Tuesday, March 08, 2005

Cash Flow, Cash Flow, Cash Flow!

I just got off the phone with the CFO of a small or rather I should say, micro company. The company has been hemorrhaging cash like a stuck pig. Having said that, the balance sheet looked pretty decent and I told them I could set them up with $100,000 invoice discounting facility if they made it through our due diligence process in one piece. If everything went as planned, I could cut them a cheque by the end of the week

The problem was that the CFO wanted the financing structured as a term loan at an attractive interest rate (the CFO's words, not mine) with some sort of stock conversion provision. I pointed out that no one in their right mind would provide a company with annual revenues of $1.5 million and annual cash losses from operations of $500,000 with a term loan as there is no cash with which to service the loan.

Here I am offering to finance the company with out any additional dilution of equity and the CFO is trying to get me to take a chunk of the business for absolutely no good reason I explained to the CFO the difference between cash flow financing, which is what the banks specialize in, and asset based financing, which the Prescott Thackery Merchant Group specializes in.

The CFO's response was "I don't really care.....................Now there is someone I'd like to put my capital behind!

The point of this story is that owner/operators of small business should care! As a rule of thumb, if your business doesn't generate positive cash flow from operations, you will not secure a term loan unless you have the personal assets to back it up. If you company lacks cash flow, think asset-based financing. It is more expensive, but provides cash when you need it.

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