Special Series: Securing Equity Capital, Part TwoDecember 11th, 2013 | Category: Industry News
In the second installment of our series, we’ll explore several loan and financing options which Michael Collins, partner at Building Industry Advisors, says are available for window film dealers. In the next few weeks, Window Film magazine will continue to explore with Collins the opportunities available and ways to obtain the capital necessary for growth in a special series.
In addition to the mergers and acquisitions discussed in our previous installment, another way to secure capital is through placement of senior debt. Collins offers several facts and bits of advice on the following in this area:
—Cash flow-based loans are difficult to secure.
—For most building products companies, asset-based loans (ABLs) are more likely.
—Typical advance rates vary by asset type, such as accounts receivable (75-85 percent), and inventory and finished goods (50 percent).
—The typical maximum amount of senior debt leverage in the current market is 3.0X EBITDA.
—Typical pricing right now is the London Interbank Offered Rate (LIBOR) of + 2-4 percent, depending on size and credit quality.
Requirements of Asset Based Loans (ABLs)
—ABLs typically feature less financial performance or other agreements than cash flow loans. “Lenders are expecting to be made whole by the value of assets if the loan defaults,” says Collins.
—The more profitable your company is, the cheaper the rate will be. “Certain aggressive lenders will loan even into troubled companies if the asset coverage is seen as sufficient,” he says.
—Cash flow usually must be two times the fixed charges.
—Customer deposits must be sent to a lockbox that covers the balance of the loan. “Customers access additional needed capital as often as daily as the loan balance fluctuates,” says Collins.
Small Business Administration (SBA) Loans
—Banks, savings and loans, credit unions and other specialized lenders participate in the SBA program. “Full or partial government backing on the loan encourages lenders to loan to small businesses,” says Collins.
—The 7(a) program is the most common small-business loan.
—Another important program created is the Small Business Investment Company (SBIC). “These groups may look like private equity funds,” says Collins. “They typically bolster their own capital with low-cost federal funding, allowing them to invest in small companies. At year-end 2012, the government had extended $1.9 billion in capital to SBICs. The government shutdowns may interfere with the processing of such capital placements.”
Real Estate Sale-Leaseback
—A sale-leaseback is completed through the simultaneous sale of a property to an investment group who leases it back to the seller (Sell your building to the group and they’ll let you rent it from them).
—There are few, if any, restrictions on the uses to which the capital generated may be put; for example, you can use the money you get from this to pay off debt or invest in equipment.
—The lease payments are a tax-deductible expense.
—While institutional investors may have $3-5 million minimum investments, a good local corporate real estate agent may be in touch with local investors willing to undertake smaller deals.
Non-Bank Finance Companies
—These financing sources are willing to loan in higher risk situations, where their payback is less guaranteed.
—Since they are higher risk for the lender, these loans often have higher interest rates and numerous fees.
—Structured finance companies are often the types of companies offering these loans. “These are non-bank lenders with looser loan requirements and higher expenses,” says Collins.
—Accounts receivable (A/R) factoring companies may also offer these loans. “These pay you upfront for your A/R, minus a healthy fee,” he says. “This capital can save a troubled company but it can also become a debt treadmill. Companies should not use A/R factoring a moment longer than necessary.”
Look to future Window Filme-newsletters for more on this topic, including preparing for conversations with capital providers and mistakes and misconceptions to avoid when going through the lending process, as well as ways to improve your company’s capital position.
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