Alternative Financing - When the Bank Says "No" (Series: BUSINESS BORROWING BASICS)

ALTERNATIVE FINANCING - WHEN THE BANK SAYS "NO" Business Borrowing Basics Premiere Date: February 21, 2017

This webinar is sponsored by: EisnerAmper 1

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MODERATOR Tom O’Hare Marquette Business Credit

PANELISTS Alex Mazer Big Shoulders Capital, Chicago Andy Moser Scargo Hill Capital, Boston Paul Schuldiner Rosenthal Trade Capital, NY

MEET THE FACULTY

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SERIES SPONSOR

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ABOUT THIS WEBINAR

Just because the Bank says “No” doesn’t mean a business is out of options. Even before the Great Recession there were plenty of “alternative” (non-bank) lenders but the number exploded in the past several years. Peer-to-peer lending, alone, came out of nowhere just a few years ago to become a major source of financing for millions of businesses. And this new business model is just the latest entrant into the larger category of what is commonly called “alternative lenders.”

Indeed, just listen to a business radio station, go to a business-focused website, or open your morning mail, and you are likely exposed to all sorts of advertisements asking you if your business would like a loan- fast and with few questions asked. This webinar paints a picture of what the alternative lender landscape looks like, how to access it, how to assess individual lenders and discusses the pros and cons of going various routes.

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ABOUT THIS SERIES Cash is the lifeblood of any business. While some companies operate solely with their own working capital, most must borrow money from time to time. Borrowing, of course, includes something as mundane as buying goods or services on credit (whether on credit terms or by using a credit card). But most companies of any significant size have a revolving line of credit or a term loan, or both, with a bank or other commercial lender. This webinar series explores where companies should look for business loans, how to negotiate them, and what to do if they default under them. Each episode is delivered in Plain English understandable to business owners and executives without much background in these areas. Yet, each episode is proven to be valuable to seasoned professionals. As with all Financial Poise Webinars, each episode in the series brings you into engaging, sometimes humorous, conversations designed to entertain as it teaches. And, as with all Financial Poise Webinars, each episode in the series is designed to be viewed independently of the other episodes, so that participants will enhance their knowledge of this area whether they attend one, some, or all of the episodes.

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EPISODES IN THIS SERIES EPISODE #1 Negotiating a Loan Agreement 1/17/2017

EPISODE #2 Alternative Financing- When the Bank Says “No” 2/21/2017

EPISODE #3 Financing a Business With Help From the Feds: 4/4/2017 SBA Loans and Other “Special Programs”

EPISODE #4 Dealing with Defaults – What to Do and Not When Your 5/9/2017 Company Violates its Loan Agreement

Dates shown are premiere dates; all webinars will be available on demand after premiere date

OVERVIEW

Because they do not have access to the public financial markets, traditional middle-market companies often rely on private debt to fund their business. The most plentiful and cheapest form of that debt is from the commercial banks.

But what if a Company’s lending needs are not a fit for commercial bank financing for some reason (and there are many)? Where do they go then? What other types of financing are available? This webinar will explore those alternative forms of financing and provide guidance on what to expect when seeking out non-traditional financing.

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OVERVIEW CONT’D

Unlike residential mortgage or auto financing, middle-market borrowers cannot be efficiently evaluated for loans by simply putting numbers into a computer and expecting a well-reasoned decision. Every borrower presents its own unique set of circumstances and will end up in a different place along the risk/return continuum.

Having an idea of where your company or client belongs on this continuum (and thus where to look for financing) can save a tremendous amount of time and money during this process. In some cases, an efficient process can even save the Company itself. In this presentation, we will discuss the world of “alternative financing” and provide some guidelines and help set expectations for Companies and professional advisors generally unfamiliar with this lending space.

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ALTERNATIVE FINANCING •  What drives the need for Alternative Financing?

•  Industries More Prone to Using Alternative Financing

•  Preparing to hit the market

•  Alternative Financing Products

•  Alternative Financing Experience (what to expect)

•  How to find Alternative Lenders

•  Guaranty Issues

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NEED FOR ALTERNATIVE FINANCING •  Earlier Stage Companies:

!  On a good trajectory, but are investing in the future and purposefully incurring losses

!  Even if profitable, may still be too “young” for traditional financing •  Companies operating at a Loss or with recent losses

!  Commercial Banks want to see consistent earnings (they are lending their depositors’ funds and thus cannot take that much risk.

!  Even if the turnaround has begun to take effect, “lender fatigue” may have set in and the Bank wants the borrower to find new/alternative financing.

•  Situational Borrowers: !  Acquisitions !  Recapitalizations

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NEED FOR ALTERNATIVE FINANCING CONT’D

•  Last Minute Borrowers: !  Borrower waited too long before seeking conventional financing and

conventional lender is going to take too long to close !  An opportunity that is short-lived !  Big sale/project

•  Borrowers with Issues: !  Pending litigation !  Past negative press

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NEED FOR ALTERNATIVE FINANCING CONT’D

•  Borrowers with non-traditional Collateral: !  Intellectual Property !  Contracts !  Other

•  Industry out of Favor !  Oil & Gas !  Mining

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COMMON TYPES OF BORROWERS

REAL ESTATE INVESTORS •  Borrowers underwater with existing lender •  Borrowers in Foreclosure •  House Flippers – People who buy at foreclosure sales, rehab and then sell

very quickly

RETAILERS •  Heavy Inventory Borrowing Needs •  Can be Highly Seasonal

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COMMON TYPES OF BORROWERS CONT’D

MANUFACTURERS •  Large project-type manufacturing – percentage of completion billings •  Can be Highly Seasonal

FINANCE COMPANIES •  Banks can have a hard time lending to other lenders

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PREPARING TO HIT THE MARKET

•  Assessing resources (does the company have the time and market knowledge to find the financing itself)

•  Preparing Offering Materials !  Sources & Uses of Funds (how much is to be borrowed and what will the

money be used for) – be specific and realistic !  Description of business (what does the company do, why does it exist,

competitive landscape, management bios) !  Financial Information (balance sheet, cash flow statement, projections,

collateral, etc.) !  Other

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PREPARING TO HIT THE MARKET CONT’D

•  Determine target market (from whom will the company seek financing)

•  Other

!  Preparing Corporate Organizational Docs (operating agreement, by-laws, partnership agreement, articles of organization/formation/incorporation)

!  Lining up Professionals (Attorneys, accountants, appraisers, surveyors, etc.)

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SPECIFIC TYPES OF ALTERNATIVE FINANCING

ASSET BASED LOANS •  Similar to bank financing – slightly higher rates •  Stricter diligence •  Generally higher advance rates on collateral – up to 85% on Accounts

Receivable and 60-65% on Inventory •  Will lend on equipment, but not as aggressively

REAL ESTATE •  Bridge Loans – to get a borrower to a better refinance or pending

sale •  Note/Mortgage purchase at a discount or short sale •  Sale/Leaseback – free up equity in building for other uses •  Loans to buy at foreclosure sale – most foreclosure sales do not

complete at the auction, so conventional financing is hard to find

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SPECIFIC TYPES OF ALTERNATIVE FINANCING CONT’D

SBIC/BDC •  Non-bank finance companies •  Support acquisitions, recapitalizations, growth •  Not subject to Banking regulations, thus can take more risk

Credit Opportunity Funds •  Often part of a larger Hedge Fund strategy •  Flexible lending mandate – can be senior, junior, combination, might

also take equity upside •  Tend to give borrower shorter “leash” relative to performance

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FACTORING •  Buying receivables advancing % of accounts receivable •  Many factors take blanket lien as well •  Most factors will have a strict lock box, all accounts receivable

debtors will be directed to pay factor directly. Excess funds after advance repaid with interest will be returned to borrower.

•  Factor can help act as a credit department for smaller companies as they may not advance against receivables from non-creditworthy debtors.

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SMALL BUSINESS LOANS •  $5,000 - $150,000 •  Quick approval – 2-3 days •  No collateral •  6-12 month terms •  Daily direct debit from business checking account •  Minimum credit score of 627 required •  2 years of business history •  Business must have daily steady sales

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PURCHASE ORDER FINANCING •  Used by borrower when it has received an order for product, but

borrower does not have the capital (cash) or other financing to fulfill the order

•  Requires credit worthy purchaser •  Diligence focused on borrower’s ability to produce •  Profit margin of product being sold must be able to support cost of

financing

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OTHER •  Merchant Cash Advance Loans •  Crowd-sourced funding •  Sale/Leasebacks (Real Estate or Equipment) •  Straight Lease Financing •  Manufacturer/Dealer Financing •  Peer-to-peer lending

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WHAT TO EXPECT

More focus on the deal •  Alternative Lending sources are less relationship-oriented than

commercial banks •  More thorough due diligence •  Often higher advance rates on collateral •  Often a quicker decision/turnaround given nature of situations

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WHAT TO EXPECT CONT’D

Higher Cost •  Recognize that this is not Commercial Banking •  Higher interest rate/fees •  Often must pay for 3rd-party due diligence

Tighter structure/Less tolerance for “hiccups” •  More willing to foreclose/realize on collateral •  Less willing to negotiate documents •  Personal guarantees, validity guarantees, etc.

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WHAT TO ASK

•  What is the Approval Process? •  How long does the process typically take from initial submission of

information to close? •  What are my upfront costs? At what point in the process must I commit

funds? •  What 3rd party diligence will be required, if any (and cost)? •  If I get a Term Sheet/Proposal, how many of the final decision-makers have

seen the deal and have “blessed” the Term Sheet/Proposal (“Execution Risk”)?

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HOW TO FIND ALTERNATIVE FINANCING

CURRENT BANKER •  Ask if they believe this is a “bankable” credit and the situation just isn’t right for their

institution. •  Ask if they have any recommendations of financing sources

PROFESSIONAL ADVISORS •  Attorneys •  Accountants •  Insurance Brokers •  Investment Bankers •  Debt Placement Agents

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HOW TO FIND ALTERNATIVE FINANCING CONT’D

INDUSTRY ASSOCIATIONS •  Commercial Finance Association (“CFA”) •  Turnaround Management Association (“TMA”) •  Midwest Business Brokers & Intermediaries (“MBBI”) or the regional like •  Association for Corporate Growth (“ACG”)

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ABOUT THE FACULTY

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TOM O’HARE [email protected]

Tom is currently a Senior Vice President/Business Development Officer at Marque7e Business Credit, covering the Midwest region out of Marque7e’s Chicago office. With over 25 years of professional experience in commercial and asset based lending, his extensive background includes experience from several companies such as American NaWonal Bank & Trust, Associated Bank, Wintrust Financial, Concord Financial Advisors and Transcap Associates (now Wells Fargo Trade Finance). He is currently a member of the Turnaround Management AssociaWon and the AssociaWon for Corporate Growth. Tom received his Bachelor of Business AdministraWon from Loyola University in Chicago, majoring in AccounWng, and his MBA from the Kellogg Graduate School of Management at Northwestern University.

ABOUT THE FACULTY

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ALEX MAZER [email protected]

As Vice President at Big Shoulders Capital, Alex Mazer focuses on deal sourcing and underwriWng. Originally from BalWmore, Maryland, Mr. Mazer moved to Chicago in 2009 to run a consumer product wholesale business for a publicly-‐traded inventory liquidaWon firm and discount retailer which was backed by a Chicago-‐based private equity group. He founded The BirdDog Group, a naWonal inventory liquidaWon firm that worked with lenders, turnaround consultants, importers, wholesalers, and distributors to purchase and/or liquidate distressed inventory and conduct retail store closings.

Mr. Mazer completed his undergraduate studies at the University of Richmond’s Robins School of Business, and received his MBA from Northwestern University’s Kellogg School of Management with a concentraWon in Finance, and InnovaWon and Entrepreneurship. He has lived and worked in Hong Kong and China.

ABOUT THE FACULTY

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ANDREW MOSER [email protected]

Andy Moser is the Co-‐Founder, Managing Partner and Chief ExecuWve Officer at Scargo Hill Capital. Andy is primarily responsible for the overall development and execuWon of corporate and direct lending strategies, business development, leadership and the safeguard of all assets under management. Andy is a Commercial Finance and Retail industry veteran, recognized by many as a subject ma7er expert, as well as by his industry peers for his contribuWons and creaWvity in asset-‐based lending for nearly twenty-‐five years.

Andy has held numerous senior execuWve posiWons at leading financial insWtuWons and alternaWve asset managers. He is also an acWve member of mulWple professional organizaWons and is a Director of the Commercial Finance AssociaWon (CFA). As an admired industry leader and subject ma7er expert, he is ohen recognized for building excepWonal teams, fostering a passionate, driven corporate culture and a noteworthy commitment toward community, charitable giving and mentorship.

ABOUT THE FACULTY

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PAUL SCHULDINER [email protected]

Paul D. Schuldiner is Senior Vice President at Rosenthal & Rosenthal, a commercial finance company specializing in factoring and asset based lending in New York. Paul leads the firm’s newest division, Rosenthal Trade Capital, and is responsible for driving the overall business strategy for Rosenthal’s purchase order financing and alternaWve inventory financing soluWons. He is a seasoned financial execuWve with over 20 years of experience in the purchase order and trade finance business and has previously held senior leadership roles at King Trade Capital, Wells Fargo Capital Finance and as a principal of Transcap Associates.

In addiWon to purchase order financing, Paul started his career in the asset-‐based lending division of a NYC based finance company and pracWced as a CPA. Paul is currently the President of the InternaWonal Factoring AssociaWon’s Northeast Chapter, the Chair of the New Jersey State Society of CPA’s CooperaWon with Bankers commi7ee, and on the Board of Directors of the New Jersey Chapter of the Commercial Finance AssociaWon and the New Jersey Chapter of the Turnaround Management AssociaWon. Paul received his Bachelor’s degree in AccounWng from Queens College, City University of New York.

Visit www.eisneramper.com EisnerAmper. Let's Get Down to Business®

EisnerAmper LLP is a leading full-‐service advisory and accounGng firm, and is among the largest in the United States. We provide audit, accounGng, and tax services, as well as corporate finance, internal audit and risk management, liGgaGon services, consulGng, private business services, employee benefit plan audits, forensic accounGng, and other professional advisory services to a broad range of clients across many industries. We work with high net worth individuals, family offices, closely held businesses, start-‐ups, middle market and Fortune 500 companies. EisnerAmper is PCAOB-‐registered and provides services to more than 200 public companies and to thousands of enGGes spanning the hedge, private equity, brokerage and insurance

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Alternative Financing - When the Bank Says "No" (Series: BUSINESS BORROWING BASICS)

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Transcript of Alternative Financing - When the Bank Says "No" (Series: BUSINESS BORROWING BASICS)