A publicly held company in the technology sector was having many financial challenges. The Company reported a loss in excess of $3 million for each of the past three years and projected a loss for the current year.
The Company reached the maximum it could borrow on its existing collateral base but desperately needed additional liquidity to execute its turnaround plan. The Company had inventory of $4 million and accounts receivable from foreign customers of $1 million, but the current lender was very restrictive, providing only small borrowings against foreign receivables and inventory. Loan advances against these asset classes was capped by onerous formulas. This lender also had a Minimum Tangible Net Worth covenant that the Company had hanging over its head. The Company’s business is such that it needs to be continually investing in new research and development. Thus, this covenant is very restrictive due to the nature of the Company’s business.
The existing lender also had an extremely high effective interest rate due to the Company’s poor financial performance.
In desperate need of additional working capital, the Company asked its existing lender to modify the current loan agreement and advance additional funds against foreign receivables and inventory. The current lender turned down the Company’s request. The Company then contacted a number of lenders on its own but was unable to identify better opportunities.
Recognizing its various financial challenges the Company’s’ CFO contacted Asset Enhancement Solutions, LLC (“AES”) for assistance.
Asset Enhancement Solutions, LLC (“AES”) reviewed the appropriate information regarding the Company and its industry. In its analysis, AES determined that the actual “effective” interest rate the Company was paying was 15.75%, not the 12.5% that it thought it was paying. The Company was outraged by this news.
AES was successful in identifying an alternative lender and structuring a line of credit that included significantly higher advance rates on inventory and foreign receivables. These higher advance rates provided the Company with additional borrowing availability of $500,000 based on its existing collateral and provided the Company with the ability to increase its borrowings as its turnaround continued.
AES was able to reduce the Company’s effective interest rate from 15.75% to 10%, a decrease of 36.5%. This interest rate decrease of 5.75% per annum will save the Company approximately $150,000 per year.
AES was also able to eliminate the Tangible Net Worth covenant which allows Company to focus on bringing new products to market without worrying about violating covenants.
Neil Seiden, 516-767-0100
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