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

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WORKING CAPITAL BASICS

FINANCING GOVERNMENT CONTRACTS

North Carolina Military Business Centers 10th Annual North Carolina

Defense Trade Show

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NON-BANK FINANCING OPTIONS

 Purchase Order Finance

 Accounts Receivable, Inventory, and Term

Loans (ABL)

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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

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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

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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

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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

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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

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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

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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

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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

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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

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ABL TERM LOANS

 Normally only made in conjunction with a

revolver

 Made as an enhancement to revolver

 Fixed amortization but a floating rate

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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

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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

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CREDIT AND COLLATERAL ISSUES

 The following issues are interrelated

 They are key elements in the credit decision  They are carefully considered by lenders

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INDUSTRY CONSIDERATIONS

 Some industries are not a good fit for an asset

based loans

 Usually has to do with the nature of the

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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

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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

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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

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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

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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

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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%

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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

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CALL ME FOR ASSET BASED LOANS OR SOURCES FOR OTHER LENDING

Barry Yelton

North Mill Capital, LLC

580 Beason Road Mooresboro, NC 28114 828-657-0030 Mobile 704-472-7710

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