Presentation on theme: "Growth Beyond Your Bank"— Presentation transcript:
1Growth Beyond Your Bank Alternatives to Traditional Bank Financing StrategiesAndre TrudellManaging DirectorUMB Capital Markets
2What drives my concerns for the business? 4/15/2017Common ConcernsCash flow gaps/restrictionsTurning down new ordersA/R days extendingA/P days shorteningProfitability erodingApproaching borrowing limitsRising interest ratesRising pricesWeakening/strengthening currencyRegulatory pressureSuccession planningRetirementTransfer of ownershipWhat drives my concerns for the business?Which capital structure is right for me?How do I prepare my business accordingly?
3EQUITY Pros Cons DEBT Pros Cons Repayment flexibility Diversify risk Which Financing Strategy is Right for me?DEBTProsLower cost of capital than equityMaintain ownershipTax deductionsConsRepaymentInterest rate riskCash and collateralEQUITYProsRepayment flexibilityDiversify riskConsGive up ownership stakeHigher cost of capital
4Balancing Debt with Equity Seek the preferred capital structure of both debt and equity that suits your businessCash flow leverage ratioCost of capitalSenior level2x to 3xLowestSubordinated debt & Junior capital3x to 5xIncreasingEquityGreater than 5xHighest
5How do I prepare my business accordingly? Capital Management ToolsHow do I prepare my business accordingly?Understand what metrics lenders (debt) and investors (equity) are looking forUnderstand the opportunity cost of each funding sourceSeek to achieve your optimal capital mixCost & Growth
6How do I prepare my business accordingly? Capital Management ToolsHow do I prepare my business accordingly?Utilize financial tools to first manage existing debtInterest rate swapsMitigate interest rate risk in rising rate environmentLock in long-term interest ratesWhat does this mean for my company?
7Increasing Cost of Growth Increasing Cost of Capital Capital Financing StrategiesSenior DebtSubordinated DebtJunior CapitalAsset Based LendingFactoringReceivables FinancingEquityIncreasing Cost of GrowthIncreasing Cost of Capital
8ABL | Asset-based lending Debt Financing StrategiesABL | Asset-based lendingSecured by an assetinventory, accounts receivable, machinery and equipmentBest suited as alternative for Bridge loans Recapitalizations, Acquisitions, and TurnaroundsStructured around balance sheet with advances against A/R and inventory
9ABL | Asset-based lending Debt Financing StrategiesABL | Asset-based lendingSecured by an assetinventory, accounts receivable, machinery and equipmentBest suited as alternative for Bridge loans Recapitalizations, Acquisitions, and TurnaroundsStructured around balance sheet with advances against A/R and inventory
10ABL | Asset-based lending Debt Financing StrategiesABL | Asset-based lendingLender focus: cash flow + source and quality of repayment (assets)Takes into consideration ability to service other loans
11Debt | Factoring Factoring is the purchase of A/R at a discount Debt Financing StrategiesDebt | FactoringFactoring is the purchase of A/R at a discountRemoves payment risk to youImmediate cash value (Advance Rate)Factoring usually incorporates a lockbox and a blocked account
12Debt Financing Strategies Debt | IssuanceWhy issue debt?To finance operationsWhat is a bond?A securitized loan from investorsWhat are the benefits?Less restrictive than a loanFixed payment schedule for principal and interestInterest rates may be less than a loanWhat are the risks?Credit risk perception can raise cost of fundingInterest rate risk/price volatility, but manageable with callable featuresProvision and covenants like loans could be growth inhibiting if not properly understood upfrontLiquidity/placement risk: limited access to investors and/or a secondary marketDebt issuance products are offered through UMBFSI
13Corporate Bond Issuance Public Offerings Debt Financing StrategiesCorporate Bond IssuancePublic OfferingsProsRequires SEC and State registrationOffering is open to the publicCovenants tend to be less restrictive than a loanConsTimeline to market can be longCosts of issuance may be prohibitiveDebt issuance products are offered through UMBFSI
14Corporate Bond Issuance Private Placement Debt Financing StrategiesCorporate Bond IssuancePrivate PlacementProsProcess may bypass some registration requirementsTimeline to market may be shorter and lower in costConsInvestor qualification requirements may applySize restrictions may applyCommunication and marketing constraintsDebt issuance products are offered through UMBFSI
15Convertible debt, senior subordinated debt, or debt with warrants 4/15/2017Mezzanine FinancingConvertible debt, senior subordinated debt, or debt with warrantsHybrid of traditional term debt and the upside in equity formEquity secured, rather than by tangible assetsRepayment may not be required until maturity, allows business owner to reinvestment for growth rather than pay back like senior debtOften used to finance acquisitions, product development, plant expansion, new equipment purchases, and ownership liquidation for alternative reinvestment
16Small business investment companies 4/15/2017Equity Financing StrategiesAngel fundingVenture capitalRoyalty financingSmall business investment companies
17Common in Startup stage as seed capital 4/15/2017Angel FundingCommon in Startup stage as seed capitalInvestors often represented by high net worth individualsDue diligence process often shorter than Venture capital processesReceive cash in exchange for influence in company and equity with placements often less than VC fundingInvestment criteriaEarly stage companies with high and rapid growth (return) potentialBusiness scalabilityStrong barriers to entry, sustainable competitive advantage, patents, proprietary technologyCredible exit strategy for investor
18Post Angel funding strategy often backed by a group of investors 4/15/2017Venture CapitalPost Angel funding strategy often backed by a group of investorsLengthy due diligence processLarger capital injection than from Angels: $500K to $3MM, but with higher return expectationsReceive cash in exchange for control, often in the form of a Board seat, and equityInvestors seek control of business, defining goals, specific return on their investment timelines
19When to consider Angel round funding 4/15/2017Angel Round vs. Venture Round FinancingWhen to consider Angel round fundingSmall team in experiment phase, testing potential idea adoptionWhen to consider Venture round fundingDeveloped commitment, in race against time to get to marketBenefit from extra capital and support
204/15/2017Royalty FinancingReceive cash in exchange for guaranteed percentage of future revenue for a period of timeProsAccess to quick cash infusion without giving up control to equity investorsPayments to investor proportional to sales/revenueConsFinancing can be expensive if repayment remains once sales take off
21Regulation/lending parameters: 4/15/2017Small Business Investment Co.SBIC lendingCreated in 1958 by SBA to support capital needs of vibrant small businessesEstablishment of SBIC subsidiary enables bank investment in small businessRegulation/lending parameters:Types of Financing: Debt, Debt plus equity, and EquityRestrictions: Percentage of capital issued, Interest rates and related venturesLength of financing agreements: Generally five years
22Can someone help me evaluate my needs? 4/15/2017How do I Access the Capital Markets?Commercial BanksCapital Markets TeamsABL LendersPrivate Equity FirmsM&A AdvisorsSBIC ProgramsMezzanine LendersLawyersAccountantsInvestment BanksWhere should I begin?Can someone help me evaluate my needs?Can I combine my financing options?
23What drives my concerns for the business? 4/15/2017Common ConcernsCash flow gaps/restrictionsTurning down new ordersA/R days extendingA/P days shorteningProfitability erodingApproaching borrowing limitsRising interest ratesRising pricesWeakening/strengthening currencyRegulatory pressureSuccession planningRetirementTransfer of ownershipWhat drives my concerns for the business?Which capital structure is right for me?How do I prepare my business accordingly?