Short-Term Financing Challenge:
A $45 million manufacturer of consumer products had a huge cash flow challenge. The Company's business is so seasonal that 80% of its sales are shipped during a four month period. Prior to the selling season they typically rely on inventory advances available on their revolving line of credit. The problem was that the previous year they had a net loss of $2.4 million which significantly affected their working capital and ability to pay-down vendors from the prior season. The inventory on hand provided them with enough availability to borrow more on their line of credit, but they had reached the maximum on their credit facility and the lender did not want to increase the amount of the total credit facility, even on a temporary basis. With no source of additional working capital and the selling season weeks away, the Company needed to fund payroll and overhead expenses for a number of weeks. The Company and the existing lender were not on good terms and the lender refused to assist the Company and the owner of the Company had few liquid assets.
Short-Term Financing Solution:
The Company was introduced to Asset Enhancement Solutions, LLC "AES" by one of the Principal's trusted advisors. After reviewing the Company's financial situation, AES presented the Company with a few options for Bridge Loans from which to choose from. AES was able to arrange a sizable real estate loan giving the Bridge Lender a second position in certain real estate assets. Since time was of the essence, the Company did not want to take a risk that unknown issues regarding the real estate could arise and the Company instead chose to go with a $1,250,000 term loan that could be closed within 10 business days. This term loan provided the Company with the working capital needed to fund payroll and overhead expenses prior to the start of the selling season.
Long-Term Financing Challenge:
Although the Company projected a sizable profit in 2014 after incurring a $2.4 million loss in 2013, the existing lender would not restructure or increase the size of the existing $13.5 million credit facility. In fact the lender became less flexible, retained an attorney to exercise its rights under the existing credit agreement and even hired a third party to conduct a physical inventory examination and valuation, all at the Company's expense. The relationship between the Company and its lender continued to deteriorate.
As Asset Enhancement Solutions, LLC was successful in providing a creative solution to the Company's seasonal financing challenge, the Company retained AES to refinance its existing credit facility of $13.5 million.
As AES became more involved with the Company, it identified the following conditions that made this a very challenging situation:
- Deficit Net Worth of $3 million
- Break-Even or Losses in the last 3 of 5 years
- Concentration with one customer of 90% of sales
- $4 million of accounts payable aged over 120 days
- Extremely seasonal business with 80% of sales occurring in a four month period
- Significant reliance on inventory advances for 12 months a year
- Inventory that has the potential to spoil if not maintained properly.
Due to the large loss in 2013, deficit net worth and industry, many lenders were not interested in the transaction. Most wanted to wait until early 2015 to see the Company's 2014 audited financial statements. However, the Company could not operate efficiently with the constraints from its existing lender and needed a more flexible lender as soon as possible.
Prior to AES getting retained, the Company terminated its CFO and a few weeks later, the Controller resigned to take another position. AES identified a lender with interest in the transaction but they required sophisticated projections to determine the best way to structure the transaction. As time was of the essence, AES stepped in and prepared monthly projections for the remainder of 2014, 2015 and 2016. AES worked closely with the lender's underwriter on various potential scenarios so that the credit facility could be structured the best way for both parties.
Creative Financing Solution:
The Company's existing Credit Facility was for $13,500,000. AES was successful in arranging a facility for $19,500,000, providing the Company with an additional $6,000,000 in working capital. The credit facility also provided the Company with seasonal Over Advances of up to $2,000,000 if funds were required in excess of what the actual collateral would support on a monthly Borrowing Base.
The interest rate on this credit facility was Libor plus 3.1% or 3.4%.
This credit facility provided the Company with the necessary capital it needed to both turnaround and grow the business.
Neil Seiden, 516-767-0100
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