Debt Financing in its simplest terms is a business owner getting a loan, going into debt and having to make principal and interest payments until the loan is repaid. The good news is that the owner still retains complete ownership of the business; the bad news is that sometimes the debt service could be staggering or the loan payment’s conditions could be operational punitive or never ending. NWXFinancialGroup advises on and arranges debt capital raising for mergers and acquisitions, business growth and expansion, restructuring and turnaround financing, refinancing of existing debt, recapitalization, balance sheet deleveraging, real estate, shareholder liquidity, and generational transfers. We assist in secured and unsecured financings, and hybrid capital. Our objective is to ensure our clients that the use of debt as a means of financing, is employed in the most strategic, cost-effective and efficient method allowing for the least intrusion of debt service and negative financial covenants on day-to-day operations. The following are some descriptions of the debt financing vehicles we employ.
Secured Debt Financings
Senior Secured Loans. A debt financing obligation issued by a bank or similar financial institution to a company that hold’s legal claim to the borrower’s assets above all other debt obligations. With universally the lowest rates and most attractive loan packages, senior secured loans are also the most difficult traditional debt financing vehicle to obtain. Strict financial requirements have to be met, and the satisfactory on-going financial condition of the business must be maintained. NWX can assist borrowers obtain these highly valued loan agreements in three ways.
First, through our global sourcing and network of banking institutions. Sometimes the most competitive loan is through a large international, national or foreign bank, or it may be a through a smaller regional or even local bank. Having access to the global debt financing capital markets as well as constant contact with local sources is necessary for sourcing the most cost-effective vehicle. Second, arrangement of the loan transaction; its size and amount, duration and financial criteria, and points and rates are interchangeable factors that can be negotiated. With such fierce competition between lenders it is of the up-most importance that a borrower’s debt service requirement represents the most attractive financial package obtainable. Lastly, contingent upon obtaining these loans, a company’s credit worthiness and financial condition are more paramount than ever before. This is where NWX can utilize the synergistic services of the entire firm to help borrowers achieve the acceptable financial criteria needed to secure these loans.
Term Loans. A loan from a bank or similar financial institution for a specific amount that has a specified repayment period with a fixed or floating interest rate. Often used for equipment loans for businesses they normally mature between one and ten years. Real estate loans are also a form of a term loan. While standard loans in the business world, global financial lending and banking competition has created numerous variations with fixed or adjustable rates, depending upon the credit worthiness and financial strength of the borrower. With so many venues to choose, NWX is aptly positioned to arrange and negotiate the best possible terms.
Asset-Based Loans. A loan from a bank or similar financial institution that specializes in asset-based loans. They are always secured by current assets such as inventory and accounts receivable, though other assets such as equipment and/or other balance sheet assets may be also used as collateral. Its term can be long or short and may have to be renewed at stated intervals. While there is more flexibility on loan structure and less focus on continuing evidence of maintaining earnings and other financial covenants, current asset levels must be line with borrowing allowances. NWX cautions borrowers that a bank can tighten or loosen its lending requirements by adjusting the borrowing base depending upon the financial condition of the borrower. The tightening of a borrowing base, for example, can extremely curtail a business from performing its daily expense related activities. However, the knowledge of this in executing loan documents allows us to shelter our clients from negative covenants. NWX has kept a close association with several asset-based lending institutions as well as with many relationship bankers over the years, many of which market their services to us on a continual basis. Usually, a phone call away we can provide our distressed clients immediate credibility with ultra-fast and positive results. Asset-based loans can also be packaged as working capital facilities.
Working Capital Facilities. A bank line of creditintended to allow a company to borrow against an established credit limit to meet short-term working capital needs such as purchasing inventory. Particularly appropriate when a business’s cash flow fluctuates within a month or season, causing short-term working capital needs. Terms are usually for two or three years and must be renewed by supplying and maintaining certain earnings and other financial covenants. NWX believes that these short term facilities should not viewed by the borrower as “life-support” financial vehicles as the lender can cease the line of credit contractually at the end of the term, causing the borrower to have to obtain another line of credit quickly and most likely at higher borrowing rates.
First and Second Lien Loans. A debt that is subordinate to the rights of more senior debt, issued against the same collateral or portions of the same collateral as the senior debt, with typically higher interest rates. When a federal or state government agency is the creditor, they typically file first or second liens without permission of the borrower. In most other situations, the creditor, with certain exceptions such as with property associations, these subordinate liens must be consented first by the borrower.
Bank Leasing. Bank finance leases on equipment become part of the borrower’s capital structure, having the same effect as a loan on the balance sheet though does not count as an equipment asset. Typically a low cost alternative to equipment loans, when the residual value of the equipment is fairly predictable. NWX recommends that conducting a cost-benefit analysis on the pros-and-cons of equipment lease financing versus equipment purchasing is necessary for equipment intensive businesses, such as companies with large yard, traffic and warehouse operations.
Cash-Flow Based Financing. A debtfinancing tool that was created for companies that have a relatively small asset base though generates significant cash flows. Typically borrowers are high margin businesses with significant intellectual capital or property, such as service providers. Borrowing capacity is calculated upon a multiple of the agreed upon cash-flows, and the lender usually takes a security interest in all company assets. NWX cautions on the necessity of pursuing cash-flow based financing in lieu of unsecured financing vehicles, unless cash-flow has unpredictable time-tables or is ill-regular in levels of activity and collectability, such as when dealing with government contracts.
Factoring. A financial transaction where a business sells its collectable accounts receivable invoices to a third party at a steep discount. The third party (e.g., the factor) provides the seller with cash in advance of the purchase price of the invoiced accounts to service basic working capital needs, such as buying inventory or meeting payroll. Since, factoring costs are often prohibitively high, this vehicle is normally intended as a short-term or bridge financing solution and is only appropriate when less expensive financing is not available. Typically used by smaller companies with no current working lines of credit or asset based facilities and/or companies that are in a distressed financial condition. While, the firm knows and has worked with several firms that conduct factoring over the years, NWX does not recommend this financing source unless strong management and expense controls are in place.
Government Backed Financing. Small Business Administration (SBA) loans and Industrial Revenue Bonds assist small businesses financing investment projects, provides loan guarantees to small businesses unable to secure financing through normal banking channels with reasonable rates, or provides working capital loan programs for small businesses. Security is based upon personal guarantees of the principals and upon pledged business assets if required. NWX can assist small business clients in navigating through the various government programs available, helping to the select the appropriate vehicle as a stand-alone government backed loan or in combination with other secured and unsecured financing arrangements.
Unsecured Debt Financings
Senior Subordinated and Subordinated Notes. A debt that is subordinate to more senior debt with no legal claims to security or collateral. In case of bankruptcy they are not paid until senior lenders are paid in full. With higher interest rates these notes are prioritized for payment in bankruptcy hearings. Often vendor financing arrangements that fail ending up in collections, see below, are converted into subordinated notes. NWX’s experience is that in distressed situations that do end up in court, unsecured creditors, are often left with pennies on the dollar. Therefore, it is to the advantage of both unsecured lenders and borrowers in distressed situations to work together to avoid a court ordered bankruptcy, either Chapter 11 reorganization or Chapter 7 liquidation. NWX recommends a out-of-court restructuring to turnaround the borrower’s company, so that both parties can reduce their losses.
Debt Offerings and High-Yield Notes. Debt offerings normally have a short term maturity of five years or less. A legal debt instrument they are not generally considered a loan because of their high interest yielding investment opportunities. A promissory note can often fall under this category. Debt offerings have a principal amount, a coupon payment, a stated interest rate and a maturity date. Some may have a warrant option. Periodically throughout the life of the debt offering, the borrower will make an interest payment to the investor, and some notes may be sold in the market at a premium.
Vendor Financing. Either the lending of money from a supplier to a customer to purchase products or extending the terms of payment and/or with discounts in order for the customer to continue to purchase products. Both ways are risky for the vendor though in turnaround situations may be necessary for over-extended vendor customer credit relationships. On the other hand, vendor financing poses serious complications to borrowers especially those with few alternative vendor sources. Complications arise when the vendor’s account receivables of the borrower begin to age past acceptable limits, causing the vendor to re-access the continuation of the monetary or product financing. Normally, a retraction of current money or materials provided is forthcoming, which can temporarily halt a borrower’s operation. This dependency of the borrower to the vendor is in most instances a non-negotiable reality in vendor financing.
Many large manufactures and buying groups of durable goods have used this financing technique to lure suppliers and retailers into purchasing excessive amounts of inventory, thereby creating a catch-22 for both parties. In this case, vendor financed sales to their customers can likely exceed borrowers demand for the materials thus building up excessive inventories as well as reducing the borrower’s cash flow, which will slow or stop the financing program altogether. NWX has the track record to work through these complicated vendor borrower relationships by arranging more acceptable financing vehicles for the borrower as well as realigning the purchasing relationships between the vendor and their customer. This may even include the return of excessive inventory at full cost to the vendor thus reducing the borrower’s debt.