Overlooked  &  Misunderstood  Capital  Sources  

Kevin  Laborde  President  

Cash  Flow  Resources,  L.L.C.    

Today’s  Objec;ves  

•  Cash  versus  Profits  

•  Equity  Investments  versus  Debt  (Loans)  

•  Tradi<onal  Sources  of  Capital  

•  Non-­‐Tradi<onal  Sources  of  Capital  

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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  

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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      

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Cash  Opera;ng  Cycle  

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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?  

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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  

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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  

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  !!  

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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  

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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  

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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  

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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  

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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  

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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  

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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  

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  

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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  

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• Merchant  Advances  on  Credit  Card  Sales  

•  Hard  Asset  Lending  Against  Real  Property  

•  Equipment  Leasing  

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Other  Forms  of  Alterna;ve/  Non-­‐Tradi;onal  Financing  

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  

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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  

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Cash  Opera;ng  Cycle  

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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  

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  

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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  

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  

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  

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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  

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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  

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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  

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  

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?  

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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…  

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Cash  Flow  Resources,  L.L.C.    Contact  Informa<on:  www.cfrscs.com  Kevin  Laborde  -­‐  President  kevinlaborde@cfrscs.com  504-­‐522-­‐6065