Syndicated Revenue Loans. Secured Lines of Credit

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1 Syndicated Revenue Loans. Syndicated Revenue Loans are Revenue loans grouped together through a syndicate. Typically these loans are given while a revenue loan is still outstanding, but the business owner needs additional funds for expansion, franchising, etc. Companies that qualify must have a gross annual revenue of at least $2 million a year, and be in business for two years. Unlike revenue loans, there are typically closing costs due upon distribution of funds. Secured Lines of Credit, also known as a Revolver, are loans that are repeatedly drawn down and repaid. Usually, the loan is secured by the borrower s receivables and/or inventory, (although there are circumstances when the funder releases it secured interest). This kind of asset-based loan is designed to optimize the availability of working capital from the borrower s current assets. The minimum line of credit size is generally $100,000 with no maximum. Secured lines usually require a personal guarantee of everyone holding 20% or more of the company. Companies generally take the secured revolver alternative when they cannot obtain an unsecured bank loan which, Secured Lines of Credit cash flow, would satisfy their working capital needs. Generally, the company must have a history of profitability and positive cash flow. However, in this economic environment, hedge funds and non- bank lenders, under certain circumstances, will approve companies that suffered losses. Virtually any business to business company in almost any industry use revolvers, however they are particularly popular among retailers, wholesalers, distributors and manufacturers because these types of companies can benefit from a cost effective source of working capital, and have specific types of assets that can easily pledge as security. This product may be available to international clients depending on the country. Please call if you have a project outside the United States.) Pricing for revolvers is a function of the size of the credit facility and the credit quality of the company. This product is available to all clients of different facility sizes, however prices and terms will vary. Moderately strong credit quality companies seeking a facility from $1 million to $10 million can expect and interest rate of 8% to 12%. Companies with superior credit seeking a facility in excess of $10 million can expect an interest rate of 5% to 8%. Most other credit facility sizes can expect an interest rate starting at 12% and up. when added to their normal Page 19

2 The process is fairly simple, though not as seamless as revenue loans. The borrower grants a security interest in its receivables and /or inventory to the lender as collateral to secure the loan. This grant of security interest creates the borrowing base for the loan. As receivables are paid, the cash is turned over to the lender to pay down the loan balance. When the borrower needs additional working capital, the borrower requests another advance. Because the borrower s customers are generally not notified of the assignment of the accounts to the lender, the borrower continues to service its receivables. The borrowing arrangement is usually transparent to the borrower s customers. Most receivables are eligible. Some receivables which fall into specific categories are not. Typical examples of ineligible receivables would include receivables 90 or more days past due, and any intracompany receivables. Most non-bank lenders will lend against government and even foreign source receivables, ensuring higher loan amounts than a bank would approve. Page 20 THE INFORMATION HEREON IS THE PROPERTY OF JTB ASSOCIATES, LLC. AND/OR ITS SUBSIDIARIES. WITHOUT WRITTEN PERMISSION, ANY COPYING, TRANSMITTAL TO OTHERS, AND ANY USE EXCEPT THAT FOR WHICH IT IS The author and the publisher specifically disclaim any liability, loss or risk incurred directly or indirectly by the use and application of any information presented in this book. Specific information contained herein is time related and can change without notice. No guarantee is made or implied regarding the accuracy of this information other than at the time of publication. Furthermore, the author acts as a publishing company only and does not provide any personal credit services, All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means without permission in writing from the author or publisher, except that forms may be reproduced by the purchaser for his or her own

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4 Page 22 chan without notice. No guarantee is made or implied regarding the accuracy of this information other than at the time of publicat publication. ion. Furthermore, the author acts as a publishing company only and does not provide any personal credit services, including presss portion of the first amendment to the constitution of the united States of America. All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means without permission in writing from the author or publisher, except cept that forms may be reproduced by the purchaser for his or her own

5 Senior Term Loans Senior Term Loans or Subordinated Debt is a type of debt financing cash flow loan, in which the lender funds, generally for working capital, using the expected cash flows that a borrowing company generates as collateral for the loan. Typically these loans are used to for funding growth or financing an acquisition. Our lenders can provide Cash Flow Loans with the following parameters; Loan is typically 2 to 3 times Earnings Before Interest Tax Depreciation and Amortization; (EBITDA) Clients can be in virtually any industry. Generally, they must have been in business at least three years and have a strong history of profitability and cash flow together with a strong balance sheet. But again, in this economic environment, non-bank lenders are considering companies with losses as well. A cash flow loan is also a common business tool used by companies that experience consistent shifts in revenue generation, based on seasonal sales. The cost of capital is based on the credit quality of the company, but generally these loans will be somewhat than an asset based revolver, the loan previous discussed. Rates are typically 12% - 15% (sometimes with an equity kicker). Minimum is $5 million, (other sizes considered on a case by case basis. Preferred industries include energy, healthcare, communications, but we will look at others. To secure repayment, the lender requires covenants from a borrower that the business will maintain those expected cash flows and other ratios such as enterprise value, EBITDA, total interest coverage ratio, total debt/ebitda and so on. They will also take a lien covering the assets of the business to provide the lender with the ability to take control in the event of default. Page 23

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7 Accounts Receivable Factoring Accounts Receivable Factoring, in contrast to a revolver, factoring means the accounts receivable are actually sold to a factoring company for cash. Depending on the credit quality of its customer and the concentration of the customer s base, the company will receive 75% to 90% of the invoices face value within a day or two of sending the invoice. Once the factor collects, the company receives the remainder back minus fees and interest rates. The minimum line of credit is $50,000, and usually requires a personal guarantee of everyone holding 20%or more of the company. This product may be available to international clients, depending on the country. (please call if you have a project outside the Unites States). qualifies them for less expensive capital such as a revolver or an unsecured bank line. Clients can be virtually any industry. Pricing ranges from 1% per month for high credit quality customers, (such as the U.S. Government or AA/AAA rated corporations) to 3.5% per month for more challenged customers. Costs can be mitigated by using a daily rate. (i.e., 1% divided by days in the month to get the daily rate) and paying off the line as soon as the funding becomes available. Cost savings are significant, especially when electronic banking methods are incorporated. When a company manages cash flow in this way, factoring can be more cost effective. Factoring is typically used by business to business companies with less-than-perfect credit, (i.e. liens, bankruptcy) in transition, or possibly in a start up mode. Interest rates and fees on these types of loans are generally higher than revolvers. Accounts Receivable factoring is often an month bridge financing vehicle which allows a company to grow to consistent profitability which in turn Factoring can be either with or without recourse. In the case of non recourse factoring, the factor assumes the credit risk for the company s outstanding invoices. This is usually more expensive than recourse factoring, where the company would be required to repurchase any invoice that has not paid within 90 days. Unlike the revolver, where the company receives payments directly from is customer, the customer is now required to send the payment to the lender s bank ( lock box ). The lender controls the funds to ensure repayment of the debt Page 25

8 Purchase Order Financing Purchase Order ( PO ) Finance is an ideal financing option for resellers or distributors of hard goods that lack the funds to pay their manufacturers. This financing structure is also available to manufacturers of products that need to purchase raw material to begin the process of fulfilling a purchase order. This is referred to as work-in-process or ( WIP ) financing. Because the lender, in this structure, bears the additional risk of the manufacturer not finishing the manufacturing process, WIP credit facilities are only provided by a few lenders and are more challenging to obtain. PO financing can provide virtually unlimited growth capital for businesses, because it relies largely on the credit quality of the company issuing the Purchase Order. Although PO financing is a great tool for companies in high growth mode, it does not work for every company. PO financing works best if you have gross margins of at least 25% and good paying customers, a relatively short cycle from the PO date to delivery of the product (no greater than 90 days). It is a perfect product for marketing and distribution companies that use a third party manufacturer and drop ships to very high credit quality customers. PO financing is typically priced on a 30-day basis. The rate can range from 2.5% to 3.5% depending on the size of the facility, the financial condition of the company and whether it is finished goods or WIP financing. It is common to combine PO financing with receivables factoring. Because PO financing is usually more expensive than factoring, this tends to reduce the total cost of the transaction. When the invoice is factored the PO funding is paid off. Moreover, it improves cash flow since the advance rate for an invoice is greater than the advance rate for a purchase order. The minimum loan size is $50,000 with no maximum. Usually requires a personal guarantee of everyone holding 20% or more of the company. Available to the U.S based companies, although the suppliers may be anywhere in the world. PO financing is simple to use. The lender buys the products or raw materials from the company s suppliers (overseas or domestic), in the company s name, using a letter of credit. Then, it ensures that the products are properly delivered to the company. Once the order is delivered and approved by the company, the funds from the letter of credit are released to the supplier. At this point, the order has been delivered and an invoice is issued to the client s customer. Page 26

9 PO financing transactions usually have 8 steps: 1. Purchase order is issued to and accepted by the company. 2. The company orders the goods or raw materials from the supplier 3. The lender pays the company s suppliers via a bank wire or letter of credit (usually 100% of the cost) to get the product produced or the materials delivered 4. The product is delivered to the company s customer, who accepts it 5. The company s customer is invoiced 6. The Invoice is factored which pays off the PO financing and increases the company s working capital in an amount equal to the difference between the advance rates. (PO financing pays 100% of cost of goods, while AR factoring pays up to 90% of the invoiced sale price) 7. The company s customer pays the invoice(usually in 30 to 60 days 8. The lender settles with the company. The inventory funding product finances the raw materials and /or the finished goods held for sale by a company. Although inventory can be financed on a standalone basis, it is more often combined with accounts receivable financing. Generally, lenders will advance 50% of the cost of the inventory. If combined with an accounts receivable line of credit, the amount of inventory financed is typically between 35% and 50% of the receivable financing. Usually, a personal guarantee is required of everyone holding 20% or more of the company. Clients can be in virtually any industry. They are either manufacturers or distributors of products manufactured by a third party. Pricing ranges from 2.5% to 3.5% per 30 days and may require the payment of a commitment fee. The lender will use an appraiser to determine the orderly liquidation value of the inventory and will required weekly reporting on changes in the amount of inventory held by the company. Periodic, physical inspection will also take place. The lender will required that all the company s sales proceeds be redirected to a new bank account controlled by the lender ( lock box ). The lender controls the funds to ensure repayment of debt. Page 27 THE INFORMATION HEREON IS THE PROPERTY OF JTB ASSOCIATES, LLC. AND/OR ITS SUBSIDIARIES. WITHOUT WRITTEN PERMISSION, ANY COPYING, TRANSMITTAL TO OTHERS, AND ANY USE EXCEPT THAT FOR WHICH IT IS The author and the publisher specifically disclaim any liability, loss or risk incurred directly or indirectly by the use and application of any information presented in this book. Specific information contained herein is time related and can change without notice. No guarantee is made or implied regarding the accuracy of this information other than at the time of publication. Furthermore, the author acts as a publishing company only and does not provide any personal credit services, All rights reserved. No part of this material may be reproduced or transmitted in any form or by any means without permission in writing from the author or publisher, except that forms may be reproduced by the purchaser for his or her own

10 Equipment Leasing/Lease-Back Equipment leasing can be used to purchase new or used equipment for a business. It can also be used to generate working capital through a sales leaseback of equipment already owned by a company. It is available to companies across the credit spectrum. Lenders will generally lend 70% of the rapid liquidation value of the equipment which is usually substantially below retail value. For companies with less than perfect credit additionally collateral will be required. In the case of a borrower with very poor credit, up to 2.5% times the amount of the lease may be required as additional collateral. Although most types of equipment are eligible, heavy equipment ( yellow iron ) holds its value well and therefore is better suited to leasing than restaurant equipment or other equipment with softer values. The term off the lease varies with the type of equipment, but is generally from 3 to 7 years. The minimum size is $50,000 with no maximum, and leases are available to U.S. based companies. Any company that uses a significant amount of equipment in conducting its business will find leasing beneficial. It is especially useful for the construction, manufacturing, medical and trucking industries; Industries that typically have equipment that retain value. tend to value it at what is known as forced liquidation value, a very low price based on what it would go for at an auction. Equipment lease backs can create tax burdens in this scenario. If an equipment piece is worth $500,000, but on the books at historical cost, $100,000, the owner will have to pay tax on the gain if it is ever sold. (Although this can be mitigated by doing a like-kind exchange, consult your tax advisor). The effective interest rates vary wildly based on the credit of the lessee. Strong credit quality with good collateral value will be in the high single digits, while the toughest credits can expect rates as high as 25% to 30%. Again, similar to the Revenue Loan, it is important to remember, that even high priced financing often is what is needed to propel a company into greater profitability. Greater profitability leads to less expensive capital in the future. The lessor purchases the equipment and leases it to the client. For operating leases (off balance sheet), the buyout at the end of the lease if Fair Market Value. For capital leases (on balance sheet), the buyout is $1.00. Equipment lease back s in addition to interest rate, may incur other costs under different scenarios. If equipment is leased that has depreciated, lenders Leasing is a complicated subject. If you intend to focus on this product, we would suggest getting a good book on equipment leasing. Page 28