available to Companies Selling Goods and Services to Other Companies (B to B)
• Purchaser (Factor) Buys Invoices from Seller at a Discount When Seller Has Cash Requirement
• Seller’s Customers (“Debtors”) Remit Payment Directly to Factor
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Factoring • Discoun<ng Invoices is Similar to What Happens When Firms Accept Credit Cards for Payment
• Debtor Dependent Underwri<ng
• Self Liquida<ng Obliga<on – “Not Debt”
• Accelerates the Cash Flow Cycle
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Cash Opera;ng Cycle
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Factoring Advance • Client Sells Product or Service and Sends Invoice to Customer (“Debtor”)
• Client Submits Invoice(s) to Factor for Funding
• Factor Verifies the Invoice with Debtor
• Once Verified, Factor Advances Funds to Client Based on a Pre-‐established Advance Rate 23
Factoring Repayment
• Debtor Remits Payment to Factor to SeEle Advance on Invoice
• Once Advance is SeEled Factor Remits Any Percentage Held in Reserve to Client Less Fees
• Cost of Factoring Impacts Opera<ng Margin of Client
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Purchase Order Funding • A Handy Short-‐term Funding Tool for Companies Facing Growth Opportuni<es
• Provides Capital Needed to Pay Suppliers Up Front for Bona Fide Product Orders (Before Product is Sold)
• Funds Usage is Restricted to the Purchase or Manufacturing of Products
• Provider Will Typically Take Title to Goods to Be Released Upon Sale 25
Purchase Order Funding • Structures Differ but May Take the Form of an LeEer of Credit Funded upon Product Delivery
• Typically for a Producer, Distributor, Wholesaler or Reseller of Manufactured Products
• Can Be Done by Itself but Ocen Put in Place in Conjunc<on with a Factor
• Process Starts with a Customer Order to Be Filled 26
Factoring versus PO Funding • Both Are Structured Based on the Underlying Transac<on – Factor – Acer Sale of Product & Invoice Created – PO Funding – Before Sale of Product
• Both Require the Business to Have Adequate Margins for the Rela<onship to be Successful
• PO Funding Must Be Used to Fulfill a Purchase Order
• Factoring Proceeds May Fund Any Short-‐term Business Need
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Merchant Advances • Lump Sum Advance Based on Monthly Credit Card Sales
• Repayment Amount Based on a mul<ple of Original Advance (~1.2x-‐1.4x)
• Advance is Repaid with a Set Percentage of Future Credit Card Sales (~8-‐10% of Sales)
• More Typically Used by Retail Establishments
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Merchant Advances • Structured to Not be a Loan – It is the Sale of Future Credit Card Related Revenue
• Repayment a Func<on of Future Sales Volume
• Expensive Compared to the Cost of a Tradi<onal Line of Credit (If You Can Get One)
• Can Provide an Effec<ve Short-‐term Bridge to Where the Business Owner Wants to Go
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Hard Asset Lending • Private Investment Groups or Individuals
• Secured -‐ Land and Commercial Property
• Bridge Financing to a Long-‐term Deal
• Low Loan to Value (~60%-‐70%) • LTV Calculated Based on Liquida<on Value or Purchase Price
• Shorter term (<3 years)
• Higher Rate (~12-‐21%) 30
Equipment Leasing • Available for Large and Small Ticket Items -‐ Anything From Computers to Heavy Equipment
• Lender Owns the Asset and Leases or Rents It Back
• Conserves Liquidity for Other Needs
• Personal Guarantees Generally Required
• Sellers of Equipment Ocen the Best Source 31
To Sum it All Up
• Are You in Need of an Equity Investment or a Loan?
• If an Investment, What Percentage Ownership Do You Want to Give Up & Is Now the Time to Do It?
• If a Loan, How Much Can You Afford or Qualify to Borrow?
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In Conclusion
If Neither a Loan or Investment Works for You, Think through Your Other Op<ons and Keep in Mind That They Can Be a Bridge to Get You Where You Need to Be…
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Cash Flow Resources, L.L.C. Contact Informa<on: www.cfrscs.com Kevin Laborde -‐ President kevinlaborde@cfrscs.com 504-‐522-‐6065