Financing your business<br />
Sources of finance<br />Bank and senior debt<br />Junior and subordinated debt<br />Preferred stock<br />Retained profits<...
What is the cost of capital?<br />Capital has a cost associated with it.<br />Cost is a function of risk and the time valu...
What is the objective?<br />Maximize debt.<br />Minimize equity.<br />Structure the financing to match the needs of the bu...
How do we approach the problem?<br />Create a budget or business plan.<br />Determine your capital needs.<br />Generate a ...
Next: cash flow or asset-based?<br />We need to determine whether your company has the size and predictability of earnings...
What is the difference?<br />Cash flow loans are relatively short term secured or unsecured loans, with few constraints on...
Typical senior loan terms<br />
Full dominion …..<br />Asset-based loans may also be structured on a full dominion basis.<br />This means that all collect...
Subordinated debt<br />Subordinated debt may be provided under a local government soft loan program or by an institution.<...
Preferred stock<br />This is another form of mezzanine funding.<br />Effective rates associated with preferred stock are s...
Common stock<br />Common equity investors look for a compound return of over 40% per annum.<br />A clear 3 to 5 year exit ...
Forms of common equity<br />Retained earnings is the least expensive because it is controlled by management.<br />Public e...
Why do retained earnings have such a high cost?<br />Retained earnings have to be serviced like any other form of capital....
Why is equity expensive?<br />Equity usually takes first loss.<br />The ability of minority common stockholders to fix a p...
So, what should the capital structure look like?<br />The capital structure is a product of the business plan and the inhe...
For further information contact:<br />Norton W. Lazarus, Managing Director<br />OEM Capital Corp.<br />Tower 56<br />126 E...
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Financing business

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Transcript of "Financing business"

  1. 1. Financing your business<br />
  2. 2. Sources of finance<br />Bank and senior debt<br />Junior and subordinated debt<br />Preferred stock<br />Retained profits<br />Common stock<br />Public<br />Private<br />Increasing cost<br />
  3. 3. What is the cost of capital?<br />Capital has a cost associated with it.<br />Cost is a function of risk and the time value of money.<br />Debt is always the least expensive source of capital.<br />Equity is always the most expensive source of capital.<br />Retained earnings is a form of equity; retained earnings has a lower cost than other equity because you are in control of the business.<br />
  4. 4. What is the objective?<br />Maximize debt.<br />Minimize equity.<br />Structure the financing to match the needs of the business.<br />Finance long terms needs with long term capital.<br />Finance short term needs with short term capital.<br />
  5. 5. How do we approach the problem?<br />Create a budget or business plan.<br />Determine your capital needs.<br />Generate a cash flow forecast.<br />See what debt you can support.<br />Develop an optimum capital structure.<br />
  6. 6. Next: cash flow or asset-based?<br />We need to determine whether your company has the size and predictability of earnings to support a cash flow loan.<br />A factor that needs to be taken into account is the proposed capital structure as this could affect the risk profile of the loan.<br />Businesses that cannot support a cash flow loan must borrow on an asset basis.<br />
  7. 7. What is the difference?<br />Cash flow loans are relatively short term secured or unsecured loans, with few constraints on the business, where cash flow is the primary source of repayment. They tend to be lower cost and have simple documentation.<br />Asset-based loans are secured loans where liquidation of assets is viewed as the primary source of repayment. They tend to be more expensive and require more documentation.<br />
  8. 8. Typical senior loan terms<br />
  9. 9. Full dominion …..<br />Asset-based loans may also be structured on a full dominion basis.<br />This means that all collections are deposited in the bank’s lock-box and applied against the loan.<br />When you need cash for operations, you borrow from the line based on availability under the advance rate formula.<br />
  10. 10. Subordinated debt<br />Subordinated debt may be provided under a local government soft loan program or by an institution.<br />Government loan programs are often an attractive source of capital.<br />If junior debt is provided by an institution, the rate is typically 12% to 13% with warrants sufficient to bring the yield into the 20% to 25% range.<br />
  11. 11. Preferred stock<br />This is another form of mezzanine funding.<br />Effective rates associated with preferred stock are slightly higher than with debt as the preferred stockholder carries more risk.<br />The coupon is usually around 8%; the warrants are designed to bring the effective return over 30% per annum.<br />There are usually control issues associated with preferred stock.<br />
  12. 12. Common stock<br />Common equity investors look for a compound return of over 40% per annum.<br />A clear 3 to 5 year exit strategy must exist.<br />The equity percentage is dependent on the amount required, the investor’s hurdle rate and the perceived risk inherent in your business plan.<br />In addition, the new equity may require special anti-dilution protection, not enjoyed by other classes of capital.<br />
  13. 13. Forms of common equity<br />Retained earnings is the least expensive because it is controlled by management.<br />Public equity is more expensive than retained earnings, but marginally so; it is dependent on the existence of a market for the stock. Commitments may be firm or best efforts.<br />A public offering usually requires up-front fees of $250,000, 10% to 15% in underwriting commissions and warrants to the underwriter.<br />Private equity is the most expensive and usually requires control, particularly in the event that things go badly.<br />
  14. 14. Why do retained earnings have such a high cost?<br />Retained earnings have to be serviced like any other form of capital.<br />When you leave profits in the business, you are assuming that the return will exceed the return that you could get in the stock market, real estate or any other investment.<br />You would expect a high rate of return on retained earnings in view of your lack of diversification of risk.<br />Leveraged re-capitalizations occur when the return on retained earning is perceived to be less than required to overcome the absence of diversification.<br />
  15. 15. Why is equity expensive?<br />Equity usually takes first loss.<br />The ability of minority common stockholders to fix a problem is often limited.<br />The rights of equity in bankruptcy are few.<br />
  16. 16. So, what should the capital structure look like?<br />The capital structure is a product of the business plan and the inherent risks of the industry.<br />A business with great variability requires more equity capital; a steady predictable business can support more debt.<br />These principles created the LBO industry; flaunting them often results in bankruptcy.<br />
  17. 17. For further information contact:<br />Norton W. Lazarus, Managing Director<br />OEM Capital Corp.<br />Tower 56<br />126 East 56th Street<br />New York, NY 10022-3613<br />(212) 319-3434 extension 15<br />Fax (212) 750-5135 Email OEMNY@aol.com<br />
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