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Growth Beyond
Your Bank
Alternatives to Traditional Bank Financing Strategies
Andre Trudell
Managing Director
UMB Capital Markets
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Common Concerns
 Cash flow gaps/restrictions
 Turning down new orders
 A/R days extending
 A/P days shortening
 Profitability eroding
 Approaching borrowing limits
 Rising interest rates
 Rising prices
 Weakening/strengthening
currency
 Regulatory pressure
1. What drives my concerns for
the business?
2. Which capital structure is right
for me?
3. How do I prepare my business
accordingly?
 Succession planning
 Retirement
 Transfer of ownership
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Which Financing Strategy is Right for me?
DEBT
 Pros
 Lower cost of capital
than equity
 Maintain ownership
 Tax deductions
 Cons
 Repayment
 Interest rate risk
 Cash and collateral
EQUITY
 Pros
 Repayment flexibility
 Diversify risk
 Cons
 Give up ownership
stake
 Higher cost of capital
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Balancing Debt with Equity
 Seek the preferred capital structure of both debt
and equity that suits your business
Cash flow leverage ratio
Cost of capital
Senior level
2x to 3x
Lowest
Subordinated debt & Junior
capital
3x to 5x
Increasing
Greater than 5x
Highest
Equity
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Capital Management Tools
 How do I prepare my business accordingly?
 Understand what metrics lenders (debt) and
investors (equity) are looking for
 Understand the opportunity cost of each funding
source
 Seek to achieve your optimal capital mix
 Cost & Growth
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Capital Management Tools
 How do I prepare my business accordingly?
 Utilize financial tools to first manage existing debt
 Interest rate swaps
 Mitigate interest rate risk in rising rate environment
 Lock in long-term interest rates
 What does this mean for my company?
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Capital Financing Strategies
Subordinated Debt
Junior Capital
Asset Based Lending
Increasing Cost of Capital
Increasing Cost of Growth
Senior Debt
Factoring
Receivables Financing
Equity
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Debt Financing Strategies
 ABL | Asset-based lending
 Secured by an asset
 inventory, accounts receivable, machinery and equipment
 Best suited as alternative for Bridge loans
Recapitalizations, Acquisitions, and Turnarounds
 Structured around balance sheet with advances
against A/R and inventory
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Debt Financing Strategies
 ABL | Asset-based lending
 Secured by an asset
 inventory, accounts receivable, machinery and equipment
 Best suited as alternative for Bridge loans
Recapitalizations, Acquisitions, and Turnarounds
 Structured around balance sheet with advances
against A/R and inventory
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Debt Financing Strategies
 ABL | Asset-based lending
 Lender focus: cash flow + source and quality of
repayment (assets)
 Takes into consideration ability to service other loans
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Debt Financing Strategies
 Debt | Factoring




Factoring is the purchase of A/R at a discount
Removes payment risk to you
Immediate cash value (Advance Rate)
Factoring usually incorporates a lockbox and a
blocked account
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Debt Financing Strategies
 Debt | Issuance
 Why issue debt?
 To finance operations
 What is a bond?
 A securitized loan from investors
 What are the benefits?
 Less restrictive than a loan
 Fixed payment schedule for principal and interest
 Interest rates may be less than a loan
 What are the risks?
 Credit risk perception can raise cost of funding
 Interest rate risk/price volatility, but manageable with callable features
 Provision and covenants like loans could be growth inhibiting if not properly
understood upfront
 Liquidity/placement risk: limited access to investors and/or a secondary market
Debt issuance products are offered through UMBFSI
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Debt Financing Strategies
 Corporate Bond Issuance
Public Offerings
 Pros
 Requires SEC and State registration
 Offering is open to the public
 Covenants tend to be less restrictive than a loan
 Cons
 Timeline to market can be long
 Costs of issuance may be prohibitive
Debt issuance products are offered through UMBFSI
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Debt Financing Strategies
 Corporate Bond Issuance
Private Placement
 Pros
 Process may bypass some registration requirements
 Timeline to market may be shorter and lower in cost
 Cons
 Investor qualification requirements may apply
 Size restrictions may apply
 Communication and marketing constraints
Debt issuance products are offered through UMBFSI
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Mezzanine Financing
 Convertible debt, senior subordinated debt, or debt with
warrants
 Hybrid of traditional term debt and the upside in equity
form
 Equity secured, rather than by tangible assets
 Repayment may not be required until maturity, allows
business owner to reinvestment for growth rather than
pay back like senior debt
 Often used to finance acquisitions, product development,
plant expansion, new equipment purchases, and
ownership liquidation for alternative reinvestment
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Equity Financing Strategies



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Angel funding
Venture capital
Royalty financing
Small business investment companies
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Angel Funding
 Common in Startup stage as seed capital
 Investors often represented by high net worth individuals
 Due diligence process often shorter than Venture capital
processes
 Receive cash in exchange for influence in company and equity
with placements often less than VC funding
 Investment criteria
 Early stage companies with high and rapid growth (return) potential
 Business scalability
 Strong barriers to entry, sustainable competitive advantage, patents,
proprietary technology
 Credible exit strategy for investor
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Venture Capital
 Post Angel funding strategy often backed by a group
of investors
 Lengthy due diligence process
 Larger capital injection than from Angels: $500K to
$3MM, but with higher return expectations
 Receive cash in exchange for control, often in the
form of a Board seat, and equity
 Investors seek control of business, defining goals,
specific return on their investment timelines
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Angel Round vs. Venture Round Financing
 When to consider Angel round funding
 Small team in experiment phase, testing potential
idea adoption
 When to consider Venture round funding
 Developed commitment, in race against time to get
to market
 Benefit from extra capital and support
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Royalty Financing
 Receive cash in exchange for guaranteed
percentage of future revenue for a period of time
 Pros
 Access to quick cash infusion without giving up
control to equity investors
 Payments to investor proportional to sales/revenue
 Cons
 Financing can be expensive if repayment remains
once sales take off
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Small Business Investment Co.
 SBIC lending
 Created in 1958 by SBA to support capital needs of
vibrant small businesses
 Establishment of SBIC subsidiary enables bank investment
in small business
 Regulation/lending parameters:
 Types of Financing: Debt, Debt plus equity, and Equity
 Restrictions: Percentage of capital issued, Interest rates
and related ventures
 Length of financing agreements: Generally five years
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How do I Access the Capital Markets?
 Commercial Banks
 Capital Markets Teams
 ABL Lenders
 Private Equity Firms
 M&A Advisors
 SBIC Programs
1. Where should I begin?
2. Can someone help me evaluate
my needs?
3. Can I combine my financing
options?
 Mezzanine Lenders
 Lawyers
 Accountants
 Investment Banks
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Common Concerns
 Cash flow gaps/restrictions
 Turning down new orders
 A/R days extending
 A/P days shortening
 Profitability eroding
 Approaching borrowing limits
 Rising interest rates
 Rising prices
 Weakening/strengthening
currency
 Regulatory pressure
1. What drives my concerns for
the business?
2. Which capital structure is right
for me?
3. How do I prepare my business
accordingly?
 Succession planning
 Retirement
 Transfer of ownership
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Question & Answer
Contact Information
Andre Trudell
Managing Director
(816) 860-7000
[email protected]
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Disclosure
DISCLOSURE AND IMPORTANT CONSIDERATIONS
UMB Capital Markets is a division within UMB Bank, n.a. UMB Financial Services Inc * is a wholly owned subsidiary of UMB Bank, n.a. UMB Bank, n.a.,
is an affiliate within the UMB Financial Corporation.
This report is provided for informational purposes only and contains no investment advice or recommendations to buy or sell any specific securities.
Statements in this report are based on the opinions of UMB Capital Markets and the information available at the time this report was published.
All opinions represent our judgments as of the date of this report and are subject to change at any time without notice. You should not use this report
as a substitute for your own judgment, and you should consult professional advisors before making any tax, legal, financial or investment decisions.
This report contains no investment recommendations and you should not interpret the statements in this report as investment, tax, legal, or financial
planning advice. UMB Capital Markets obtained information used in this report from third-party sources it believes to be reliable, but this information
is not necessarily comprehensive and UMB Capital Markets does not guarantee that it is accurate.
All investments involve risk, including the possible loss of principal. This information is not intended to be a forecast of future events and this is no
guarantee of any future results. Neither UMB Capital Markets nor its affiliates, directors, officers, employees or agents accepts any liability for any
loss or damage arising out of your use of all or any part of this report.
“UMB” – Reg. U.S. Pat. & Tm. Off. Copyright © 2012. UMB Financial Corporation. All Rights Reserved.
*Securities offered through UMB Financial Services, Inc. member FINRA, SIPC, or the Investment Banking Division of UMB Bank, n.a.
Insurance products offered through UMB Insurance, Inc. You may not have an account with all of these entities. Contact your UMB representative if
you have any questions.
Securities and Insurance products are:
NOT FDIC INSURED * NO BANK GUARANTEE * NOT A DEPOSIT * NOT INSURED BY ANY GOVERNMENT AGENCY * MAY LOSE VALUE
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