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  1. #1
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    Just out of curiosity-What would you do or suggest for the following:

    DF,

    Just out of curiosity I would like to see what people would offer to a Company or suggest to a company. Before some of you go crazy asking to fund the deal....it's not a live deal. It is a scenario and I am curious what some of you would offer or suggest the Company do:
    -5 Year old Manufacturer of consumer products sold to large retailers and distributors in the US. All the customers are credit quality.
    -The Owner/Operator owns 100% of the Company, but had some credit issues.
    -The Company became profitable last year. Due to unprofitably and owner credit history the Company is un-bankable.
    -Company generates over 35Mil in revenue and slightly profitable.
    -AP has become stretched with critical suppliers due to lack of working capital.
    -Demand from customers is stretching working capital. If the Company had access to working capital they could conceivably hit $40mil in revenue over the next 12 months and be very profitable. Company operates on a "sold-out" basis. They have to wait for cash to come in before manufacturing more products.
    -AR outstanding is $3.5Mil... nothing over 90 days with all credit quality debtors.
    -Company has raw materials and finished good inventory of $100K-Perpetual inventory system in place. Company does not have enough working capital in place to build sufficient raw goods inventory and has very little finished goods on hand.
    -Company has about $300K in equipment used to manufacture products.
    -Company operates from a rented facility-no real estate.

    As an investor/lender what would you potentially off the Company?
    If you are a broker or advisor what would you suggest the company do?
    What would be the expected cost of capital?
    Hedley Lamarr......That's Hedley

  2. #2
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    Kevin,

    Sounds like a trick question.. What we are not being told is what debt does the client have on the balance sheet. How did they get to this point (3M per month) especially with growth and a stretch of not being profitable?

    As this is simply a scenario to ponder-if the outstanding A/R is 3.5 Million to credit insurable clients, there is 300k in unencumbered equipment, and 100k in perpetual inventory- I would likely call a commercial bank that has an ABL division that liked this particular type of client.

    As this was a bank- their cost of funds would translate to affordable capital to the client- that rate would of course be subject to all the mitigating risk factors. After introducing it to such a contact, I would likely gauge their interest and have a fail safe ABL firm in play- just in case UW from the bank was more conservative than other folks that play in that space..

    I would expect a deal like this to close in approximately 30 days. If in fact the infusion of capital propelled the client past critical mass- the client would be eligible and attractive to several commercial lenders within a year- to be conservative..

  3. #3
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    Richard,

    No debt. The owner self funded to date with equity, but the equity is eroded due to years of unprofitably. The Company is not bankable due to owner's credit and lack of equity on the balance sheet. They just turned profitable so they will gain back their equity position over time and with the help of working capital to grow top and bottom line.
    Hedley Lamarr......That's Hedley

  4. #4
    Senior Member Reputation points: 5034 AlexSMF's Avatar
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    If there were funders out there that would actually provide a 2,000,000 advance for 12-15 months in the low to mid 1.30's (assuming the cash flow and balances are there to cover the ACH's) then that is what this deal probably qualifies for. In the real world, a scenario like this would not generate that type of offer however. Kevin, were you asking specifically what an MCA company would offer this?

  5. #5
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    Hi Alex,

    Given the scenario, what would you think would be the best, most cost effective working capital solution for a Company such as this and what would be the cost of capital. A ballpark APR....

    Best,

    Kevin
    Hedley Lamarr......That's Hedley

  6. #6
    Senior Member Reputation points: 5034 AlexSMF's Avatar
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    Quote Originally Posted by kevinhenry0527 View Post
    Hi Alex,

    Given the scenario, what would you think would be the best, most cost effective working capital solution for a Company such as this and what would be the cost of capital. A ballpark APR....

    Best,

    Kevin
    In this scenario, I would broker this to an ABL that would overlook the balance sheet being upside down (especially since the source of it is the shareholders loans). Probably a 12% best cast to 18% worst case. Leverage the receivable with no debt service. Actually, I know this guy, I think his name is Kevin Henry...company had something to do with water. Westcoast funding, eastcoast funding, no wait, seacoast funding, yes that's it. You should call Kevin, he may be able to help in this type of scenario.
    Last edited by AlexSMF; 06-22-2016 at 04:25 PM.

  7. #7
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    AlexSMF,

    The source of the negative equity is losses over the years of start-up. The start-up capital was injected as equity...no debt on the balance sheet. ABL or factoring would make good sense at least for the next twelve months or until the equity on the balance sheet turns positive. The rates might be a touch high depending on who you take it to....
    Hedley Lamarr......That's Hedley

  8. #8
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    A/R backed revolver structured as interest only payments. Solves the "sold out" problem and help optimize the merchant's cash-to-cash cycles, and if they run into an issue of an invoice running a little late the interest only structure would help keep payments low until they can pay

  9. #9
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    If all is clean (as purported) Let's say 4 over LIBOR to be safe...

  10. #10
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    Just out of curiosity-What would you do or suggest for the following:

    I would structure this as follows:

    1. Worst case scenario: Factoring facility with a production finance component if the margins allow it. This should help them get back on their feet and improve both cash-flow and equity position and lower DSO on payables to then prepare them for an ABL structure in a few months.

    I would assume this company has open POs from creditworthy customers, which should allow them to leverage with a Production lender and help them better purchase raw materials and lower their COGS significantly.

    Factoring and Production would run anywhere from 12-18%

    Option 2 (Best Case Scenario): structure the deal as an ABL and advance 80-90% on receivables, (inventory is low for funding consideration, but assuming a lender would entertain inventory as part of the borrowing base, then they would receive up to 50% of cost on the inventory (not to exceed 30% of AR exposure) and up to 75% advance on liquidation value on the equipment (depending on the type of equipment)

    ABL would go anywhere between 6% and 15%.

    If the DSO on the payables dont affect much their cash conversion cycle and the ABL lender would allow a company with just one year of positive EBITDA, and there are no debtor concentrations of more than 15%, I would submit this through an ABL lender.

    I would choose factoring with production finance first and then graduate them to a more structured ABL structure once they hit the $40Mill

  11. #11
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    Just out of curiosity-What would you do or suggest for the following:

    This sounds like an situation made for the Delancey Hybrid. I would not monitize the inventory nor the equipment but I would lien then as additional colateral.
    I would calculate how much cash they needed to fill back orders, advance an appropriate unsecured amount for say 30 days and then factor those receivables newly created paying the unsecured portion back.
    Bob

  12. #12
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    Thanks for the responses given even though there was limited information given about the Company, but enough to point those who know what they are doing in the right direction to make a recommendation. Given limited information and I would always want to see the documents and I mean ALL of them I would likely propose the following:
    -Worse case $5mil factoring facility and include the inventory. The inventory facility will grow as the company has the ability to cycle cash faster.
    -Better Case: ABL facility using AR and Inventory in the borrowing base. Utilize the equipment if there is a need for extra liquidity.

    Most important..... A company of this size and dynamics should NOT be paying more than 11% on a annualized basis for access to secured capital. Anything higher there is either something very ugly in the weeds, the advisor does not know who to call, or the lender does not have access to cheap cost of funds.
    Hedley Lamarr......That's Hedley

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