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  Funny Money Accounts Receivable Financing Building a Bridge ”What to know before you begin”
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Funny Money What if you could grow your business by spending 1 dollar to buy 5 dollars…10 dollars…maybe even 20 dollars worth of goods? What if you could print that 1 dollar bill as your own “super-script” or currency? What if you could grow your business that way to become a $100 million dollar company in five to seven years…sell out to a larger company…and retire with over $200 million dollars? Funny money? Well, it’s legal…it’s safe…and you’ll probably have a heck of a good time doing it. More and more foreign businesses are using this method to beat us at our own game in our own backyard. Keeping below many of our radar screens, they are coming to the United States, expanding their business, going-public, and using their publicly-traded shares as their “super-script” to purchase cash-generating, productive assets at a multiple to the nominal value of the shares. They can build a 100 million dollar company, but they must use those shares as money to buy cash producing assets. But going public is not an easy matter for anybody. * Hard fact…98% of all companies which go public on the OTCBB (Over-the-Counter Bulletin Board) are out of business in five years or less. That’s 98%. Those are the kind of lousy odds you get playing the slots in Las Vegas and Atlantic City. If you desire to run your business as a gamble, it’s a perfect way to go. You may have fun. Your insiders may pocket some of the public’s money, but your company is likely to go broke. * You can go public in the US via an IPO (Initial Public Offering), but after spending over 2 million dollars in expenses and waiting an average of 18 months, you only have a 50/50 chance of successfully trading. If you do, the underwriters might take almost one-fifth of your IPO funds. If you do trade – but poorly – the merchant banker and brokerage houses will walk away from you. Bottom line? The traditional formula for going public works well for the market pros, but not nearly as well for your company and the public. * You can go public in the US via the purchase of an already-existing, publicly-traded shell company. This method will cost you less to begin with and you will be trading. But the old adage is “there are no clean shells.” In the end, it will probably cost 5 million dollars. You’ll have to spend a lot of money buying out the shares owned by the previous insiders. They’ll be selling those shares into your best efforts to raise your share price. Then you’ll have to spend another fortune supporting those shares and finding other buyers for them. The obligation to find buyers for your public company’s float is never ending. Indeed, it’s the primary reason public companies go back to being private. Overall, not a pretty picture, is it? But when done right, there are ways to…
Chinese companies are now learning these ways while also becoming the manufacturing floor of the world. The number of US companies buying from or distributing for Chinese companies continues to grow. We advise and assist US companies, directly or indirectly doing business with China suppliers, on financing business activities via factoring, asset-based lending, and trade-finance. But another one of our areas of specialty is advising foreign companies (mainly Chinese) on how to take advantage of this “right” way to go public. The interest is there…the investment money is there…but there are rules to follow. Rules on how to...
It’s not easy…but it must be done. The use of publicly traded shares as super-script to buy these US assets is a global strategy that makes sense to the Chinese. It is also a strategy which is difficult for the Chinese to execute back home in China. For the past 6 years, China’s economy has been growing at break-neck speeds of 7-10 percent each year, but the Chinese stock markets are at 6 year lows. A contradiction? Not when you consider the problems in China with fraud, corruption, lack of transparency, corporate governance, and government ownership of over 75% of the shares (non-tradable but generally seen as an imminent dump on the market, a huge float problem – and “float” is the real killer in China and the US). Decades ago American companies realized it was much easier, quicker and cheaper to buy another company rather than wait to rely on organic internal growth. To wait exposes the company to being pushed out of the market or simply being passed by. It’s the buying power in US publicly traded shares that make them “super-script” in purchasing assets as part of a growth strategy. Done right, you can grow your company using this “super-script” for 5-7 years before selling out to a larger company. Nothing “funny” about it…except maybe laughing all the way to the bank. Craig Johnson, MBA, CPA Mr. Johnson is a licensed US certified public accountant who has been in China since 1995 and now handles foreign-related projects for one of the largest Chinese CPA firms in Central China. He can be contacted at: 52 Yuan, Niezhuang #805 Accounts Receivable Financing Well you finally did it, congratulations! After countless hours building your business, your first sale is complete, your product is shipped and you just mailed your first invoice. Your customer agreed to net 30 terms, however he just told you he won’t be able to send payment for 45 days! You were counting on that money so you could buy more product to complete your next sale and to help make payroll. What can you do in order not to lose your next order and pay your employees? Accounts receivable financing is a common form of funding for businesses that are unable to qualify for traditional bank financing. It also works well for fast growing companies that need cash to keep growing or to take advantage of discount prices from suppliers. Companies sell their accounts receivable to a third party which pays an agreed percentage of the invoice within 24 hours. This provides the necessary working capital to help pay suppliers and manage payroll without having to ask your customers to pay their invoices early (or on time!). What to look for from an accounts receivable lender…
Scott Winicour is Vice President of Sales & Marketing for Gibraltar Financial, an asset based lender in Chicago that specializes in accounts receivable financing for small to medium sized businesses. Since 1951, Gibraltar Financial has provided businesses across the United States with the necessary working capital needed to take their business to the next level. Contact Scott at 773-777-7798 or visit www.gibrlatarfinancial.com for more information on their services. Building a Bridge Bridge loans are short-term funds that "bridge" the gap between today's need for immediate cash to pay bills and the final closing of a pending investment deal or long-term financing package. Firm owners can go to banks for such a loan if they have a solid cash-flow position and the bank feels comfortable with the level of monthly sales as sufficient to support the loan for 60, 90 or 120 days. The bridge can also be provided by a factor, a firm that agrees to provide front-end cash on specific accounts receivable that meet certain credit requirements on the part of the payer. The factor will typically provide 50 to 70 percent of the face value of the invoices upfront, and the balance of the funds will be paid to the entrepreneur at the collection date on the receivables. Equity investors are also open to providing bridge loans. If a major equity funding deal is pending final logistics until it closes in 90 days, sometimes the funding group will make a short-term bridge loan in advance of the closing on the stock purchase. Sometimes this bridge loan financing is in the form of a convertible note that will either pay the lender interest only during the bridge period (no principal due until the long-term equity deal closes) or some combination of interest and principal. The conversion feature is a call option that will allow the lender to choose to either have the loan paid off (any fees, interest and the full principal) or roll the loan into an additional equity stake in the longer-term funding package. This often occurs when the bridge is for 180 days and the company's sales and profit prospects improve dramatically during those six months due to securing a major new client, moving into a great new facility or recruiting top-level management talent. But what about the situation where the company needs cash right now to pay bills, and the future equity deal is not coming from one capital funding source, but from several smaller angel investors? Is it possible to arrange a bridge loan today that is provided in lieu of the aggregate capital that is coming in a few months from different individual investors? The answer is yes! The entrepreneur can utilize letters of intent (LOIs) to put together a short-term bridge loan. Consider the following example: A small firm is in the middle of closing a "B" round of equity funding during the second year of operations. Four individual investors have agreed to purchase stock in the company in these amounts on these dates: investor A, $20,000 in two months; investor B, $30,000 in four months; investor C, $35,000 in two months; and investor D, $10,000 in three months. Together, these four investors are providing $95,000 in new equity capital for the firm, but the total will not be entirely in-hand for another 120 days. The company has new marketing and promotions contracts to pay, and equipment to purchase, over the next three to four months, totaling $80,000 as part of the growth plan for this funding. The entrepreneur will not be able to get a bank to do the bridge loan due to insufficient monthly cash flow to service the debt, and a factor is not interested in promises made by "potential" equity investors. But another equity investor, a family member or one of the four angels could be approached about fronting the company a $95,000 bridge loan for 120 days, and the earnest for the funds would be the signed LOIs from the four investors. Such a deal might require the bridge loan originator to meet face-to-face with the four angels to confirm their signatures and the terms of the LOIs, as well as hear firsthand their intentions to invest in the firm. Of course, an LOI is generally not a binding contract between the angel investor, the entrepreneur and his or her firm. If the bridge loan is made and the angels do not come through with their proposed investments, the bridge lender cannot recoup payment on the loan from the angels based on the LOIs. However, the relative strength of the LOIs can serve as a solid basis for securing a bridge loan, especially if the lender is also one of the angels who is willing to cover the entire funding amount for a short-term period, and then remain an equity investor on his or her portion of that after the others invest and the entrepreneur repays the bridge loan. David McClymont is Executive Vice President of International Capital Alliance Inc, which is a Southeast Florida based company assisting businesses nationwide as well as internationally with creative alternatives to "old school" business financing. Our solutions include business financing to drive growth, improve cash flow, restructure, consolidate debt and provide working capital. Commercial loans can also provide business financing for acquisition & buyout. For questions or additional information, please do not hesitate to contact David McClymont at 888-525-7082 ext. 2 or e-mail at dmcclymont@icafunding.com |
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