How trade spend affects eligibility of debt financing

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Solid and ongoing management of trade spending is critical in order to qualify for, and reap the optimal benefits of debt financing. Banks and finance houses offering credit lines, asset-based lending and factoring will often thoroughly analyze both a company's actual trade spend results and its ability to keep those expenses under control and/or predictable into the future.

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  • There is no more unsecured anything!!
  • How trade spend affects eligibility of debt financing

    1. 1. MEI Webinar<br />Keith Kohler, K² Financing<br />
    2. 2. Introduction<br />K² Financing<br />Financing: focus on debt origination<br />Services: strategy; CFO for rent<br />Making the Numbers Work for You<br />Projects<br />www.k2financing.com<br />
    3. 3. Objective and the Goal<br />The Objective: Offer relevant information and perspective to assist you inunderstanding how trade spending effects your initial and ongoing eligibility for debt financing<br />The Goal: The application of these lessons to your business to result in successful or optimal financing<br />
    4. 4. Topics to Cover<br />Term Sheet structures for debt financing<br />The financier’s perspective<br />Case Studies<br />How to Obtain the Best Results<br />
    5. 5. Before You Seek Any Financing<br />What is your level of financial acumen??<br />0. Complete focus on product or idea<br />Simple calculations e.g. costs, expenses<br />Embrace your financial statements<br />Establish a financial rhythm<br />Understand the outsider’s view<br />“Make the Numbers Work for You”<br />
    6. 6. Sources of Debt Financing<br />Bank offerings<br />Lines of credit<br />Term Loans<br />SBA Loan Programs<br />Large guarantee fees (typically 2% of the loan amount)<br />Wide variety of amounts available (usually $50,000 to several million)<br />The funding bank applies its own underwriting criteria; the SBA is just a guarantor<br />Local Economic Development Organizations<br />Microlenders<br />Specialty finance products<br />Asset-based lending<br />Factoring<br />
    7. 7. Eligibility Requirements: Debt<br />Commercial Banks<br />Minimum two years in business<br />Repayment ability (based upon profitability and/or cash flow)<br />Quality of collateral<br />Personal Guarantees<br />Other Debt Funding Sources<br />Quality of accounts receivable (credit risk)<br />Overall balance sheet strength (profitability not always required)<br />Minimum revenue level typically of $1 million<br />Personal or Validity Guarantees<br />
    8. 8. Docs for Debt Providers<br />Accountant-reviewed tax returns<br />Accounting software good enough for analysis, but not for closing a deal<br />Accurate Interim statements<br />Balance Sheet<br />Profit and Loss<br />Aging Accounts Receivable Report<br />Aging Accounts Payable Report<br />Ownership Structure<br />Articles of Incorporation<br />
    9. 9. Deal Structure: Lines of Credit<br />Avg. base interest: ranges from prime (long ago) to prime +3-4% variable with floor (today)<br />Annual fee: ¼% to 1% (very negotiable)<br />Closing Costs: vary due to complexity/approvals<br />Personal Guarantees<br />Quarterly Reporting Requirements<br />“Bad results” or risk (as perceived by the bank) can cause the line to be called in, not renewed, or capped <br />Higher than expected or out of control/unknown trade spend can contribute (case study: CA food company “L”)<br />
    10. 10. Deal Structure: Asset-based lending<br />Average base interest rate: 8% - 12% variable<br />Annual fee: ½% to 1% (negotiable)<br />Accounts Receivable handling fees: ¼% to 1%<br />Lockbox Requirement<br />Advance Rate: 70-80% of eligible A/R<br />Closing / diligence (cash flow analysis)<br />Dilution – the real issue<br />“Not to exceed 5%” (blended basis)<br />If higher, will reduce the advance rate<br />Could jeopardize renewal or ability to increase funding<br />The problem with grocery (case study: SoCal juice company)<br />
    11. 11. Deal Structure: Factoring<br />Avg. fee/period: 1.25% - 2% per 30 days<br />Term: 12-24 months (more often 18-24)<br />Initiation Fee: usually nominal<br />Lockbox Requirement<br />Advance Rate: 70-80% of eligible A/R<br />Closing / diligence (cash flow analysis)<br />Dilution – the real issue<br />“Not to exceed 5%” (blended basis)<br />If higher, will reduce the advance rate<br />What if you cannot predict? (case study: CA juice company)<br />
    12. 12. Case Study: SoCal food company<br />Summary of Income Statement Items<br />
    13. 13. Conclusions<br />Continuously track your historical and expected trade spend<br />Understand the differences by channel<br />Know how current and expected trade spend will effect your cash requirements for operating and for future growth<br />Getting the right debt instrument is all about timing, preparation, and understanding what the financier wants<br />Find the right financing partners<br />Shop the deal<br />Do your diligence (as much as they do with you)<br />Deals must be managed actively<br />Always seek more favorable terms if you “qualify”<br />Always be proactive is there are issues or surprises<br />
    14. 14. Into the Future…<br />Can I help you with…<br />financing or preparing yourself for the process?<br />offering perspective on your current and future trade spending requirements?<br />The starting point: a review of your core financial statements (Bal. Sh., P&L, A/R, A/P)<br />
    15. 15. Thank you for your participation!<br />Keith Kohler, K² Financing<br />keith@k2financing.com, 305-519-9455<br />

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