This session was presented by Kevin Laborde, President of Cash Flow Resources. Find out more at http://www.cfrscs.com.

1. Overlooked
&
Misunderstood
Capital
Sources
Kevin
Laborde
President
Cash
Flow
Resources,
L.L.C.

2. Today’s
Objec;ves
• Cash
versus
Profits
• Equity
Investments
versus
Debt
(Loans)
• Tradi<onal
Sources
of
Capital
• Non-­‐Tradi<onal
Sources
of
Capital
2

3. Se<ng
the
Stage
• First
a
LiEle
Background
&
Context
– Drivers
of
Funding
Needs
– Basic
Financial
SoluAons
– How
They
Differ
– ExpectaAons
of
Stakeholders
• Capital
– TradiAonal
Sources
v
Non-­‐TradiAonal
Sources
– Non-­‐TradiAonal
Sources
You
Need
to
Know
3

4. Cash
versus
Profits
• So
I
sell
my
product
or
service
for
more
than
its
cost:
– I
generate
a
profit
– I
have
liOle
or
no
Cash
• Where
is
the
cash
from
my
profitable
opera<ons?
– Inventory
– Receivables
– Work-­‐in-­‐Process
– New
Equipment
– Debt
Payments
4

5. Cash
Opera;ng
Cycle
5

6. Cash
is
King
• What
is
a
Good
Customer?
– Capable
and
Willing
to
Pay
• Credit
Terms
for
Customers
– Are
they
worth
it?
• Trade
Credit
from
Vendors
&
Suppliers
– Can
you
get
it?
• The
Balancing
Act
• Based
on
What
You
Have,
What
Do
You
Need?
6

7. Equity
vs.
Debt
(Loans)
• You
Need
Capital
to
Operate
• Poten<al
Capital
Sources:
– Equity
(Investment
in
Ownership
of
EnAty)
– Debt
• Think
Both
Ends
of
the
Spectrum
• Both
Inject
Capital
into
a
Business
• Both
Have
an
Expecta<on
of
Return
• You
Must
Understand
Those
Expecta<ons
7

8. Equity
vs.
Debt
(Loans)
• One
has
a
Fixed
Return
(Debt)
• One
has
a
Poten<ally
Infinite
Return
to
Investor
(Equity)
• One
Leverages
Returns
(Debt)
• One
Dilutes
Your
Ownership
(Equity)
• Which
is
Best
for
Your
Business?
8

9. Equity
Investments
• What
do
Equity
Investors
seek?
– Percentage
Ownership
– Control?
– Competent
Management
– Growth
Opportuni<es
–
Scalable??
– An
Exit
Strategy
• The
Sky
is
the
Limit
–
Infinite
Poten<al
!!
9

10. Tradi;onal
Bank
Financing
• Who
provides
Credit?
BANKS!
• Loans
and
Lines
of
Credit
• What
makes
a
Loan
a
Loan?
– Fixed
Contract
to
Repay
– Primary
and
Secondary
Sources
of
Repayment
***
– Leverage
Owner
Returns
with
OPM
10

11. Tradi;onal
Sources
of
Capital
-­‐
Debt
• Underlying
En<ty
Must
be
UnderwriEen
For
Debt
• How
the
En<ty
Is
UnderwriEen:
– The
5
Cs
of
Credit:
• Character,
Capacity,
Capital,
Collateral,
CondiAons
– The
4
Ps
of
Credit:
• Purpose,
Payment,
ProtecAon,
People
11

12. Tradi;onal
Sources
of
Capital
-­‐
Equity
• Underlying
En<ty
Must
be
UnderwriEen
For
Equity
Contribu<ons
-­‐
Think
“Shark
Tank”
• For
Investor
to
Provide
Equity:
– Market
Opportunity
• Considers
CompeAAon,
Barriers
to
Entry,
DifferenAaAng
AOributes,
Scalable?
– Core
Competencies
of
Management
• Ability
To
Execute
12

13. Capital
Availablity
• If
Credit
Availability
is
Too
Low
or
Unavailable
OR
• If
Equity
Investor
Requirements
Do
Not
Fit
OR
BOTH
IT
MAY
BE
TIME
TO
LOOK
ELSEWHERE
13

14. Non-­‐Tradi;onal
Financing
• Non-­‐Tradi<onal
Financing
Provides
Entrepreneurs
with
Tools
to:
– Validate
Business
Model
– Grow
Businesses
to
Create
a
Larger
Cri<cal
Mass
– Provide
Demonstrable
Results
to
Poten<al
Investors
and
Lenders
14

15. Non-­‐Tradi;onal
Financing
• Some
of
the
Underwri<ng,
Evalua<on
Methods
and
Requirements
are
the
Same
as
for
Tradi<onal
Sources
• The
Difference
Comes
in
How
this
Same
Informa<on
is
U<lized
15

16. Non-­‐Tradi;onal
Financing
• U<lizes
the
Balance
Sheet
Strength
of
Another
Party
to
Make
Things
Happen
• Products
Offered
Typically
Do
Not
Require
the
Same
Client
Characteris<cs
of
Tradi<onal
Sources
• Providers
are
Generally
Seeking
Returns
Higher
than
Tradi<onal
Sources
• Providers
are
Taking
More
RISK
16

17. Non-­‐Tradi;onal
Financing
• Non-­‐Tradi<onal
Programs
Work
Because
Capital
is
Employed
Using
Different
Approaches
to
Control
Risk
• Transac<on
Specific
Factors
Take
the
Place
of
Tradi<onal
Underwri<ng
Principles:
– Largely
independent
of
the
underlying
enAty
– Specific
to
the
asset/transacAon
being
funded
17

18. Major
Forms
of
Alterna;ve/
Non-­‐Tradi;onal
Financing
• Factoring
A/R-­‐
(Think
Visa/MC
versus
Cash
Sales
or
A/R)
• Purchase
Order
(P.O.)
Funding
-­‐
on
CommiEed
Product
Sales
and
Manufactured
Products
• Both
of
These
Accelerate
a
Company’s
Cash
Flow
Cycle
18

19. • Merchant
Advances
on
Credit
Card
Sales
• Hard
Asset
Lending
Against
Real
Property
• Equipment
Leasing
19
Other
Forms
of
Alterna;ve/
Non-­‐Tradi;onal
Financing

20. Factoring
• Basically
Means
the
Sale
of
a
Commercial
Invoice
• Available
to
Companies
Selling
Goods
and
Services
to
Other
Companies
(B
to
B)
• Purchaser
(Factor)
Buys
Invoices
from
Seller
at
a
Discount
When
Seller
Has
Cash
Requirement
• Seller’s
Customers
(“Debtors”)
Remit
Payment
Directly
to
Factor
20

21. Factoring
• Discoun<ng
Invoices
is
Similar
to
What
Happens
When
Firms
Accept
Credit
Cards
for
Payment
• Debtor
Dependent
Underwri<ng
• Self
Liquida<ng
Obliga<on
–
“Not
Debt”
• Accelerates
the
Cash
Flow
Cycle
21

22. Cash
Opera;ng
Cycle
22

23. Factoring
Advance
• Client
Sells
Product
or
Service
and
Sends
Invoice
to
Customer
(“Debtor”)
• Client
Submits
Invoice(s)
to
Factor
for
Funding
• Factor
Verifies
the
Invoice
with
Debtor
• Once
Verified,
Factor
Advances
Funds
to
Client
Based
on
a
Pre-­‐established
Advance
Rate
23

24. Factoring
Repayment
• Debtor
Remits
Payment
to
Factor
to
SeEle
Advance
on
Invoice
• Once
Advance
is
SeEled
Factor
Remits
Any
Percentage
Held
in
Reserve
to
Client
Less
Fees
• Cost
of
Factoring
Impacts
Opera<ng
Margin
of
Client
24

25. Purchase
Order
Funding
• A
Handy
Short-­‐term
Funding
Tool
for
Companies
Facing
Growth
Opportuni<es
• Provides
Capital
Needed
to
Pay
Suppliers
Up
Front
for
Bona
Fide
Product
Orders
(Before
Product
is
Sold)
• Funds
Usage
is
Restricted
to
the
Purchase
or
Manufacturing
of
Products
• Provider
Will
Typically
Take
Title
to
Goods
to
Be
Released
Upon
Sale
25

26. Purchase
Order
Funding
• Structures
Differ
but
May
Take
the
Form
of
an
LeEer
of
Credit
Funded
upon
Product
Delivery
• Typically
for
a
Producer,
Distributor,
Wholesaler
or
Reseller
of
Manufactured
Products
• Can
Be
Done
by
Itself
but
Ocen
Put
in
Place
in
Conjunc<on
with
a
Factor
• Process
Starts
with
a
Customer
Order
to
Be
Filled
26

27. Factoring
versus
PO
Funding
• Both
Are
Structured
Based
on
the
Underlying
Transac<on
– Factor
–
Acer
Sale
of
Product
&
Invoice
Created
– PO
Funding
–
Before
Sale
of
Product
• Both
Require
the
Business
to
Have
Adequate
Margins
for
the
Rela<onship
to
be
Successful
• PO
Funding
Must
Be
Used
to
Fulfill
a
Purchase
Order
• Factoring
Proceeds
May
Fund
Any
Short-­‐term
Business
Need
27

28. Merchant
Advances
• Lump
Sum
Advance
Based
on
Monthly
Credit
Card
Sales
• Repayment
Amount
Based
on
a
mul<ple
of
Original
Advance
(~1.2x-­‐1.4x)
• Advance
is
Repaid
with
a
Set
Percentage
of
Future
Credit
Card
Sales
(~8-­‐10%
of
Sales)
• More
Typically
Used
by
Retail
Establishments
28

29. Merchant
Advances
• Structured
to
Not
be
a
Loan
–
It
is
the
Sale
of
Future
Credit
Card
Related
Revenue
• Repayment
a
Func<on
of
Future
Sales
Volume
• Expensive
Compared
to
the
Cost
of
a
Tradi<onal
Line
of
Credit
(If
You
Can
Get
One)
• Can
Provide
an
Effec<ve
Short-­‐term
Bridge
to
Where
the
Business
Owner
Wants
to
Go
29

30. Hard
Asset
Lending
• Private
Investment
Groups
or
Individuals
• Secured
-­‐
Land
and
Commercial
Property
• Bridge
Financing
to
a
Long-­‐term
Deal
• Low
Loan
to
Value
(~60%-­‐70%)
• LTV
Calculated
Based
on
Liquida<on
Value
or
Purchase
Price
• Shorter
term
(<3
years)
•
Higher
Rate
(~12-­‐21%)
30

31. Equipment
Leasing
• Available
for
Large
and
Small
Ticket
Items
-­‐
Anything
From
Computers
to
Heavy
Equipment
• Lender
Owns
the
Asset
and
Leases
or
Rents
It
Back
• Conserves
Liquidity
for
Other
Needs
• Personal
Guarantees
Generally
Required
• Sellers
of
Equipment
Ocen
the
Best
Source
31

32. To
Sum
it
All
Up
• Are
You
in
Need
of
an
Equity
Investment
or
a
Loan?
• If
an
Investment,
What
Percentage
Ownership
Do
You
Want
to
Give
Up
&
Is
Now
the
Time
to
Do
It?
• If
a
Loan,
How
Much
Can
You
Afford
or
Qualify
to
Borrow?
32

33. In
Conclusion
If
Neither
a
Loan
or
Investment
Works
for
You,
Think
through
Your
Other
Op<ons
and
Keep
in
Mind
That
They
Can
Be
a
Bridge
to
Get
You
Where
You
Need
to
Be…
33
Cash
Flow
Resources,
L.L.C.
Contact
Informa<on:
www.cfrscs.com
Kevin
Laborde
-­‐
President
kevinlaborde@cfrscs.com
504-­‐522-­‐6065