Financing Your Business: When and How to Use Debt and Equity

Presented by: Frank Coker, CMC, MBA

CompTIA Faculty

CEO, CoreConnex, Inc.

Why does it matter?

• Debt and equity management are essential to growing a business

• It is too late to get cash when you’re desperate

• It’s far less expensive to do it right (plan ahead)

Why does it matter?

Your money + their money = lift-off

(Then you can play with the big boys)

Agenda: Financing your Business

• Why does it matter?

• Flavors of debt and equity

• Ratios that matter

• Relationships that matter

• Strategy / timing

• Best practices

• Dashboarding

• CompTIA resources

How Does it Work?

How Does it Work?

• Credit cards• LOC (line of

credit)• Vendor credit• Short term loans

• Credit cards• LOC (line of

credit)• Vendor credit• Short term loans

• Mortgage• Leases• Long term loans• Convertible debt

• Mortgage• Leases• Long term loans• Convertible debt

• Founders stock• Common stock• Preferred stock• ESOP / SOP• Warrants

• Founders stock• Common stock• Preferred stock• ESOP / SOP• Warrants

How Does it Work?

• Credit cards• LOC (line of

credit)• Vendor credit• Short term loans

• Credit cards• LOC (line of

credit)• Vendor credit• Short term loans

• Mortgage• Leases• Long term loans• Convertible debt

• Mortgage• Leases• Long term loans• Convertible debt

• Founders stock• Common stock• Preferred stock• ESOP / SOP• Warrants

• Founders stock• Common stock• Preferred stock• ESOP / SOP• Warrants

• Paid off in one year• Cover fluctuations• Align cost/ revenue

• Paid off in one year• Cover fluctuations• Align cost/ revenue

• Paid over years• Investment in

future revenues• Align cost/ revenue

• Paid over years• Investment in

future revenues• Align cost/ revenue

• Paid at exit (or drain early)

• Accum earnings• Invest in future

value

• Paid at exit (or drain early)

• Accum earnings• Invest in future

value

The Cost of Money

Source Interest Principle Cost

Credit Cards Highest Flexible Highest

Line of Credit ModerateFlexible(should pay down often)

Moderate

Short Term Loan

Low-Moderate High Moderate

Long Term Loan Low Low Moderate

(low annual)

Stock n/a n/aDilution - winner takes all!

What Does the Banker Want?

• Profitable and thriving customers• Long-term relationship• Minimum risk – high certainty• Mutual trust – up-front honesty• Visibility• Opportunity to help solve problems early• Current (not dated) information• Success stories; referrals

The Biggest Problems

• Surprises – with no opportunity for a fix• Shut down on communications• Personal banker looses borrower to the “troubled

assets” department when surprises occur(no fun for anyone)

• Customer borrows money for the wrong purpose(e.g. LOC increase for a capital investment)

Special Cases

Solutions:•Personal guarantee from owner•Personal assets as collateral•Higher cost loans•“Alternative Lending” sources•Third party investor (provides investment and guarantee on loans)

High-risk Situations•Service Company – no long-term assets•Extreme peaks and valleys•Revenues on down trend•Industry that is struggling•Company with history of losses•Company that is highly reliant on a single expert

Key Concepts

• A company with no debt has no leverage• A company with no debt works harder to keep up with

competitors that have appropriate debt levels• A company with excessive debt often cannot grow fast

enough to solve the problem; austerity is often the only way out

• Too much debt will crush a company

OPM - Other People’s Money (pronounced “opium”)

can be addictive

Ratios that Matter

•

Financial Strength Metrics

Working Capital = Current Assets – Current LiabilitiesTarget Rate = 1.5 [average across industries, some industries different]

Target Minimum = (1.5 x Current Liabilities) – Current Liabilities

Example:Current Assets = 100Current Liabilities = 60Working Capital = 40Target Minimum = 30

Healthy Scenarios

• Goal is to get above Target Minimum

• Understanding “health” means tracking trends

Unhealthy Scenarios

• Falling below or being below Target Minimum is fundamentally unhealthy

• Understanding “health” requires trend lines

Relationships that Matter

•

Strategies and Timing

When should you repair your roof?

When is the repair most urgent?

Thinking Ahead

Planned•Normal fluctuations

•Expansion

•Investment

•Acquisition

•Merger

Unplanned•Economic downturn•Competition•Technology shift•Opportunity•Disaster•Health surprise

It takes time to get ready;All scenarios benefit from a strong financial position

What are Your Trends

• Growth• Margins• Working Capital• LOB Performance• ROI• Asset Performance• Staff Contribution

Get an Advisor (Coach)

Recommended role:•Facilitate monthly review process

•Build structure and process

•Keep focus on priority issues and opportunities

•Help solve specific problems

•Support accountability

Corelytics Dashboard

•Trends•Goals•Comparison •Forecasts•Metrics•Contribution

Dive Deep – Dive Quickly

Monthly Process

1. Set GoalsEstablish Plan vs. Actual

2. Track TrendsAdjust to hit goals

3. Align TeamShare to build understanding and commitment

Tips

• Your accounting or goals don’t have to be perfect, start and adjust

• Get help (advisory board, experts)

• Force accountability (peers, associations)

• Manage/borrow cash as one of your top goals

• Get your team involved! (screen shots of dashboard)

• Dashboarding makes it easier

CompTIA Benefit:

Free Financial ReportSee your trends, financial strength and working capital

Free Financial ConsultationCompTIA members get consultation with Financial Expert (each with IT expertise).

How?•Email: support@corelytics.com•Subject: Financial Strength•Text: Your contact information & your current accounting system type

For More Informationhttps://CompTIA.corelytics.com

Questions?

Thanks!

Thank You!

https://comptia.corelytics.com

Contact Frank at – frank@corelytics.com