The ISEEE is a New York 501(c)3 not for profit educational organization that was established to provide current and former stock exchange chairmen and CEO’s from around the world an opportunity to collaborate on matters including issues and challenges facing the various exchanges, discuss best practices, review trends and concerns in the respective countries and economies, and make recommendations that are passed along to relevant regulatory and legislative bodies. According to Schnorf, the ISEEE has not only issued insightful recommendations on matters such as urgent capital market reforms that are needed, but also launched the “Small Business Task Force” which is headed by David Weild, former Vice Chairman of NASDAQ. Both Calvin and Schnorf are members of the Task Force, along with a small group of other ISEEE participants. “Don Calvin once again was the inspiration behind starting the task force, an idea that was immediately embraced by the entire ISEEE membership. David Weild made a compelling presentation to the group that stressed the decline of the small cap IPO market in the U.S., as well as the alarming reduction in the number of small cap listed companies. Don felt that the ISEEE would be the perfect group to tackle this issue and the task force was put in place with Dave agreeing to serve as Chairman. Substantive progress has been made including not only providing specific recommendations to regulatory authorities, but also creating awareness among key U.S. Senators and Representatives about the alarming situation with the small cap market in this country”, Schnorf indicated. The ISEEE website includes the “Orlando Declaration” and a summary of the most recent meeting held in March, 2011 as well as a list and short biographies on the members of the ISEEE.

This March there will be current and former executives from the NYSE, AMEX, NASDAQ, National Stock Exchange, and the Chicago Board Options Exchange from the U.S., as well as the Toronto Exchange from Canada. From South America there will be attendees that have served in executive level exchange and securities capacities from Brazil (Bovespa Exchange) and Peru. From Africa there will be officials that have served on behalf of the Cairo and Alexandria Exchanges in Egypt, as well as the Johannesburg Exchange. From Europe there will be senior exchange officials that have served on behalf of the London Exchange, Istanbul Exchange, Dubai and Abu Dhabi markets, the Zurich Exchange, the Dutch Boerse, the Stockholm Exchange, the German markets, Malta Stock Exchange, the Luxembourg Exchange, Vienna Stock Exchange, the Prague Stock Exchange, and the Borsa Italiana. In regards to Asian exchanges there will be attendees that have served as executives for the Hong Kong Exchange, the Moscow and Kazakhstan markets, and from Malaysia/Kuala Lumpur. In addition, executives that have served the Australia and New Zealand exchanges will also be in attendance. Two Vice Chairmen, Robert Aber (former General Counsel for NASDAQ) and William Foster (former CEO of the New Zealand Exchange and Chief Operating Officer of the Abu Dhabi Securities markets) who is currently an Advisor to the new Cambodian Exchange will also be attending. Special guests will include among others Stanley Sporkin, the legendary Director of Enforcement at the Securities & Exchange Commission and former Federal Judge and General Counsel to the Central Intelligence Agency. Schnorf indicated that since the size of the group has grown to such a significant number of attendees, it is now impossible to schedule dates even a year in advance that will accommodate all members’ schedules that want to attend. For this upcoming conference the former CEO of Eurex and the Berlin Stock Exchange, as well as the former CEO of the European Options Exchange, have conflicts and will not be able to participate, he said.

The ISEEE has chosen SNN to be the official media sponsor for the event. In addition to covering the forum, SNN will also be conducting interviews of many of the ISEEE officials which will be aired on the SNN radio network, and will be writing a lead article for the Microcap Review magazine recapping the conference. Schnorf said, “We are very pleased to have SNN as the media sponsor for this prestigious event. Given Shelly Kraft’s passion for the small cap market, as well as his knowledge of both U.S. and foreign markets and his relationships with thousands of public company executives over the years, we felt SNN was the perfect choice for our event. I know I speak on behalf of all of the ISEEE attendees in expressing our excitement of having SNN serve in this capacity”.

Last year Schnorf arranged for the newly elected Governor of Florida, Rick Scott, to attend the event and meet with the ISEEE participants. Among topics discussed was the prospect of potentially creating an “international financial center” in Florida. “The Governor was extremely interested in not only meeting this highly distinguished group of international financiers, but in also hearing recommendations as to how Florida could benefit from their experience, relationships, and past successes in their respective geographies. In addition, these are all very influential people in their respective countries, so the opportunity to further establish business relationships and strategic partnerships was clearly part of the agenda. Governor Scott, with his successful business background, clearly recognizes that two of the major impediments facing business today are lack of capital access, and excessive government regulation. He is clearly committed to resolving both of these issues on behalf of the State of Florida, and the fact that he changed his schedule on short notice to come from Tallahassee to meet with this group is indicative of his commitment to these initiatives. Small business is where jobs are going to be created in the future, and these are probably the two largest issues facing job growth. Clearly the lack of capital, especially in Florida where in years past in excess of 95% of venture capital invested in Florida came from outside the state, is an urgent issue that has to be addressed”, Schnorf said.

Although the forum is not open to the public, Schnorf has indicated there is an opportunity for a small number of highly relevant firms to attend one or more of the events as a lunch or dinner sponsor, which would include an opportunity to meet the ISEEE attendees and make a brief presentation about their firms. The forum begins with a welcoming dinner on March 25, with technical meetings, a luncheon and dinner on March 26, technical meetings, a luncheon, and a reception (which will include Orlando area senior business and political attendees) on March 27, and technical meetings and a farewell dinner on March 28. The Small Business Task Force will also meet on March 25. On March 26, the keynote dinner speaker will be Professor Melvin Escudero, the former head of the Peru Pension System who will discuss the rapidly growing Andean Stock Exchange. The March 27 luncheon keynote speaker will be Mohamed Abdel Salam, Chairman and CEO of the Egpytian Securities Exchange and Vice Chair of the Arab Stock Exchange. Firms that have an interest in participating can contact Jim Schnorf.

Jim Schnorf, CPA, CMA, MBA is the Founder and President of Wall Street Strategic Capital, Inc. and a number of other entities that arrange non-traditional debt financing including bridge loans, facilitate revenue opportunities with government agencies and large entities, and arrange strategic partners and high profile board members/endorsers for client firms in the U.S. and approximately 20 foreign countries. He is a frequent guest speaker at conferences and symposiums involving debt funders, major pension funds, and private equity firms and most recently presented at the SuperReturn Conference in Boston.

Syndicated with permission from Stock News Now and the Micro-Cap Review.

• Equity
• Debt
• Debt-Equity Hybrids

Each of the three has its own unique benefits and drawbacks, so it’s wise to consider the merits of each before pursuing a specific funding strategy. In basic terms, equity is a form of ownership, debt is an obligation, and debt-equity hybrids, as the name implies, represent a blend of the two.

Equity

Equity funding represents, in general, a direct capital commitment by an investor into an enterprise. Equity funding can be of various types and designs, but most frequently is subcategorized into either common or preferred equity – also referred as common stock/interest/units and preferred stock/interest/units, depending on corporate structure.

Common equity is the most customary and frequently used methodology for companies to obtain equity investments. Generally speaking, common equity comes with standard distribution, liquidation, and voting privileges. Most simple corporate structures deploy a single class of common equity. In such structures, the common equity’s value rises or falls in direct proportion to the economic success of the entity.

Preferred equity is a separate class, distinct from common equity, and is known as “preferred” because it carries with it certain preferential features compared with common equity. In virtually every case, preferred equity will have liquidation preference over common equity (in case of the company is sold or otherwise shut down). Oftentimes, preferred equity carries with it defined “floor yields or returns,” which could be in the form of dividends, etc. Any unpaid yields due on preferred equity generally have to be addressed before payments are made to holders of common equity. In addition, preferred equity may include features such as “super voting rights,” conversion privileges, and veto power regarding certain corporate decisions. In many cases, given a choice, an investor will orient toward preferred equity as an initial investment and, once the enterprise is growing and successful, will opt to convert to common equity at a future date if such conversion is available. The reason: Preferred equity will generally have a defined liquidation value whereas common equity can have (in theory) unlimited upside potential value.

Equity Funding Sources

Equity funding sources will frequently include but not be limited to:

1. Initial principals of the company
2. Outside “angel” investors
3. Institutional investors
4. Strategic investors

Initial principals of the company are the most common of the equity investors. These owners frequently provide the money by which the rest of the company begins (and hopefully continues) its initial operation, and are usually given the “right of first refusal” in subsequent funding opportunities. As the company matures, however, these funding sources are used with less frequency.

Angel investors are generally individuals not directly involved with the company who have sufficient wealth and interest to invest in the enterprise. Most angel investors tend to invest early on in the history of the company’s capital structure. Generally, angel investors are “accredited,” – meeting the tests for minimum net worth/earnings. By using accredited investors, companies raising equity can minimize regulatory obligations as compared with accepting investments from anyone in the public.

Institutional investors are entities whose primary mission is to make investments in companies and transactions. Such investors can be small or large institutions, from small venture capital funds to major pensions funds, insurance companies, etc. This category of investor tends to be financially sophisticated and to be much more methodical in terms of completing due diligence before making an investment decision. Consequently, the time cycle for institutional investment is longer than for angel investors. In addition, institutional investors commit materially larger sums of money per each transaction funded.

Strategic investors are generally entities that have a particular interest in either the sector or the company in question. In many cases, strategic investors display a longer-term interest in potentially acquiring all or a majority control of the companies in which invest. Alternatively, strategic investors could see a particular investment as valuable if the company is a key supplier or complementary in some fashion to the strategic investor’s core business.

Debt

Debt financing presumes a future obligation of repayment. In short, the receiving entity must repay the funding source the principal amount of the money provided, plus any interest or other obligations pursuant to the agreed upon terms. Debt financing can be either “secured” or “unsecured” – repayment may or may not be guaranteed by some form of collateral. If secured, in most cases lenders will “perfect” their secured interest by some type of publicly recorded filing. Such filings could include mortgages (if real estate), UCC-1 filings (if equipment, inventory, receivables, etc.), assignment of titles (for example, vehicles), etc., which tells the public that these specified assets have already been unconditionally pledged to another funding source. This presumably eliminates new sources from providing money to a borrowing entity against assets already encumbered by another funding source. Oftentimes, personal guarantees are required from principals of the company.

Larger, established companies are sometimes able to borrow funds on an unsecured basis – that is, a lender will advance funds based solely on the general credit worthiness of the borrower.

Debt Funding Sources

Debt funding sources will frequently include but not be limited to:

5. Banks
6. Contract/factoring/purchase order lenders
7. Institutional sources
8. Specialty finance companies

Banks are government-chartered entities that provide a variety of services to taxpayers and that are obligated to follow defined regulatory protocols to protect the public’s interest. Banks have an inherent advantage relative to other lenders in the United States in that their source of money is the U.S. government, which provides funding via the FDIC at a rate that hovers at or around zero. Though banks have materially more regulatory restrictions on how they can lend money relative to non-government regulated sources, their compelling cost advantage makes them by far the most competitive source of lending in the U.S. However, banks in recent years have become a materially smaller part of the lending landscape due to their reluctance to finance all but “slam-dunk” type deals.

Contract/factoring/purchase order lenders specialize in a particular type of transactional lending, namely entities that have qualified contracts, purchase orders, or receivables. In most cases, the transactions represent very safe, defined lending opportunities that protect the lender by assigning the contracts, orders, or receivables in a very specific legal manner. As such, the lender is repaid upon the client’s customer making payment. Consequently, these types of financings are almost always short in duration.

Institutional sources of debt financing are non-bank entities specifically established for the purpose of making loans. They include but are not limited to pension funds, insurance companies, and sovereign wealth funds (outside the U.S.). In most cases, collateral requirements will not be materially more liberal than a bank’s, but other factors, such as ratio tests, credit scores, etc. will be significantly more relaxed than with a traditional bank. Thus, institutional entities in this environment are much more likely than banks to fund so-called “marginal” transactions.

Specialty finance companies fund particular subsets of transactions, for example a particular sector within a given geography. These groups are oftentimes the most aggressive within that sector and geography, but very restrictive on funding transactions outside of their core space.

Debt-Equity Hybrids

Debt-equity hybrid financing incorporates the fundamentals of a debt structure combined with an upside yield feature such that funders obtain a materially higher return expectation versus a standard senior debt lender. Though oftentimes the debt component is secured with standard types of collateral, the lender may be in a second position behind another funding source in the event of a default and liquidation. In other cases, there may not be specific collateral securing the loan – rather, the lender is counting on the general creditworthiness of the borrower. Since these structures are materially more risky than loans secured by first position collateral, lenders in this space require significantly higher yields relative to senior debt. These yield enhancements depend on some combination of higher interest rates, “points,” options or warrants to take an equity position in the borrower’s company, a percentage of profits of a project, etc.

Debt-Equity Hybrid Funding Sources

Most funders in this space are special-purpose entities or divisions that focus on these specific types of transactions. Most generally, these are referred to as “mezzanine” or “subordinated debt” lenders. These firms frequently accept “second positions” in collateral – for example, a second mortgage on a commercial office building.

Debt-equity hybrid funding sources will frequently include but not be limited to:

9. Mezzanine lenders/funds
10. Divisions of large financial institutions specializing in this higher yield product
11. Distress funds

Mezzanine funds specialize in moderately higher-risk lending transactions that provide the repayment characteristics of debt coupled with yields that in many cases may approach equity- type returns.

Divisions of large financial institutions that make loans are operating components separately identified to focus on a defined business segment.

Distress funds are special-purpose financing entities established to take advantage of defaults in the commercial real estate or commercial debt sectors within the U.S. or a foreign country. The belief is that these funds will obtain extremely attractive yields relative to risk as generally the values of the assets in question have already materially depreciated, so there is a lot less downside risk value-wise to the lender.

Where to go from here?

This brief summary of commercial funding sources for the various types of international funding is by no means exhaustive. If you’re looking for more information and would like help achieving your capital-raising goals, contact us today. Collectively, we have more than 300 years of experience funding commercial real estate, contracts, farms, and other international projects, from $1 million up to $200 million for especially attractive opportunities.

Click here to contact us today

Dustin Watkins is a Senior Analyst at Wall Street Strategic Capital, Inc., a strategic financial consulting firm that arranges non-traditional debt financing, including asset-based bridge loans and contract financing.

This group gathers once a year to discuss issues related to capital market reforms. Last year, the Small Business Financing Crisis (SBFC) Task Force, recognizing that a “one-size-fits-all” approach to public market regulation is not working, developed a “carve out” construct designed to facilitate the raising of equity capital for financing small and medium sized enterprises to create jobs and stimulate the economies in countries worldwide. In conjunction with this, they issued the Orlando Declaration in support of urgent capital market reforms in the U.S. and abroad. 

Present or past affiliations of the group’s members include the New York Stock Exchange, NASDAQ, American Stock Exchange, the National Stock Exchange and the Chicago Board of Options Exchange, the Philadephia Stock Exchange, Amsterdam Stock Exchange, Euronext, Istanbul Stock Exchange, Stockholm Exchange, OMX, Kuala Lumpur Stock Exchange and Hong Kong Exchanges and Clearing, the Toronto Stock Exchange, Sao Paulo Stock Exchange (Bovespa), New Zealand Stock Exchange, Johannesburg Stock Exchange, Borsa Italiana, London Stock Exchange, Luxembourg Stock Exchange, Cairo and Alexandria Stock Exchanges, Vienna Stock Exchange, Prague Stock Exchange, Eurex, Deutsche Börse, Zurich Stock Exchange, Abu Dhabi Securities Exchange, Frankfurt Stock Exchange, Australian Securities Exchange, European Options Exchange and the Berlin Stock Exchange. Nearly half the attendees have senior securities regulatory experience.  

List of Expected Participants:

Robert E. Aber

• Former: Senior Vice President and General Counsel, NASDAQ
• Current: General Counsel and Corporate Secretary, Skarven Enterprises, Inc. New Jersey

Maribel Aber

• Former: Vice President of Corporate Client Group, NASDAQ
• Current: TV Spokesperson, Host, Writer, Producer, Marketing Executive and Lawyer

Sinan Arslaner

• Former: Vice President Citibank; Executive Vice President Demir Bank, Istanbul
• Current: President, Cfs Consulting, Ltd., Istanbul

Richard P. Bernard

• Former: Executive Vice President and General Counsel, New York Stock Exchange

Svetlana G. Bernard

• Former: Interpreter and Secretariat Supervisor, Resource Secretariat for Russian Federal Commission on Securities, Moscow
• Current: Office Manager, Occupational Therapy Practice of Susan Scangt, New York

Donald L. Calvin

• Former: Office of the Chairman and Executive Vice President, New York Stock Exchange
• Current: Chairman, International Business Enterprises, Inc; National Stock Exchange Board of Directors, New York

Alger B. Chapman, Jr.

• Former: Chairman and CEO, Chicago Board of Options Exchange; Vice President, Government Affairs, NYSE
• Current: Chairman, Prime Insurance Holdings, Chicago

Paul Man Yiu Chow

• Former: Chief Executive Hong Kong Exchanges and Clearing; Vice Chairman World Federation of Exchanges
• Current: Council of Hong Kong Institute of Certified Public Accountants; Advisory Committee of HK Securities and Futures Commission (“SFC”) and other Boards and Councils

Hugh Cleland

• Former: Vice President, Policy Development and Regulation, Toronto Stock Exchange; Consultant to Stock Exchange and Securities Commission in Canada and abroad

Dato Nik Mohamed Din

• Former: Executive Chairman Kuala Lumpur Stock Exchange
• Current: Executive Chairman OSK Group

James F. Duffy

• Former: Executive Vice President and General Counsel, NYSE Regulation, and Executive Vice President and General Counsel, American Stock Exchange
• Current: Consultant, NYSE 

Gilberto de Souza Biojone Filho

• Former: CEO Bovespa – Sao Paulo Stock Exchange, CEO of Ancor Associação das Corretoras de Valores, Câmbio e Mercadorias (National Association of Brokerage Houses),
• Current: CEO of SGB Particpações e Assessoria Ltda, Sao Paulo

William Foster

• Former: CEO, New Zealand Stock Exchange; Chief Operating Officer, Abu Dhabi Securities Market, Executive Director, Mudara Institute of Directors in Dubai International Financial Center
• Current: Advisor and Project Manager to the Cambodian Securities Commission

David E. Franasiak

• Former: Office of Chairman, Ernst & Young; Director of Tax, U.S. Chamber of Commerce; British Petroleum; Staff Director to Tax Oversight Subcommittee U.S. House of Representatives
• Current: Vice President of Finance and Executive Committee of Williams & Jensen Law Firm, Washington, D.C.

Martin Kinsky

• Former: General Counsel, Australian Stock Exchange (“ASX”); National Manager Investigations and Enforcement, ASX; Managing Director-Markets, Dubai Financial Services Authority

Dr. Richard Meier

• Former: CEO, Zurich Stock Exchange; International Relations, SWX Swiss Exchange
• Current: Research Associate, Swiss Banking Institute of University of Zurich

Joseph Rizzello

• Former: President, Philadelphia Board of Trade; Executive Vice President, Philadelphia Stock Exchange
• Current: CEO, National Stock Exchange; Chairman, National Stock Exchange Holdings, Inc.

Prof. Dr. Rüdiger von Rosen

• Former: Head of Press Information and Personal Advisor to the President of Deutsche Bundesbank; Executive Vice President and Speaker of the Board, Deutsche Boerse, A.G.
• Current: Managing Director, Deutsches Aktieninstitut e. V., Frankfurt and Brussels Passport: Germany

Daulet Saudabayev

• Former: Deputy Minister of Finance of Kazakhstan; Advisor to Executive Director of IMF
• Current: Non-Staff Advisor to the Prime Minister of Kazakhstan; President, Access ED Consulting

Aril Seren

• Former: Vice Chairman, Istanbul Stock Exchange; Secretary General FEAS, Istanbul

Judge Stanley Sporkin

• Former: Director, U.S. SEC Division of Enforcement; General Counsel, CIA, Federal Judge
• Current: Stanley Sporkin Associates, Washington, DC

Roland Tibell

• Former: Chief Information Officer, Stockholm Stock Exchange; President, OMX (U.S.) Inc., New York
• Current: Partner, Bourse Consult

Edward Waitzer

• Former: Vice President, Toronto Stock Exchange and Chairman, Ontario Securities Commission
• Current: Senior Partner, Stikeman Ellliot and Jarislowsly, Ditima Mooney Chair in Corporate Governance, York University, Toronto

David Weild IV

• Former: Vice Chairman, NASDAQ; President, E- Commerce, Prudential Securities
• Current: Chairman and CEO, Capital Markets Advisory Panel

Massimo Capuano

• Former: CEO Borsa Italiana; Deputy CEO London Stock Exchange; President , World Federation of Exchanges; President, Federation of European Exchanges.
• Current: CEO Centro Bank, Milan

Professor Melvin Escudero

• Former: Head of Peruvian Pension Fund Investment Supervision within the Banking, Insurance and Pension Fund Superintendency
• Current: Director, Graduate Finance Program Universidad dei Pacifico in Lima, Peru, CEO El Dorado Investments, Lima, Peru; CEO El Dorado Investments

Mark Guillaumier

• Former: CEO Malta Stock Exchange; Advisor to Governor of Central Bank of Malta and Maltese Ministry of Finance; Board of Directors of European Central Securities Depositories
• Current: Board of Directors of International Companies operating in the financial services sector

Russell Loubser

• Current: CEO Johannesburg Stock Exchange

Michel Maquil

• Current: CEO Luxembourg Stock Exchange

Mohamed Abdel Salam

• Former: Chairman and CEO, Cairo and Alexandria Stock Exchanges
• Current: Executive Chairman of the Egyptian Exchange, Executive Chairman of Misr for Central Clearing, Depository & Registry, Executive Chairman of the Egyptian Investor Protection Fund, Chairman of the Africa and Middle East Central Depositories Association, Chairman of the World Forum of CSDs

Hannes A. Takacs

• Former: Member of the Supervisory Board of Energy Exchange Austria, Vienna, Austria; Director, Head of Consulting & International Projects at Vienna Stock Exchange, Vienna, Austria
• Current: Managing Partner CAPMEX-The Capital Market Experts, Vienna, Austria Vice-Chairman Board of Directors of Prague Stock Exchange, Prague, Czech Republic

Prior Attendees:

Professor Dr. Jorg Franke

• Former: CEO of Eurex; Director, Deutsche Boerse; CEO Berlin Stock Exchange,
• Current: Chairman and CEO of the Supervisory Board, Tradegate A.G., Berlin; and other companies in Frankfurt and Berlin

Atilla Ilkson

• Former: General Counsel’s Office, New York Stock Exchange; Senior Counsel at Merrill Lynch, London
• Current: Director, Merrill Lynch Bank, Istanbul

Bengt Ryden

• Former: Chairman and CEO, Stockholm Exchange and President, International Federation of Stock Exchanges (FIVB)
• Current: Chairman and Director of Swedish Companies and Organizations

Theodore Westerterp

• Former: CEO European Options Exchange; Founder and Treasurer International Options Markets Association (“IOMA”); Netherlands Under Secretary of State for Foreign Affairs; Netherlands Secretary of Transportation and Public Works Passport: Netherlands

Dustin Watkins is a Senior Analyst at Wall Street Strategic Capital, Inc., a strategic financial advisory firm that arranges non-traditional debt financing, including asset-based bridge loans and contract financing.

Purchase order financing is the process of borrowing against a written sales contract between a buyer and a seller. This sales contract, called a purchase order, will detail the exact product to be sold or services to be rendered from a vendor and will specify the payment and shipping terms, delivery dates, etc. Financing is possible for both international or domestic purchase order contracts.

So how can you tell if your purchase order qualifies? If you can meet the six qualifications described below, purchase order financing is probably right for you.

Qualification #1: You’re able to demonstrate that you can do the work.

Purchase order financing hinges on your ability to complete the work, and thus “earn” your purchase order. By showing that you have experience in successfully completing reasonably similar type work efforts, you’re showing the lender that you can finish the job that you’ve been hired to do.

Qualification #2: You can prove that your customer can (and will) pay.

More important than your ability to do the work is your customer’s ability to pay. That’s what the purchase order is being financed against, isn’t it? By showing that your customer is either

• Financially capable of paying your bill or
• Protected by some form financial guarantee (either in the form of an internationally recognized bank letter of credit, bond issuance, or some other form of credit enhancement), you are helping to prove that you’ll be able to pay back the loan.

The best customers are governments and large, publicly traded companies. Large private corporations can also be valid customers, as are international customers whose financial capability is validated through the use of a letter of credit provided by an internationally recognized bank (more details below).

For large construction projects, performance bonds are oftentimes put in place to minimize the risk to the customer, which can be a method of ensuring that you will be paid for the work you have done. If you’re a subcontractor, one way I have seen this situation handled is to have the payment to the contractor (for the work being done by your company) be in the form of a joint check payable to the contractor as first endorser and your company as final endorser. That way, the contractor can’t just take the funds intended for your company. Of course, if it is a bonded project, then there can be protection that way instead.

For international projects, purchase orders will generally be backed by a letter of credit (or through some other type of predetermined collateral). Further, once the purchase order has been borrowed against, the buyer is not going to pay the seller directly — leaving the lender to rely on the seller to repay them. Instead, the payment will go directly to the lender, who will then forward the balance (after loan fees and principal have been deducted) on to the seller.

Qualification #3: You’re charging enough.

Because of loan costs and other variables, purchase order financing rarely works if your margins are less than 20-25% (but very high quality orders with short payment cycles will qualify with margins as low as 15-20%). You can calculate your gross profit margin by dividing your anticipated gross profit by the total revenue you expect to receive.

Qualification #4: You’re not asking for too much.

Oftentimes, borrowers expect to be able to borrow as much as the full face amount of the purchase order. For various reasons, this is simply not possible. A more realistic number for this type of financing is 80-85% (or below) of the face value of the purchase order for government and large corporate contracts, 50-65% for private companies.

Qualification #5: You’re direct with your customer.

If there’s another party or two between you and your customer, then it’s just too convoluted.

Qualification #6: You’re getting paid quickly.

It’s great if you are paid within 30 to 90 days of completing the work. It’s not so good if the payment is stretched over a longer period of time. In some cases, I’ve seen contracts that extend payment over three years. Those would not work for purchase order financing.

If you’ve got a contract that meets these qualifications, then we will likely have an interest.

Click here to contact us today.

Dustin Watkins is a Senior Analyst at Wall Street Strategic Capital, Inc., a strategic financial consulting firm that arranges non-traditional debt financing, including asset-based bridge loans and contract financing.

There are, fortunately, other offsets for farm owners. With the E85 initiative, most new motor vehicles sold in America are being made to burn E85 gas fuel, which blends 85% gasoline and 15% ethanol. Historically, the blend has been lower, at only 90%/10%. Since the E85 initiative began in the early 2000’s, the U.S. has become the world’s largest fuel ethanol producer, and in May 2011, the US Department of Agriculture (USDA) began providing financial assistance, via grants and loan guarantees, to fuel station owners to install E85 and blender pumps. These moves should offset the loss in demand from the corn ethanol subsidy withdrawals. 

The current generation of ethanol facilities is also more efficient, and has a greater use of by-products (in terms of supplemental revenue streams), which will work to counter the withdrawal of the subsidies.

For many, there is also a fundamental belief that demand for staple farm grains is going to remain strong. For a variety of reasons, including cultural changes in places such as China, this may well be true. Last year, for example, we saw a number of instances where when corn prices dropped (perhaps in contemplation of the ethanol subsidies being withdrawn), China and other foreign countries made historically high purchases of corn from farmers in the United States. Our expectation is that this trend will continue through 2012.

Most of our funding sources seem to have a fundamental belief that food prices are going to stay fairly strong — no one thinks corn is going to go down to $2.00 or $2.50 a bushel and stay there. Further, we’ve seen some major funds with farm-related investments committing to double their portfolios in the upcoming year. They are bullish on staple farming operations, and so are we.

Because of this, we believe the odds are high that prices for corn and other farm-related products will be reasonably stable in 2012, without the wild fluctuations that some are predicting.

Dustin Watkins is a Senior Analyst at Wall Street Strategic Capital, Inc., a strategic financial advisory firm that arranges non-traditional debt financing including asset-based farm loans, bridge loans, and contract financing.

Although equity for major transactions ($500 million and up in enterprise value) has clearly become more abundant in recent months…resulting in materially higher multiples for acquisitions in this space…equity raises with attractive terms for smaller transactions and for Micro-caps and private entities in general has remained challenging. There is a strong likelihood this trend will continue, at least in general, for a number of years ahead, with exceptions for specific sectors and specialized deals, for example raising equity for cloud computing firms in the first six months of 2011 has been less problematic than with other sectors.

The Challenges in Equity Markets

At the forefront of ongoing challenges for fair and attractive equity raises in the Micro-cap and private entity markets is the demise of the traditional Micro-cap IPO market. Since this article is limited to a discussion concerning U.S. markets and is focused on debt alternatives, a detailed analysis of the Micro-cap IPO market and post-IPO support in general for Micro-cap firms is not possible. Suffice it to say that this market has been in a period of continuous and substantive decline since 1997 for a whole host of reasons. The virtual elimination of small IPO’s as an exit strategy severely limits liquidation options for equity investments in private firms that historically would have viewed a traditional IPO as a likely exit mechanism. From a practical standpoint, a sale of the company to a strategic or financial buyer becomes the only likely scenario for returning funds to investors. For existing Micro-cap companies, the inability of firms to be reasonably compensated for research and executing trades makes after-market support very challenging. I have the privilege of hosting the annual meeting of the International Stock Exchanges Executives Emeriti and for those readers interested in this subject, we have created a “Small Business Task Force” headed by David Weild, former Vice-Chairman of NASDAQ, to address these issues.

The substantively more complex and burdensome regulations that equity raises face compared to debt financing result in the need for a material premium on overall yield. Although regulatory issues and concerns are probably overstated in terms of what percentage of the total problem they actually cause (and issues such as the proliferation of electronic trading, decimalization, etc. are understated or not even mentioned), there is no question that the attractiveness of debt structures is greatly enhanced by the less burdensome regulatory environment for these types of financings. The trend has been for the “spread” in the scope of difference in regulatory burdens between these alternative funding structures to increase, not lessen. We currently see no likelihood that this “spread” will materially decrease, at least in the near term, thus continuing to favor lending oriented raises.

A variety of other factors will favor the rise of debt financing as an alternative to equity in the days ahead. The concern over dilution with raising equity at prices deemed by company principals to not be in the long term best interest of shareholders will remain a constant issue. In many cases companies will elect a debt option with the plan to defer an equity raise until more attractive terms can be negotiated. The recent noteworthy financial reporting irregularities of select Chinese domiciled firms subsequent to reverse merging onto U.S. exchanges resulted in the typical reaction of taking macro level steps to ensure such events cease to occur…with the result that the market for Chinese reverse mergers was immediately decimated. We believe that many worthy Chinese domiciled firms (and other foreign domiciled firms wishing to trade on U.S. exchanges) will find funding solutions via listings in other countries, or thru debt structures.

These types of “macro reactions” to issues have pronounced long term consequences that can fundamentally change entire dynamics. Approximately 30 years ago, while I was working at Caterpillar, Inc., an embargo was put in place on the exporting of earthmoving/construction equipment to the Soviet Union. Though the dollar loss of that particular transaction was significant, it was not catastrophic to the company…but the underlying message that the United States would use an embargo to impose its social agenda had far reaching effects on the firm.

Another issue that will challenge equity investments into Micro-caps and private equity will be a growing need for current cash yields. With a dramatic decline in the risk free rate of return as evidenced by the concurrence of the academians and consultants around the country, interest rates and dividends are compressed to levels that make current yields on debt structures seem especially attractive. Although a number of major pension funds by policy limit investments into the traditional Bulletin Board stocks, these types of institutional investors face tremendous pressure to generate overall current portfolio yields in the 8% annual return range in order to meet actuarial contribution requirements. In recent months I have met with and spoken to a number of major U.S. pension funds that are venturing into the high yield bridge loan space or focusing more on preferred stock structures with meaningful current distributions. Likewise, in meeting with sovereign foreign wealth funds on my recent trip to Asia, it is quite clear that a number of these entities believe equity type yields can be attained through innovative debt transactions in the U.S. markets…with much simpler due diligence, less challenging negotiations, and materially lower risk levels.

Debt Will Provide at Least a Partial Solution

Given all the regulatory pressures, the issues with current yield, and the changing nuances of marketplace requirements involving equity, debt financing structures will continue to evolve to fill at least part of the missing funding gap that will not be able to be fulfilled by traditional equity raises. The fact that debt transactions are almost always much simpler and faster than equity financings will be a major influencer in the months and years ahead. We continue to see new variations in debt financing terms and structures being implemented to serve as a surrogate for equity.

For established companies generating revenues from financially viable customers, we believe purchase order financing will continue to grow in significance as a replacement for equity raises. The purchase order financing business was in a state of despair with the easy credit markets in the middle of the last decade. Now many of these firms are able to charge a significant fee per month (for example 2%) plus a percentage of profits on orders…and sometimes with a guaranteed floor yield regardless of how short the borrowing period is. Though on the surface this may not appear to be an attractive alternative, it is materially less costly in the long run than a highly dilutive equity offering…and much, much faster to consummate. As an example, we have arranged multiple tranches of purchase order financing for a firm exporting products to South America where the speed in closing the funding was paramount, or a major customer would have been lost. The alternative would have been for the client to take an equity partner and give up a major stake in his company…forever. Since the length of time the debt was outstanding was short, the absolute cost of the financing was very modest, though on a daily basis the cost would have been deemed to be unattractive.

Debt structures that incorporate underlying collateral as security, coupled with some form of upside yield potential, are poised to grow in popularity. Though not necessarily the traditional “mezzanine” type financing structure, the end result will be similar…a base yield coupled with the potential for meaningful return enhancements. We believe many of these structures will be a senior debt base (as opposed to subordinated debt), coupled with yield upside. With the challenges smaller firms will have in raising equity, debt providers are concluding that they can “have their cake and eat it too”. The return enhancers will certainly include options and warrants for the lenders, but will also include more non-traditional type terms, for example “revenue participation certificates” or guaranteed floor yields via “puts” upon the sale of the company or some other type of liquidation or financing event.

Convertible debt structures in the Micro-cap space have a less than stellar reputation due to the utilization of classic “toxic spiral” type structures in past years. In most of these situations, the lender would short the stock being held as collateral, with notorious ratchet features allowing the lender to further prosper as the borrower’s market cap declined…requiring the continued delivery of additional shares. We envision a more benevolent debt structure where stock is not the primary collateral utilized, and if used as supplemental collateral the parties would agree to a “no short” clause in the loan agreement, subject to very specific exceptions. The return enhancers incorporated into the agreement serve to add value to both the borrower and lender if the borrowing entity prospers, thus eliminating the incentive for the lender to take actions to cause the demise of the borrower.

Jim Schnorf, CPA, CMA, MBA is the Founder and President of Wall Street Strategic Capital, Inc. and a number of other entities that arrange non-traditional debt financing including bridge loans, facilitate revenue opportunities with government agencies and large entities, and arrange strategic partners and high profile board members/endorsers for client firms in the U.S. and approximately 20 foreign countries. He is a frequent guest speaker at conferences and symposiums involving debt funders, major pension funds, and private equity firms and most recently presented at the SuperReturn Conference in Boston.

Syndicated with permission from Stock News Now and the Micro-Cap Review.