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Growth Beyond Your Bank Alternatives to Traditional Bank Financing Strategies Andre Trudell Managing Director UMB Capital Markets 1.

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Presentation on theme: "Growth Beyond Your Bank Alternatives to Traditional Bank Financing Strategies Andre Trudell Managing Director UMB Capital Markets 1."— Presentation transcript:

1 Growth Beyond Your Bank Alternatives to Traditional Bank Financing Strategies Andre Trudell Managing Director UMB Capital Markets 1

2 Common Concerns 2  Cash flow gaps/restrictions  Turning down new orders  A/R days extending  A/P days shortening  Profitability eroding  Approaching borrowing limits  Rising interest rates  Rising prices  Weakening/strengthening currency  Regulatory pressure  Succession planning  Retirement  Transfer of ownership 1.What drives my concerns for the business? 2.Which capital structure is right for me? 3.How do I prepare my business accordingly?

3 Which Financing Strategy is Right for me? 3 DEBT  Pros  Lower cost of capital than equity  Maintain ownership  Tax deductions  Cons  Repayment  Interest rate risk  Cash and collateral EQUITY  Pros  Repayment flexibility  Diversify risk  Cons  Give up ownership stake  Higher cost of capital

4 Balancing Debt with Equity 4  Seek the preferred capital structure of both debt and equity that suits your business Cash flow leverage ratioCost of capital Senior level2x to 3xLowest Subordinated debt & Junior capital 3x to 5xIncreasing EquityGreater than 5xHighest

5 Capital Management Tools 5  How do I prepare my business accordingly?  Understand what metrics lenders (debt) and investors (equity) are looking for  Understand the opportunity cost of each funding source  Seek to achieve your optimal capital mix  Cost & Growth

6 Capital Management Tools 6  How do I prepare my business accordingly?  Utilize financial tools to first manage existing debt  Interest rate swaps  Mitigate interest rate risk in rising rate environment  Lock in long-term interest rates  What does this mean for my company?

7 Capital Financing Strategies 7 Senior Debt Subordinated Debt Junior Capital Asset Based Lending Factoring Receivables Financing Equity Increasing Cost of Growth Increasing Cost of Capital

8 Debt Financing Strategies 8  ABL | Asset-based lending  Secured by an asset  inventory, accounts receivable, machinery and equipment  Best suited as alternative for Bridge loans Recapitalizations, Acquisitions, and Turnarounds  Structured around balance sheet with advances against A/R and inventory

9 Debt Financing Strategies 9  ABL | Asset-based lending  Secured by an asset  inventory, accounts receivable, machinery and equipment  Best suited as alternative for Bridge loans Recapitalizations, Acquisitions, and Turnarounds  Structured around balance sheet with advances against A/R and inventory

10 Debt Financing Strategies 10  ABL | Asset-based lending  Lender focus: cash flow + source and quality of repayment (assets)  Takes into consideration ability to service other loans

11 Debt Financing Strategies 11  Debt | Factoring  Factoring is the purchase of A/R at a discount  Removes payment risk to you  Immediate cash value (Advance Rate)  Factoring usually incorporates a lockbox and a blocked account

12 Debt Financing Strategies 12  Debt | Issuance  Why issue debt?  To finance operations  What is a bond?  A securitized loan from investors  What are the benefits?  Less restrictive than a loan  Fixed payment schedule for principal and interest  Interest rates may be less than a loan  What are the risks?  Credit risk perception can raise cost of funding  Interest rate risk/price volatility, but manageable with callable features  Provision and covenants like loans could be growth inhibiting if not properly understood upfront  Liquidity/placement risk: limited access to investors and/or a secondary market Debt issuance products are offered through UMBFSI

13 Debt Financing Strategies 13 Debt issuance products are offered through UMBFSI  Corporate Bond Issuance Public Offerings  Pros  Requires SEC and State registration  Offering is open to the public  Covenants tend to be less restrictive than a loan  Cons  Timeline to market can be long  Costs of issuance may be prohibitive

14 Debt Financing Strategies 14 Debt issuance products are offered through UMBFSI  Corporate Bond Issuance Private Placement  Pros  Process may bypass some registration requirements  Timeline to market may be shorter and lower in cost  Cons  Investor qualification requirements may apply  Size restrictions may apply  Communication and marketing constraints

15 Mezzanine Financing 15  Convertible debt, senior subordinated debt, or debt with warrants  Hybrid of traditional term debt and the upside in equity form  Equity secured, rather than by tangible assets  Repayment may not be required until maturity, allows business owner to reinvestment for growth rather than pay back like senior debt  Often used to finance acquisitions, product development, plant expansion, new equipment purchases, and ownership liquidation for alternative reinvestment

16 Equity Financing Strategies 16  Angel funding  Venture capital  Royalty financing  Small business investment companies

17 Angel Funding 17  Common in Startup stage as seed capital  Investors often represented by high net worth individuals  Due diligence process often shorter than Venture capital processes  Receive cash in exchange for influence in company and equity with placements often less than VC funding  Investment criteria  Early stage companies with high and rapid growth (return) potential  Business scalability  Strong barriers to entry, sustainable competitive advantage, patents, proprietary technology  Credible exit strategy for investor

18 Venture Capital 18  Post Angel funding strategy often backed by a group of investors  Lengthy due diligence process  Larger capital injection than from Angels: $500K to $3MM, but with higher return expectations  Receive cash in exchange for control, often in the form of a Board seat, and equity  Investors seek control of business, defining goals, specific return on their investment timelines

19 Angel Round vs. Venture Round Financing 19  When to consider Angel round funding  Small team in experiment phase, testing potential idea adoption  When to consider Venture round funding  Developed commitment, in race against time to get to market  Benefit from extra capital and support

20 Royalty Financing 20  Receive cash in exchange for guaranteed percentage of future revenue for a period of time  Pros  Access to quick cash infusion without giving up control to equity investors  Payments to investor proportional to sales/revenue  Cons  Financing can be expensive if repayment remains once sales take off

21 Small Business Investment Co. 21  SBIC lending  Created in 1958 by SBA to support capital needs of vibrant small businesses  Establishment of SBIC subsidiary enables bank investment in small business  Regulation/lending parameters:  Types of Financing: Debt, Debt plus equity, and Equity  Restrictions: Percentage of capital issued, Interest rates and related ventures  Length of financing agreements: Generally five years

22 How do I Access the Capital Markets? 22  Commercial Banks  Capital Markets Teams  ABL Lenders  Private Equity Firms  M&A Advisors  SBIC Programs  Mezzanine Lenders  Lawyers  Accountants  Investment Banks 1.Where should I begin? 2.Can someone help me evaluate my needs? 3.Can I combine my financing options?

23 Common Concerns 23  Cash flow gaps/restrictions  Turning down new orders  A/R days extending  A/P days shortening  Profitability eroding  Approaching borrowing limits  Rising interest rates  Rising prices  Weakening/strengthening currency  Regulatory pressure  Succession planning  Retirement  Transfer of ownership 1.What drives my concerns for the business? 2.Which capital structure is right for me? 3.How do I prepare my business accordingly?

24 Question & Answer 24 Contact Information Andre Trudell Managing Director (816)

25 Disclosure 25 DISCLOSURE AND IMPORTANT CONSIDERATIONS UMB Capital Markets is a division within UMB Bank, n.a. UMB Financial Services Inc * is a wholly owned subsidiary of UMB Bank, n.a. UMB Bank, n.a., is an affiliate within the UMB Financial Corporation. This report is provided for informational purposes only and contains no investment advice or recommendations to buy or sell any specific securities. Statements in this report are based on the opinions of UMB Capital Markets and the information available at the time this report was published. All opinions represent our judgments as of the date of this report and are subject to change at any time without notice. You should not use this report as a substitute for your own judgment, and you should consult professional advisors before making any tax, legal, financial or investment decisions. This report contains no investment recommendations and you should not interpret the statements in this report as investment, tax, legal, or financial planning advice. UMB Capital Markets obtained information used in this report from third-party sources it believes to be reliable, but this information is not necessarily comprehensive and UMB Capital Markets does not guarantee that it is accurate. All investments involve risk, including the possible loss of principal. This information is not intended to be a forecast of future events and this is no guarantee of any future results. Neither UMB Capital Markets nor its affiliates, directors, officers, employees or agents accepts any liability for any loss or damage arising out of your use of all or any part of this report. “UMB” – Reg. U.S. Pat. & Tm. Off. Copyright © UMB Financial Corporation. All Rights Reserved. *Securities offered through UMB Financial Services, Inc. member FINRA, SIPC, or the Investment Banking Division of UMB Bank, n.a. Insurance products offered through UMB Insurance, Inc. You may not have an account with all of these entities. Contact your UMB representative if you have any questions. Securities and Insurance products are: NOT FDIC INSURED * NO BANK GUARANTEE * NOT A DEPOSIT * NOT INSURED BY ANY GOVERNMENT AGENCY * MAY LOSE VALUE


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