Overlooked and Misunderstood Capital Sources


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This session was presented by Kevin Laborde, President of Cash Flow Resources. Find out more at http://www.cfrscs.com.

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Overlooked and Misunderstood Capital Sources

  1. 1. Overlooked  &  Misunderstood   Capital  Sources   Kevin  Laborde   President   Cash  Flow  Resources,  L.L.C.    
  2. 2. Today’s  Objec;ves   •  Cash  versus  Profits   •  Equity  Investments  versus  Debt  (Loans)   •  Tradi<onal  Sources  of  Capital   •  Non-­‐Tradi<onal  Sources  of  Capital   2  
  3. 3. 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   3  
  4. 4. 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       4  
  5. 5. Cash  Opera;ng  Cycle   5  
  6. 6. 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?   6  
  7. 7. 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   7  
  8. 8. 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  
  9. 9. 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  !!   9  
  10. 10. 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   10  
  11. 11. 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   11  
  12. 12. 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   12  
  13. 13. 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   13  
  14. 14. 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     14  
  15. 15. 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   15  
  16. 16. 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  
  17. 17. 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   17  
  18. 18. 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   18  
  19. 19. •  Merchant  Advances  on  Credit  Card  Sales   •  Hard  Asset  Lending  Against  Real   Property   •  Equipment  Leasing   19   Other  Forms  of  Alterna;ve/   Non-­‐Tradi;onal  Financing  
  20. 20. 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   20  
  21. 21. 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   21  
  22. 22. Cash  Opera;ng  Cycle   22  
  23. 23. 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  
  24. 24. 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   24  
  25. 25. 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  
  26. 26. 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  
  27. 27. 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   27  
  28. 28. 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   28  
  29. 29. 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   29  
  30. 30. 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  
  31. 31. 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  
  32. 32. 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?   32  
  33. 33. 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…   33   Cash  Flow  Resources,  L.L.C.     Contact  Informa<on:   www.cfrscs.com   Kevin  Laborde  -­‐  President   kevinlaborde@cfrscs.com   504-­‐522-­‐6065  
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