CBE16 - Funding Sources and Considerations
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Transcript of CBE16 - Funding Sources and Considerations
Finance, the other F Word
Jeff Clark
Live Oak Bank Wine & Craft Beverage
John Fisher
Fisher & Company
Don Winkle
Spaulding McCullough & Tansil LLP
Craft Beverage Expo 2016
© 2015 Live Oak Banking Company. All rights reserved. Member FDIC
Equity vs. Debt
Equity = No Collateral = No Secondary
Source of Repayment
Value of Collateral = How Liquid Is It?
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Degree of Liquidity by Asset Class
In Descending Order
Cash
Marketable Securities
Accounts Receivable – Purchase Orders
Finished Goods – Case Goods
Bulk Wine – Aging Spirits
Equipment
Real Estate
Collectables – Art, Rare Items, etc.
Lottery Tickets
Penny Stocks
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Equity
5
Risk to Lender– Highest
Minimal collateral if any
Cost to Company – High
Dilution of profits
Potential reduction in decision making process
Advantages
Sometimes the only source of capital available
Often far more capital available than can be provided by debt
Synergies of experience, industry connections
Asset Based Lender
Risk to Lender – High
Mitigated by collateral value
Cost to Company – Higher than conventional lender
Lower advance rates
Control of working capital
More frequent reporting
Advantages
Less reliant on cash flow
Generally will take more risk than conventional lender
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Conventional Lender
Risk to Lender – Low
Mitigated by historic and projected cash flow
Mitigated by collateral
Cost to Company – Lowest cost of capital
Less frequent reporting than asset based lender
Advantages
Usually higher advance rates
Relationship banking can provide price and structure leverage
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SBA
Risk to Lender – Lowest
Mitigated by historic and projected cash flow
Mitigated by U.S. government guarantee
Cost to Company – Lowest cost of capital
In line with conventional lender
Advantages
Up to 100% financing
Longest terms with no calls
No covenants
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What do Equity Investors and
Lenders Seek?
Acceptable Return on Investment
Repaid as Agreed
Risk = Reward
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Management
Industry experience
Marketing, Sales, Operations, Finance
Strategic Partners – Distributor, Accountant, Attorney, Consultants
Regulatory and Compliance
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Business Plan
Production
Sales
Strategy
Action Plan with time line
Documented Fact Based Projections
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Reporting Capabilities
Quarterly or Monthly
Accounts Receivable
Accounts Payable
Inventory
Income Statement
Balance Sheet
Annual
Compiled, Reviewed, Audited and Tax Returns
Projections
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Case Study # 1 – Distillery Refi & Tenant Improvement
One year old distillery had an opportunity to move their tasting room to a high foot traffic
resort location. They had boot strapped the operation with a conglomeration of high
interest debt with short terms. Although they could service this debt it left no cash flow
for additional growth. They needed capital to do tenant improvements to the new
location, refinance existing debt and purchase additional production equipment. Based on
historic trends, projected cash flow, DTC and 3 tier distribution structure Live Oak was
able to provide a term debt structure with a six month interest only period.
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LOAN TERMS
Loan Amount $1,030,000
Loan Term 6 months I/O followed by 126 months of P&I (132 months total)
Loan Rate 5.50%
Loan Payment $10,779.17/month
Use of Proceeds
Use of Proceeds Borrower SBA Total
Refinance $0 $567,262 $567,262
Construction $0 $377,312 $377,312
Contingency $0 $37,731 $37,731
Working Capital $0 $5,657 $5,657
Soft Costs $0 $42,038 $42,038
Total $0 $1,030,000 $1,030,000
Case Study # 2 – Brewery Equipment & Leasehold
Improvements
Five year old brewery needed to expand to keep up with demand. Needed a 20 barrel
system to replace their existing 5 barrel. New system would increase production while
reducing labor costs. They also wanted to open a tap room to sell DTC. DTC sales would
enhance gross margins while expanding their client base. They had just achieved
positive cash flow but the local banks wanted to see a couple of years of profits. The
local banks did not want to finance the leasehold improvements.
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LOAN TERMS
Loan Amount $825,000
Loan Term 4 months I/O followed by 180 months of P&I (184 months total)
Loan Rate 5.50%
Loan Payment $6,962/month
Use of Proceeds
Use of Proceeds Borrower SBA Total
Equipment $0 $550,000 $550,000
Working Capital $0 $250,000 $250,000
SBA Guaranty Fee $0 $22,000 $22,000
Closing Costs $0 $3,000 $3,000
$0 $0 $0
Total $0 $825,000 $825,000
Case Study # 3 – Winery Construction & Expansion
Six year old winery with two existing liens needed to build out their production facility and
a tasting room. Established in the depth of the Great Recession it had struggled to
develop estate vineyards and grow sales. The expanded production would allow for
additional custom crush revenue. Utilizing projections, historic sales trends, letters of
intent, cost saving and inventory analysis Live Oak was able to provide a 3rd lien
construction/take out loan with a 25 year term, amortization, no balloon payments and no
financial covenants.
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LOAN TERMS
Loan Amount $3,467,500
Loan Term 12 months I/O followed by 300 months of P&I (312 months total)
Loan Rate 5.25%
Loan Payment $21,293.48/month
Use of Proceeds
Use of Proceeds Borrower Live Oak Bank Total
Construction $0 $3,000,000 $3,000,000
Contingency $0 $300,000 $300,000
Const Supervision $0 $5,000 $5,000
Interest only payments $0 $60,000 $60,000
Appraisal & Bus Valuation$5,000 $0 $5,000
SBA Guaranty Fee $0 $95,000 $95,000
Bank Legal $0 $5,000 $5,000
Title $0 $2,500 $2,500
Total $5,000 $3,467,500 $3,472,500