Working Capital

Cash flow velocity calculations

Cash flow is an important consideration for any business. It measures the amount of money that flows into and out of a business, without considering the value of the business or its level of debt. Cash flow velocity refers to the speed with which a business takes in money. Bankers, accountants and business owners use a number of cash flow calculations to learn about the company’s financial health.

Our financing options

Asset Based Lending

Asset based lending (ABL) is an excellent working capital solution that can help businesses with cash-flow needs that cannot be addressed through traditional bank lending. Whether it’s having greater leverage, less restrictive covenants, or enhanced flexibility; asset based financing facilities can be suited to meet the needs of various industries. Credit is provided based on your company’s eligible:

  • Accounts Receivable
  • Inventory
  • Machinery & Equipment
  • Commercial Real Estate

In contrast to other methods of financing, asset based lending can provide a cost effective way of obtaining working capital. Through the use of (ABL), companies are able to avoid relinquishing equity in their business, while achieving greater strength to grow and recapitalize. Some of the benefits are: expansion, supplier discounts, shareholder buyout and funding payroll.

Receivables (Factoring)

Maintaining steady cash flow is one of the most vital aspects of any business. Accounts receivable factoring is the financing of a company’s receivables that accelerates payments for merchandise that has been sold to its customers that have (30, 60, 90) day terms. Factoring can provide an average advance rate of (60% to 85%) of the invoice purchase price. In some cases depending upon client risk it may be as much as (90%). Types of factoring available:
  • Recourse Factoring – The client bears responsibility to collect any invoice. Should a buyer fail to pay, the client must collect the payment. Note: (Better Factoring Rates) Complete liability to you with the associated expense of recovery.

  • Non-Recourse Factoring – The factor handles the collections process, and bears the liability should one of your client’s fail to pay an invoice. Note: (Higher Factoring Rates) No liability with less responsibility.

Purchase Order Financing

Purchase order financing (PO) company usually advances upwards of (70%) of a confirmed purchase to your suppliers. They will then pay your supplier or open a letter of credit. Once your business delivers the approved goods they will invoice your customer.

After collecting the payment from your customer, the purchase order finance company will remit back to you the difference between the value of the order, and the amount paid to the supplier, minus any fees or monies used in the transaction once the payment has been received.

Important note: Most factoring companies are uncomfortable taking on a client in need of both receivables finance, and purchase order finance. In such situations, they will usually team-up with a reputable PO company to complete the deal.

Real Estate Lending

Commercial Real Estate Lending, unlike traditional home mortgages, can be used in a variety of ways, but more commonly property acquisition, renovations, leveraging equity for business expansion and inventory updates.

As a result of these types of transactions, business borrowers can expect banks and private lenders to have a completely different attitude when considering a request. The usual suspects in commercial real estate lending are office buildings, shopping centers, industrial warehouses or apartment complexes.

After the 2008 market crash, financial institutions have become more stringent with whom they conduct commercial lending. This has brought dramatic changes in compliance requirements, with a direct effect on deal perspective, risk-appetite, and credit underwriting standards. Lenders use a general rule of thumb called the (5) C’s of creditCharacter, Capacity, Capital, collateral and conditions. These categories are used to assess a potential borrower’s ability to support a loan and its conditions.

As a result of the subprime housing bubble during 2007 and 2009 respectively, banks were dishing out residential mortgages to anyone that could prove they had a job with decent credit. (ARM) financing was the white elephant in the room, and people were buying houses they could never afford on a $60,000 a year salary with monthly interest- only payments.

The average middle-class wage earner was living large until their 3 to 5 year (ARM) ballooned. That’s when the cradle broke, unleashing a tsunami of foreclosures and short sales that left an indelible mark on the real estate market and peoples’ lives years later.

The housing bubble that preceded the crisis was financed with mortgage-backed securities (MBS) and collateralized debt obligations (CDO), which initially offered higher interest rates (i.e., better returns) than government securities, along with attractive risk ratings from rating agencies. While elements of the crisis became more visible during 2007, several major financial institutions collapsed in September 2008, causing significant disruption in the flow of credit to businesses and consumers, which produced a substantial global recession.

Since the financial crisis, lenders have started to concentrate on a new metric, debt yield, to complement the debt service coverage ratio. Debt yield is defined as the net operating income (NOI) of a property divided by the amount of the mortgage.

Commercial mortgages are structured to meet the needs of the borrower and the lender. Key terms include the loan amount (sometimes referred to as “loan proceeds”), interest rate, term (sometimes referred to as the “maturity”), amortization schedule, and prepayment flexibility.

Generally, commercial mortgages are subject to extensive underwriting and due diligence prior to closing. The lender’s underwriting process may include a financial review of the property and the property owner (or “sponsor”), as well as performing a third-party appraisal and review of the property.

Debt service coverage ratios vary in each case and ideally range between (1.2 to 1.4). This formula is the net cash flow the property produces. A (DSCR) of less than (1.1) is a red flag that signals poor cash flow. (DSCR) of less than (1) indicates only enough income to cover 95% of annual debt payments. This means the borrower will have to use personal funds to keep things operating. Unless the borrower has considerable personal income, lenders tend to shy away from poor cash flow deals.

Industry types

Working capital can help with making payroll, updating inventory or covering unexpected maintenance costs, which can make the difference between growth and stagnation. For example, companies with seasonal business such as Landscapers, Pool Maintenance, HVAC, Wholesalers, and Retailers typically see sales increase or decrease throughout the year. Traditional bank lending requirements are systemically about the same. Sometimes companies don’t meet specific criteria to secure a loan because of the established timeline in business, poor credit or even industry type. These are simply a few elements that could influence a bank’s approval or decline process.

Your company’s ability to meet its trade and short term debt obligations is very important. For businesses that provide Net-Terms to their customers’, cross-aging of receivables is significant. Banks and private lenders use internal formulas to determine the classification of debtors whose outstanding debts exceed (90) days, and represent more than (50%) of a company’s own debts. Depending on the risk factor appetite of the lender, they may choose to back out portions of the receivables or completely reject them. It’s crucial for your business to evaluate company’s receivables carefully because this not only affects your profitability, but the process is used by credit underwriters to determine how your company conducts business and the likelihood of success or failure of your ability to pay back any outstanding debt owed.

Understanding Lenders

Lenders look at loan to value (LTV) loan to value. This formula expresses the amount of a mortgage as a percentage of the total appraised value. For instance, if a borrower wants $8,000,000 to purchase an office worth $12,000,000, the LTV ratio would be $8,000,000/$12,000,000 or 66%. Commercial mortgage LTV’s typically range from 55% and 70%, whereas residential mortgages can scale 80% or above. Your financier will also evaluate the rent per square foot, cost per square foot and replacement cost per square foot. Depending on the location and its use, formulas can vary widely. Moreover, market conditions, have a direct effect as does the associated rent roll and occupancy ratio.

Criteria & Situations

When clients’ are asked to leave an institutional lending relationship for various reasons, or perhaps the business is too new for bank financing, Stratacus Business Capital can provide suitable alternative programs that can help companies and commercial property investors achieve success in non-traditional and challenging situations.

Required Financing Criteria:
 Minimum Annual Sales Revenue – $2MM or higher
 Senior Loan Size: $250K to $25M
 Subordinate/Junior Loan Size: $300K to $10M
 Company EBITDA: $500K Minimum for Subordinate/Junior Loans
 Company Type: Private Companies or Publicly Traded

Growth/Hyper-Growth Capital
 Working Capital
 CAPEX
 Bridge Loans
 Distressed/Turn-around

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