1. Sources of Capital Jeff Clark Live Oak Bank Wine and Craft Beverage John Fisher Fisher & Company
ACSA Chicago 2016
© 2015 Live Oak Banking Company. All rights reserved. Member FDIC

2. What is acceptable DEBT to a bank?
i. Primary source of repayment
ii. Secondary source repayment
Collateral
Personal or Corporate Guarantees

3. Equity vs. Debt
Equity = No Collateral = No Secondary Source of Repayment Value of Collateral = How Liquid is it?

4. Equity Risk – Highest Minimal collateral if any Cost to Company – High
Dilution of profits
Regulatory and reporting costs
Potential reduction in decision making process
Advantages
Sometimes the only source of capital available
Often far more capital available than can be provided by debt
Synergies of experience, industry connections

5. Asset Based Debt Risk to Lender – High Mitigated by collateral value
Cost to Company – Higher than conventional lender
Lower advance rates
Control of working capital
More frequent reporting
Advantages
Less reliant on cash flow
Generally will take more risk than conventional lender

6. Conventional Debt Risk to Lender – Low
Mitigated by historic and projected cash flow
Mitigated by collateral
Cost to Company – Lowest cost of capital
Less frequent reporting than asset based lender
Advantages
Usually higher advance rates
Relationship banking can provide price and structure leverage

7. SBA Risk to Lender – Lowest
Mitigated by historic and projected cash flow
Mitigated by U.S. government guarantee
Cost to Company – Lowest cost of capital
In line with conventional lender
Advantages
Up to 100% financing
Longest terms with no calls
No covenants

8. The “5 C’s” of Credit
Character: Can you run the run the business? Are you a borrower the bank wants to be in business with? Banks consider the long-term relationship.
Capacity (Cash Flow):
Acquisition – Will historical cash flows support the business, the debt and pay you a reasonable salary?
Expansion – Are the projections reasonable? Do they cover the business operations and debt and pay you a salary?
Condition: Understand the condition of the business, management, the industry, and the economy; why it is important to work with a lender who understands the WCB industry.
Capital: What personal investment you plan to make in the business?
Injecting capital = decrease the chance of default = ‘skin in the game’
Collateral: Generally very important in a conventional loan, not as important with an SBA lender.

9. Case Study # 1 – Distillery Refinance & Expansion
A four year old distillery had grown rapidly producing both clear and aged spirits. They obtained initial debt financing as they were selling more product than they could produce. The owner requested Live Oak Bank to refinance the existing debt due to unreasonable terms and provide additional funds to finance inventory growth. The business had just achieved breakeven but with Live Oak’s expertise we were able to understand and document the projections. We included an initial interest only period on the term loan to assist with cash flow.

10. Case Study # 2 – Distillery Refi & Tenant Improvement
One year old distillery had an opportunity to move their tasting room to a high foot traffic resort location. They had boot strapped the operation with a conglomeration of high interest debt with short terms. Although they could service this debt it left no cash flow for additional growth. They needed capital to do tenant improvements to the new location, refinance existing debt and purchase additional production equipment. Based on historic trends, projected cash flow, DTC and 3 tier distribution structure Live Oak was able to provide a term debt structure with a six month interest only period.

11. Jeff Clark Domain Expert – Live Oak Bank Wine & Craft Beverage C O
100 B Street Suite 100 | Santa Rosa CA 95401

12. © 2013 Live Oak Banking Company. All rights reserved. Member FDIC