Raising Capital

Helping your business get funded

Raising Capital Introduction

Westrock Capital Corp. helps businesses obtain loans and/or equity to finance working capital, sales growth, or acquisitions. Westrock Capital also helps businesses restructure debt or find new lenders as well as helps buyers obtain acquisition financing.

Loan Side:

On the loan side, we work closely with a large variety of commercial banks, asset based lenders, specialty finance companies, life insurance companies, and junior lenders such as subordinated debt providers and mezzanine lenders.

Equity Side:

On the equity side, we work with venture funds, private equity funds, corporate strategic investors, and other sources of institutional capital.

With a broad network of capital providers covering the full spectrum of debt and equity sources, we are able to help many companies acquire the financing they need.

Westrock Capital Guidance:

The complexity and variety of ways to finance a business are so numerous today that business owners are challenged to figure out the best way to finance their businesses. Some ways are clearly better than others, but how do you know what’s best for you? Then where do you go to get it? Let Westrock Capital Corp. help.

Debt Placement

Business owners usually have several options when financing a business and some options will be better than others. Loans are an excellent solution when you have cash flow to support them, but not good when cash is tight. Loans rely on tax deductible interest payments, and are almost always a cheaper cost of capital than equity. They can also be self-liquidating either through regular payments of principal and interest or by applying cash collections to the loan balance. Loans are not a good solution when cash is so tight that you have trouble making the payments. They’re also not good when your leverage is so high that all your capital is being used to pay the loans instead of operating the company.

Westrock Capital helps business owners identify and locate the best loans for their businesses. We maintain regular contact with a very large network of lenders of all kinds, and stay abreast of current trends in interest rates, fees, loan structures, and loan appetite. Because we work closely with many lenders, we know which lenders are good ones, which ones are offering competitive rates and terms, and which ones are most appropriate for a particular company.

Other Sources of Equity Capital

Corporate strategic investors, individual buyers, and specialized investment groups can often be a good source of equity capital for companies, when a company does not meet the criteria of a venture or buyout fund. Corporations are always looking for new product lines, new markets, new customers, and sometimes new managers. They often invest with the idea of buying the company at a later date, and in the meantime, their involvement will usually lead to greater sales and greater value for your company. Individuals are often another good source of capital as they are looking to buy companies in which the management team remains in place and with new capital, grows the business. Occasionally specialized investment groups can be a good source of capital when there is some kind of special situation such as an expansion to a foreign country, a turn around situation, or bankruptcy.

Equity Placement

For a variety of reasons, business owners occasionally need to raise equity. Reasons include financing an acquisition of a company, financing a new product line, buying out a partner, increasing working capital, shoring up the balance sheet, and reducing leverage.

Raising equity capital can be very difficult, but not impossible. With over 1,050 venture firms and over 1,200 buyout firms looking to back dynamic growth companies, equity is becoming increasingly available to smaller middle market companies. Generally rapidly growing companies with lots of upside have the best chance of raising equity capital, although special situations or profitable companies in fragmented industries may also be attractive.

Acquisition Financing

In addition to helping companies obtain financing for their businesses, Westrock Capital also helps companies obtain financing to acquire companies. The process for obtaining acquisition loans is similar to obtaining other types of loans, except it is often expedited to meet the deadlines of a letter of intent or purchase agreement.

Loan Analysis and Structuring

When you hire Westrock Capital to help you obtain a loan, we will ask you to provide us with key financial documents about your business. This information will include historical financial statements, monthly statements for the current year, and the current year’s budget. Using sophisticated financial analysis programs, we will assess your company’s financial performance and analyze different loan structures to see which ones make the most sense for you and your company. We will also examine how similar companies structure their balance sheets as well as contact select lenders to test the market.

Descriptive Financing Memorandum

Once we determine an appropriate financial structure for your company, we will then complete a Financing memorandum. Financing memorandums describe key aspects of the company as well as provide an extensive analysis of the company’s historical and projected financial performance. Financing memorandums help lenders understand your company’s business, and help them analyze the company’s ability to repay the loan. Depending on the complexity and size of loan, the financing memorandum may be fairly simple or it may be complex. For example, subordinated debt lenders usually require detailed memorandums, because they need to assess the company’s ability to repay the loan as well as the company’s ability to compete and grow the business.

After completing the Financing memorandum, we then contact select lenders and discuss the company and loan opportunity. We will send some of the lenders copies of the Financing memorandum and follow up several days later. For lenders that express a strong interest in the company, we will arrange for them to meet and tour the company. These meetings will give the lenders a chance to learn more about the business, assess the management team, and validate their assessment of the company’s ability to repay the loan. After the meetings, the lenders will follow up with Westrock Capital and either provide a loan proposal or their reasons for declining the loan request. Oftentimes Westrock Capital will meet with the lenders in order to clarify or revise the terms.

Raising Funds

Venture Funds:

Venture firms provide growth capital to new or young companies in exchange for a minority equity position in the company. Most venture firms specialize in certain industries including telecommunications, software, biotechnology, healthcare devices, and the Internet. Because of their specialization and capital, venture firms help new or young companies grow rapidly. In fact, they will only back companies that can achieve very high growth in sales and earnings.

Buyout Funds:

Buyout firms typically buy controlling interest in older companies operating in rapidly growing or fragmented industries. Generally they buy a company to serve as a platform for acquiring other companies in the same or complimentary industries. Buyout firms target certain industries, but they usually have a broader focus than venture firms and target more industries. Both venture firms and buyout groups invest capital to help companies accelerate sales, add new products, expand operations, or acquire other companies. Both groups will require board representation and the ability to replace management in the event that the company does not perform as expected.

Contacting Lenders

After completing the Financing memorandum, we then contact select lenders and discuss the company and loan opportunity. We will send some of the lenders copies of the Financing memorandum and follow up several days later. For lenders that express a strong interest in the company, we will arrange for them to meet and tour the company. These meetings will give the lenders a chance to learn more about the business, assess the management team, and validate their assessment of the company’s ability to repay the loan. After the meetings, the lenders will follow up with Westrock Capital and either provide a loan proposal or their reasons for declining the loan request. Oftentimes Westrock Capital will meet with the lenders in order to clarify or revise the terms.

Negotiate Terms with Lenders

After receiving feedback from the lenders, Westrock Capital will meet with the company to review the offers, discuss possible changes, and select a lender. We will immediately contact that lender, request any changes, and subject to those changes, inform the lender that the company is ready to accept its offer. Usually the lender will follow up with a revised term sheet or commitment letter, and if acceptable, the company will sign and return that letter with a deposit for the fee. The lender will then initiate due diligence, which may include a collateral audit, appraisal, and additional visits to the company. The lender will also provide the company with a draft of the loan documents. Most lenders use standard forms, but they may include financial covenants that require close scrutiny.

Due Diligence & Closing

Westrock Capital will work closely with both the company and the lender to facilitate loan closing. We often get actively involved in due diligence as well as in helping the company negotiate the loan documents, particularly the financial covenants. Fortunately everyone is motivated to close the loan and the large majority of loans that reach due diligence will close and fund.

Loan Types

Bank Loans

Bank Loans are the most familiar form of loan and usually have the lowest interest rates. The most common loans are term loans and revolving lines of credit. Lines of credit typically have a one year maturity while term loans last for 1 to 7 years. Many banks have a preference for loans secured by real estate or machinery and equipment. For most smaller mid-market companies, banks will require personal guaranties of the owners and senior, blanket liens on all assets of the company. Banks prefer floating interest rates, but fixed interest rates are also available. Fees are smaller than what non-bank lenders charge. Most banks describe themselves as cash flow lenders, but that can be a little misleading as they typically limit the loan amount to the adjusted value of the collateral. These adjustments might include a 15% to 20% discount on real estate, a 25% discount on equipment, a 15% to 25% discount on accounts receivable, and a 40% to 60% discount on inventory excluding work in process. Loans may also include other terms such as an interest only period, fixed principal payments, and earnings recapture.

Asset Based Loans

Asset Based Loans generally place primary reliance on the collateral. These loans may often utilize a higher advance rate than a traditional bank loan which means you can often borrow more money using the same assets. Because asset based lenders focus on the collateral, they may be less concerned about the level of your current profitability or your amount of leverage. Some banks provide asset based loans, but generally non-bank lenders provide more aggressive terms to smaller middle market companies. Asset based loans may consist of revolving lines of credit or term loans secured by machinery and equipment. Unlike banks, they usually do not like real estate. Interest rates and fees are higher than bank loans, and interest rates are floating. Another potential negative is that because they are more focused on collateral, asset based lenders generally require more frequent and detailed reporting than other lenders.

Specialty Finance Loans

Specialty Finance Loans are loans that are tailored to specific needs or collateral and may be offered by banks, asset based lenders, or specialized lenders. These loans may include factoring, purchase order financing, trade finance, bankruptcy loans, or even more specialized loans such as the financing of taxi cab medallions. In general, these loans provide financing that would, otherwise, be unavailable. They usually entail higher advance rates, and higher interest rates and fees. Factoring is a form of financing in which you sell your receivables to the lender on either a recourse or non-recourse basis. Recourse essentially means that the business guaranties the payment of an account. Non-recourse means the lender assumes the risk of collection. Factorers (or Factoring lenders) can often advance a higher percentage of the account receivable than other lenders; however, it is more expensive and not always suitable. Certain industries such as textiles and furniture rely extensively on factoring. Purchase order financing is increasingly difficult to obtain and expensive, but it can enable you to secure financing for a large order. Trade finance can involve documentary letters of credit, foreign exchange, and loans that are guaranteed by the Export Import bank. This financing is usually provided by specialized areas of a bank. Bankruptcy loans come in many forms and from a variety of bank and non-bank sources.

Mezzanine Loans

Mezzanine or Subordinated Debt Loans are loans that rely on the cash flow of the company to repay the loan. These loans are usually unsecured or secured by a junior lien position behind the primary lender. These loans are an excellent way to finance a company when there is plenty of cash flow, but not enough collateral. These loans are usually available in amounts of $1.5 million or more for companies with more than $10 million in revenues. Interest rates are usually fixed, and some lenders require the company to issue them a small amount of equity in addition to paying interest.

Acquisition Loans

Acquisition Loans are a term loan and line of credit used to acquire a company. The term loan is secured by the long term assets of the company, and part of the loan amount may exceed the value of the underlying collateral. This over-advance is usually repaid with excess earnings.

Life Insurance Loans

Life Insurance Loans are usually associated with real estate loans or large mezzanine loans. Real estate loans from life insurance companies are very attractive as they are usually fully amortizing over 15 to 20 years with no balloon or guaranties. In addition, the interest rate is fixed. These loans are typically not available for owner occupied property or in amounts of less than $1 million. They are ideal for investment grade commercial properties

Financial Restructuring/Recapitalization

From time to time, businesses need to restructure their loans in order to get lower payments, better interest rates, a different type of loan, or even a different lender. Other times, businesses need to replace debt with equity because either the bank requires it or because the business is having trouble making the loan payments. Businesses change over time, and what made sense a year or two ago may not make sense today.

Regardless of your reasons for restructuring your loan(s), Westrock Capital can help. We maintain regular contact with a very large network of lenders, which specialize in all kinds of loans, and we stay abreast of current trends in interest rates, fees, advance rates, loan structures, guaranties, etc. For example, we recently helped a company consolidate several loans and leases into a new loan with payments that were half of the old payments. We also helped several other companies obtain loans after their current lenders said no. One of these companies had a backlog that exceeded the previous year’s revenues, but their lender would not give them the loans to fund their growth. Another company had a complicated legal structure, which made them appear over leveraged when they weren't. Westrock Capital has the expertise and will spend the time necessary to understand and properly present each company's unique structure and needs.

Reasons for Restructuring

There are many reasons to consider a restructuring such as:

Replacing short term leases with loans that have a longer amortization schedule. This change will reduce the monthly payments and perhaps reduce the interest rate. It may also allow the company to begin depreciating the equipment rather than simply make lease payments.

Converting the frozen balance on a line of credit into a term loan that is paid out over several years. Terming out the balance will increase working capital, and it may free up the line of credit to support operations. It will also help you repay a loan that has been on your books for too long.

Obtaining a new bank or asset based lender in order to get a higher advance rate on collateral. Perhaps your current bank will only give you an advance rate of 75% of accounts receivable that are less than 60 days old or only 40% on finished goods. Perhaps it will only give a 75% advance rate on your property and equipment. A new lender might offer you higher advance rates.

Obtaining a new bank or asset based lender to get better terms. Perhaps your current lender limits the amount that it lends against certain customers or disqualifies certain accounts receivable as ineligible. Perhaps it limits the size of your line of credit even though you have the collateral to support a larger loan. Again a new lender might be able to improve your existing terms.

Consolidating multiple loans into one loan that has smaller fixed payments.

Replacing your current lender, because it refuses to lend you more money even though you have the capacity to borrow more funds.