WORKING CAPITAL BASICS
FINANCING GOVERNMENT CONTRACTS
North Carolina Military Business Centers 10th Annual North Carolina
Defense Trade Show
NON-BANK FINANCING OPTIONS
Purchase Order Finance
Accounts Receivable, Inventory, and Term
Loans (ABL)
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
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
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
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
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
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
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
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
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
ABL TERM LOANS
Normally only made in conjunction with a
revolver
Made as an enhancement to revolver
Fixed amortization but a floating rate
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
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
CREDIT AND COLLATERAL ISSUES
The following issues are interrelated
They are key elements in the credit decision They are carefully considered by lenders
INDUSTRY CONSIDERATIONS
Some industries are not a good fit for an asset
based loans
Usually has to do with the nature of the
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
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
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
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
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
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%
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
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
