WORKING CAPITAL BASICS FINANCING GOVERNMENT CONTRACTS. North Carolina Military Business Centers. 10 th Annual North Carolina Defense Trade Show

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1 WORKING CAPITAL BASICS FINANCING GOVERNMENT CONTRACTS North Carolina Military Business Centers 10 th Annual North Carolina Defense Trade Show August 9, 2011

2 NON-BANK FINANCING OPTIONS Purchase Order Finance Accounts Receivable, Inventory, and Term Loans (ABL) Factoring

3 PURCHASE ORDER FINANCING Requires a PO from government or other commercial or institutional entity Normally requires an accounts receivable financing or factoring facility in place Pricing is normally 18% to 36% per annum This is NOT mobilization finance must have an ongoing business Sources Include: Wells Fargo Trade Finance Hartsko Financial Services Claro Trade Finance Innovare Capital

4 ASSET BASED LOANS Focused on the value of assets not balance sheet and P&L Typically underwrite assets as if in a liquidation scenario Borrowers often anticipate a much greater loan to asset value than they actually receive

5 ABL REVOLVING LOANS Accounts Receivable are always the most preferred collateral for revolving loans Most easily tracked and most easily liquidated in a worst case scenario Closest to cash and most easily converted to cash To Finance federal government accounts, the lender must have an assignment of claims from the government on a contract by contract basis

6 ACCOUNTS RECEIVABLE ADVANCE RATES Receivable advances are dependent largely on dilution Dilution is the aggregate of returns, allowances, bad debts, discounts and other items that decrease the net value of receivables The higher the dilution factor, typically the lower the advance rate

7 ACCOUNTS INELIGIBLE FOR BORROWING Over 90 days from invoice 25% or more of the account is over 90 Customers with bad pay history Contra or offsetting accounts Related company accounts Consumer accounts Officer or employee accounts Foreign accounts without letters of credit Excessive concentrations of credit

8 INVENTORY BORROWING ABL s struggle with inventory lending Can be very difficult for a lender to sell in a liquidation scenario Goods can quickly become obsolete Inventories can deplete quickly

9 DON T EXPECT A LOT FROM INVENTORY! Long history of lenders losing money liquidating inventory Lenders typically cap inventories at a fraction of the total lending facility Lenders often rely on orderly liquidation value appraisals by a third party

10 TYPICAL INVENTORY ADVANCES Many borrowers expect 50-60% on ALL inventory Most get 25-40% on ELIGIBLE inventory, sometimes less Lender may propose 50% of cost or 80% of OLV whichever is less guess which is always less! Advances are often capped at 50% or less of total loans

11 INELIGIBLE INVENTORY TYPES Stale or obsolete items Packing supplies Work in process Inventory for internal use not sold in the normal course Offsite inventory Inventory at customer location Bulk storage inventory Very rapidly turning inventory Customer specific inventory Branded inventory may require licensing

12 ABL TERM LOANS Normally only made in conjunction with a revolver Made as an enhancement to revolver Fixed amortization but a floating rate Normally 50% or less of total lending facility

13 TERM LOAN TYPES AND ADVANCE RATES Normally restricted to plant equipment; sometimes rolling stock Turnaround companies can get M&E loans, but valuation is Net Forced Liquidation Value Lender will advance 70-80% of NFLV Amortization is normally 24 to 60 months

14 REAL ESTATE Asset based lenders typically lend very conservatively on real estate Advance rates of 25-50% of quick sale value are normal Amortizations of less than ten years are typical Normally only for asset based loans larger than $10 million in total

15 CREDIT AND COLLATERAL ISSUES The following issues are interrelated They are key elements in the credit decision They are carefully considered by lenders

16 INDUSTRY CONSIDERATIONS Some industries are not a good fit for an asset based loans Usually has to do with the nature of the industry s billing practices or customer base

17 FACTORING Formerly factoring was used as a trade credit and finance vehicle Modern recourse factoring is used as an alternative to bank or asset based finance for new, more distressed, or smaller companies Factor actually purchases your invoices, with recourse back to you if the account debtor does not pay. The invoice is put back to the client when it reaches 90 days old. Pricing is higher, but factors can often finance companies that banks and ABL s cannot

18 FACTORING REQUIREMENTS Must provide invoice(s) and supporting documentation Typically need assignment of claim from federal government Collection of accounts will go directly to factor You can factor all or part of your accounts

19 FACTORING ADVANTAGES More aggressive credit approach financing for new companies, high-leverage companies, companies losing money, tax liens, and other major structural problems Finance all or part of your accounts receivable Quick turnaround usually less than a week Short contract period sometimes no contract or a year or less

20 FACTORING LIMITATIONS Normally will not lend on inventory, equipment, or real estate Full notification of customers is normally required Pricing is normally 14% to 30% or more Must provide copies of all invoices and supporting documentation Watch out for pricing tricks, add-on fees for slow paying invoices, etc.

21 GETTING LENDER TO SAY YES How you present your loan request matters Keep it simple, make it complete Provide basic information on the business, history, ownership, etc. Avoid long detailed discussions of the company s business or future plans No blue sky discussions Put the bad news right up front

22 KEY ELEMENTS OF THE LOAN PACKAGE Summary of your sources and uses of funds Accounts receivable aging Accounts payable aging Last three years financials Most recent interim and prior year comparable Projections with assumptions Inventory summary Fixed asset listing Schedule of company debt Ownership structure Company history, product brochures, other pertinent information Personal financial statements for active owners of more than 10%

23 FINDING THE RIGHT NON-BANK LENDER Ask your bank Ask your CPA Ask your attorney Google asset based lending or commercial finance Check websites such as Find a good advisor or intermediary and let them do the search for you

24 CALL ME FOR ASSET BASED LOANS OR SOURCES FOR OTHER LENDING Barry Yelton North Mill Capital, LLC 580 Beason Road Mooresboro, NC Mobile

25 Thank You!