TSL May 2017 by Secured Finance Network

Representing the Asset-Based Financing, Factoring & Supply Chain Finance Industries Worldwide May 17

The

Entrepreneurial Finance Issue INDUSTRY INSIGHTS TO GROW YOUR BUSINESS

IN THIS ISSUE FUNDING FOR INDEPENDENT COMMERCIAL FINANCE COMPANIES P12 ATYPICAL COLLATERAL CAN ENDANGER AN M&A P16 THE ENTREPRENEURIAL LENDERâ&#x20AC;&#x2122;S GUIDE TO RAISING CAPITAL P20 REFINANCING THE BORROWER THROUGH AN ASSIGNMENT AND ASSUMPTION: WHEN, WHY, AND HOW P24 ACCESSING CAPITAL: LENDERS AND TRADE CREDIT INSURANCE, FUELING THE ENGINE TOGETHER P28 THE TSL INTERVIEW: LIN CHUA P32

DEPARTMENTS COLLATERAL // THE CFA BRIEF WHAT WOULD YOU DO? REVOLVER

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Representing the Asset-Based Financing, Factoring & Supply Chain Finance Industries Worldwide

Volume 73, Issue 4

May 17

FEATURES 12 Funding for Independent Commercial Finance Companies: Where to Look for Junior Capital in Today’s Capital-Rich Environment Tim Stute of Houlihan Lokey’s Financial Institutions Group discusses how knowing your strategic goals and understanding how they mesh with the various players in the institutional capital market will help entrepreneurial finance companies navigate their options. By Tim Stute

16 Atypical Collateral Can Endanger an M&A

12 20 The Entrepreneurial Lender’s Guide to Raising Capital

Finding the right capital partner can make all the difference. John Cochran and Benjamin Kaplan of Lovell Minnick set out guidelines for entrepreneurial lenders seeking to raise capital. By John D. Cochran and Benjamin P. Kaplan

“Atypical” collateral in financing deals is being included in deals to make the deals more attractive. Robert Wood of Freed Maxick discusses three types of atypical collateral: unbilled receivables, in-transit inventory and work-inprogress (WIP) inventories. By Robert Wood, CPA

24 Refinancing the Borrower Through an Assignment and Assumption: When, Why, and How

In Part 1 of this two-part series, Jason I. Miller introduces the assignment and assumption structure and its benefits, discusses the factors a lender can use to determine whether it is ultimately a beneficial strategy to pursue under the circumstances, and begins to focus on key provisions typically found in an assignment and assumption agreement. By Jason I. Miller

32 28 Accessing Capital: Lenders And Trade Credit Insurance, Fueling The Engine Together

Joseph Ketzner Sr. of Global Commercial Credit explains how lenders and trade credit insurance providers can work together to fuel the engine that drives the business.. By Joseph Ketzner Sr.

32 The TSL Interview: Lin Chua, a Female Founder in the Fintech Space

The Secured Lender’s senior editor sat down with Lin Chua, co-founder, COO & head of Capital Markets of InterNex Capital, an asset-based digital lender providing revolving lines of credit to small and midsized businesses. By Eileen Wubbe

DEPARTMENTS 6

Letter From Richard D. Gumbrecht, Interim CEO of CFA, updates readers on CFA’s progress and shares some of the exciting initiatives that are underway.

Collateral The latest issues affecting the ABL and factoring industries, including company news and personnel announcements.

What Would You Do? In this edition of What Would You Do?, the Chief Credit Officer of Overadvance Bank considers a prospect’s request to lend to the prospect and its affiliate, as coborrowers, under a combined borrowing base. By Dan Fiorillo and Jim Cretella

The CFA Brief 38 44 46

Among CFA Members CFA Chapter News Calendar

Advertisers Index

Revolver Robyn Barrett of FSW Funding discusses how asset-based lending remains an industry built on relationships.

STAFF & OFFICES Michele Ocejo Editor-in-Chief Eileen Wubbe Senior Editor Aydan Savaser Art Director

Editorial Offices 370 Seventh Avenue Suite 1801 New York, NY 10001 (212) 792 -9390 Fax: (212) 564-6053 Email: tsl@cfa.com Website: www.cfa.com

Advertising Contact: James Kravitz Business Development Director T: 646-839-6080 jkravitz@cfa.com

The Commercial Finance Association is the trade group for the asset-based lending arms of domestic and foreign commercial banks, small and large independent finance companies, ﬂoor plan financing organizations, factoring organizations and financing subsidiaries of major industrial corporations. The objectives of the Association are to provide, through discussion and publication, a forum for the consideration of inter- and intra-industry ideas and opportunities; to make available current information on legislation and court decisions relating to asset-based financial services; to improve legal and operational procedures employed by the industry; to furnish to the general public information on the function and significance of the industry in the credit structure of the country; to encourage the Association’s members, and their personnel, in the performance of their social and community responsibilities; and to promote, through education, the sound development of asset-based financial services. The opinions and views expressed by The Secured Lender’s contributing editors and authors are their own and do not necessarily express the magazine’s viewpoint or position. Reprinting of any material is prohibited without the express written permission of The Secured Lender. The Secured Lender, magazine of the asset-based financial services industry (ISSN 0888-255X), is published 9 times per year (Jan/Feb, March, April, May, June, July, September, October and November) $65 per year non-member rate, and $100 for two years non-member rate, CFA members are complimentary, by Commercial Finance Association, 370 Seventh Avenue, New York, NY 10001. Periodicals postage paid at New York, NY, and at additional mailing offices. Postmaster, send address changes to The Secured Lender, c/o Commercial Finance Association, 370 Seventh Avenue, New York, NY 10001.

letter from

THOUGHTS FROM CFA AND TSL STAFF

t’s been a few months since I introduced myself and shared my near-term agenda for the CFA. I’d like to update you on our progress and share some of the exciting initiatives that are underway. First, our search committee has made good headway in identifying potential candidates to serve as our next Executive Director and the committee is continuing to work through the vetting process with promising expectations. Meanwhile, in addition to CFA’s core programming and many engaging Chapter events, our staff, board and volunteer community have been hard at work introducing new resources, such as our recently delivered virtual web training on Healthcare ABL and Specialty Lending, our improved Industry Data Survey (results due out shortly), and our first-ever Women in Commercial Finance Conference, set for September 27-28 in New York City, featuring Sallie Krawcheck as the keynote speaker. Please visit www.cfa.com for further details and to register. Registration is still open for next month’s International Lending Conference in London on June 6-8. This Conference will bring together major players in asset-based

lending from the U.S., U.K., Continental Europe and elsewhere for a comprehensive, two-day summit on cross-border assetbased lending. Our 2017 Leadership Program will be held June 7-8 in Atlanta. Leadership development is an investment. It’s an ongoing commitment to increase an organization’s capacity for success. This program is designed help develop skills and capabilities that complement and enhance your company’s internal programs. You will have the opportunity to learn from some of our industry’s top leaders. We will celebrate some of our most dynamic young leaders at this year’s CFA 40 Under 40 Awards. While nominations closed on May 1, I hope you will attend our Celebration scheduled for September 28 at The Pierre Hotel in New York City. To coincide with CFA’s Independent Finance & Factoring Roundtable, May 17-19, in Austin, this issue focuses on entrepreneurial lenders. The Roundtable is the only event designed solely for entrepreneurial asset-based lending and factoring executives. Panel highlights include The Competitive Landscape – How are the Independent Finance/Factoring Companies Positioning Themselves for the Future? And a roundtable discussion on Alternative Methods of Business Development. On page 12, of this issue, Tim Stute of Houlihan Lokey’s Financial Institutions Group discusses how knowing your strategic goals and understanding how they mesh with the various players in the institutional capital market will help entrepreneurial finance companies navigate their options.

In Atypical Collateral Can Endanger an M&A, on page 16, Robert Wood of Freed Maxick explains how the competitive environment has led to decreasing interest rates, increasing advance rates and, in many cases, a less than comprehensive due diligence effort by lenders. “Atypical” collateral in financing deals is being included in deals to make the deals more attractive. On page 28, Joseph Ketzner Sr. of Global Commercial Credit explains how lenders and trade credit insurance providers can work together to fuel the engine that drives the business. On page 24, in Refinancing the Borrower Through an Assignment and Assumption: When, Why and How, Jason I. Miller introduces the assignment and assumption structure and its benefits, discusses the factors a lender can use to determine whether it is ultimately a beneficial strategy to pursue under the circumstances, and begins to focus on key provisions typically found in an assignment and assumption agreement. Knowing that finding the right capital partner can make all the difference, John Cochran and Benjamin Kaplan of Lovell Minnick set out guidelines for entrepreneurial lenders seeking to raise capital, on page 20. On page 32, The TSL Interview highlights Lin Chua, Co-Founder, COO & Head of Capital Markets of InterNex Capital. The fintech entrepreneur shares her story of launching InterNex, dispensing advice for novice business owners along the way. It remains my privilege to serve you and be part of this vital, diverse and dynamic community. Thank you for your continued support of your Association and Foundation.

“. .. and our first-ever Women in Commercial Finance Conference, set for September 27-28 in New York City, featuring Sallie Krawcheck as the keynote speaker. Please visit www.cfa.com for further details and to register.”

REGISTRATION IS OPEN FOR CFA’S ANNUAL CONVENTION IN CHICAGO! WWW.CFA.COM

Warm regards, Richard D. Gumbrecht CFA Interim CEO

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collateral INDUSTRY NEWS

THE INDUSTRY IN BRIEF

Middle Market Participants See Growth Opportunities in 2017, Finds Antares Capital Survey Antares Capital, a leading provider of financing solutions for the middle market, released its 2017 Market Outlook Survey of private equity borrowers, sponsors and investors in the middle-market. The survey, Antares Compass, examines postelection sentiment related to M&A activity, hiring and the state of the U.S. and global economies. Antares Compass is unique in its ability to provide a more holistic view of the health and outlook of the middlemarket by combining insights from three fundamental sets of middle-market participants – private equity firms, private equity-owned companies and institutional investors, such as banks, mutual funds, CLOs and insurance companies. “Over the past two decades, we have built one of the largest portfolios of private middle-market companies in the U.S.,” said John Martin, managing partner and co-CEO of Antares. “These companies represent a broad cross section of industries, so when they tell us they anticipate moderate-tostrong EBITDA growth over the next year, or they expect to increase hiring in the next 12 months, that’s something to pay attention to. Their insight in combination with those of private equity sponsors and investors, who sometimes offer alternative views on market dynamics, delivers a unique look into this critical sector of the economy.” U.S. Economic Sentiment Remains Strong Despite economic and political uncertainty across the globe, middle-market private equity participants see the U.S. as a bright spot. More than 75 percent of all respondents expressed confidence in U.S. economic performance in the near-term. The prospect of a reduced regulatory environment and lower taxes were viewed as an opportunity by respondents. However, outlook for the global economy is more cautious. Two-thirds of private

equity sponsors who responded described themselves as pessimistic or uncertain about the global economy’s performance. Europe was listed as a particular area of concern due to Brexit and upcoming elections across the continent. “In the U.S., despite a volatile few months politically, positive economic conditions and fundamentals have proven resilient and companies appear to be growing increasingly optimistic about their prospects for the next few years,” said Martin. “More specifically, investing and hiring activity are likely to remain high within industries such as business services, energy, TMT and healthcare that sponsors predict will experience the most growth over the next 12 months.” M&A Expectations Vary, Positive Overall Predictions for M&A activity are favorable, although they vary among survey respondents. Nearly three-quarters of sponsor respondents anticipate the same level of activity as last year, while nearly half of institutional investors who responded anticipate an increase in M&A activity in the next 12 months. A potentially encouraging sign for the M&A environment this year is the fact that a majority of sponsors who responded cited having over 50 percent of their current fund available to invest, though inflated valuations will hamper a major uptick in M&A activity. Additionally, sponsors suggest that potential sellers could wait for increased clarity on tax reform before moving forward with a sale. “In line with the survey results, it has been our view that ample liquidity in credit markets, renewed optimism for U.S. growth prospects and a more favorable regulatory and tax environment will likely help lift sponsored middle-market M&A activity in 2017,” said David Brackett, managing partner and co-CEO of Antares. “At the same time, rising optimism may also increase competition for quality assets at reasonable prices. In 2017, private equity

REGISTRATION IS OPEN FOR CFA’S ANNUAL CONVENTION IN CHICAGO! WWW.CFA.COM

firms will be challenged to be strategic in assessing the landscape and will have to continue to look for ways to differentiate themselves. The ‘smart money’ will find new ways to innovate and create value by leveraging technology and data analytics to improve operational efficiencies, and drive functional best practices across portfolio companies.”

Kaestner joins Berkshire Bank Commercial Lending Team in Mid-Atlantic Region Berkshire Bank, America’s Most Exciting Bank®, is excited to announce a new addition to its Commercial Banking team. Kenneth Kaestner will serve as senior vice president, Asset-based Lending (ABL) regional leader of the mid-Atlantic. Kaestner brings over 20 years of ABL experience to the Bank. Prior to Berkshire Bank, Kaestner held the title of SVP, team leader and relationship manager at PNC Business Credit, a division of PNC Bank. In this role, he was responsible for managing a team, enhancing business development and contributing to overall growth for the company. As SVP, ABL regional leader for Berkshire Bank, Kaestner will supervise a team of ABL relationship managers, portfolio managers and administrative support personnel to develop new ABL business relationships in the mid-Atlantic region. He will also utilize his regional and community knowledge to maintain and grow an existing customer base. Kaestner holds a BS in finance from The College of New Jersey and is a current board member of the Commercial Finance Association, Philadelphia Chapter. “Kaestner will be instrumental in leading the Bank’s initiatives in driving growth and retention through an integrated sales and relationship strategy throughout the mid-Atlantic footprint,” stated Michael D. Carroll, EVP, Commercial Lending. “We are

Bibby Financial Services Re-structures its Global Executive Team Bibby Financial Services (BFS) announced a re-structure of its global executive team to further enhance its strategy to focus and grow its operations in key markets around the world. As a result of the changes, Edward Winterton will become chief executive, UK, moving from his current position of UK Commercial Director. Ian Watson will expand his role to become chief executive, North America, to now incorporate responsibility for Canada, whilst Richard Carter will move into the newly created role of chief executive, Europe and Asia. All new appointees will be members of the Global Executive Committee (ExCo), and report directly to global chief executive, David Postings. Edward Winterton will also join the Global Board. Commenting on the changes, David Postings said: “Over the past twelve months, we have made significant strides in delivering our business strategy which has resulted in growth across the vast majority of our markets and the resurgence of our operations in America. The structure that we are putting in place builds on our international capabilities to deliver one joined-up global business whilst still recognizing key geographic territories and income-generating operations.” As a result of the re-structure, the international division of BFS will cease to operate. Steve Box, International chief executive, has therefore decided to leave the business with immediate effect. David Postings continued: “Steve’s

efforts, expertise and energy have been invaluable in delivering our strategy to date. The business across the world has benefitted from his hard work and we are very grateful for all that he has done to help guide the teams to where we are today.” Steve Box added: “The international division has played an important role in helping to successfully deliver our global strategy. Given the advances we have made, it is timely that we disband the division and focus on strengthening the voices of our distinct markets in our global executive team. I therefore leave Bibby Financial Services proud of the progress that we have made and wish the very capable team all the very best for the future.” In other executive moves, Carol Roberts, managing director of Leasing in the UK, will now report directly to David Postings and join the Global Executive Committee.

Gordon Brothers Expands into Australia; Tim Stewart to Lead Sydney Office Gordon Brothers, the 114-year-old global advisory, restructuring, and investment firm, announced today that the company has expanded its footprint to Australia. Based in Sydney, the new office will be led by seasoned restructuring and turnaround management professional Tim Stewart, who will serve as managing director, Australia. “We at Gordon Brothers see tremendous opportunity in the Australian market,” said Frank Morton, CEO, International. “Tim’s restructuring expertise and ties to the local turnaround community are extensive. Under his leadership, and in partnership with Gordon Brothers Finance Company, we will deliver capabilities and capital long overdue in the Australian market.” “I am thrilled to lead Gordon Brothers’ expansion into Australia,” said Stewart. “The economy presents outstanding asset-based finance opportunities. We look

forward to partnering with retail, commercial and industrial firms –as well as the professionals who advise them – to move forward through change.” Prior to joining Gordon Brothers, Stewart was managing director and head of the Royal Bank of Scotland (RBS) Plc’s restructuring team in the Asia Pacific region. He was responsible for managing distressed and underperforming assets across India, Singapore, Hong Kong, Japan, China, Malaysia and Australia and led financial and operational restructures, debt for equity swaps and turnarounds. Stewart held a number of other roles and responsibilities during his time at RBS, including managing director of the strategic disposals group, chief risk officer of the RBS Australia Branch and head of structured asset finance, Australia. Stewart is the current chairman of the Turnaround Management Association (TMA) in Australia and the immediate past president. Joining Stewart in the Sydney office will be Christopher Shaw, an eight-year veteran of the firm. Shaw’s expertise includes inventory and brand valuations, restructuring and corporate finance. Shaw will relocate from Gordon Brothers’ London office. Gordon Brothers operates out of 26 offices spread across five continents. International markets include: Europe, with a major presence in London; Asia, with Tokyo-based operations; and South America, where the company recently opened offices in São Paulo, Brazil. Gordon Brothers is headquartered in Boston. To learn more visit www.gordonbrothers.com/Australia Since 1903, Gordon Brothers (www. gordonbrothers.com) has helped lenders, operating executives, advisors, and investors move forward through change. The firm brings a powerful combination of expertise and capital to clients, developing customized solutions on an integrated or standalone basis across four service areas: valuations, dispositions, operations, and investments. Whether to fuel growth

INDUSTRY NEWS

thrilled to have an experienced professional to support Berkshire Bank’s commitment to the region and our customer-focused approach as we continue to grow and pursue our strategic objectives.” Kaestner is located at 840 Route 33 Hamilton, NJ 01691; Tel.: (609) 528-2095.

THE SECURED LENDER MAY 2017 9

INDUSTRY NEWS

collateral

or facilitate strategic consolidation, Gordon Brothers partners with companies in the retail, commercial, and industrial sectors to put assets to their highest and best use. Gordon Brothers conducts more than $70 billion worth of dispositions and appraisals annually. Gordon Brothers is headquartered in Boston, with 26 offices across five continents.

MUFG Boosts Asset-Based Finance Business in the Americas By Hiring Edward Gately To Lead Group Mitsubishi UFJ Financial Group, Inc. (MUFG), one of the world’s leading financial institutions, announced it has taken a significant step in enhancing its Asset-Based Finance (ABF) business in the Americas by hiring Edward Gately as a managing director to lead the group. MUFG’s ABF franchise specializes in formula-driven revolving lines of credit, and term loans based on eligible assets, including accounts receivable, inventory, equipment, and owner-occupied real estate. A unit of MUFG’s Investment Banking group, ABF provides flexibility for rapid growth, acquisitions, and turnarounds for commercial and corporate clients. Gately will report to Jon Lindenberg, MUFG’s deputy head of Investment Banking for the Americas. “Adding Ed to MUFG’s investment banking team will provide a tremendous boost to our asset-based finance business, while enhancing our relationships across the bank’s broad client base,” Lindenberg said. “Ed brings the right blend of skills, experience, and passion that are necessary to effectively lead this critical product area.” Gately joins MUFG after 12 years at HSBC Bank USA, where he was head of the asset-based lending business. While at HSBC, Gately was responsible for a national specialty lending business with $8 billion in commitments, and $90 million in annual U.S. revenues.

Before HSBC, Gately spent nearly 20 years with Bank of America and one of its legacy institutions, Fleet Bank. In his most recent position at Bank of America, he managed a specialty lending unit with more than 50 employees, $2 billion in commitments, and over $30 million in annual U.S. revenues. Gately holds a B.S. degree in accounting and finance from Providence College. Headquartered in New York, MUFG Americas Holdings Corporation is a financial holding company and bank holding company with total assets of $148.1 billion at December 31, 2016. Its main subsidiaries are MUFG Union Bank, N.A. and MUFG Securities Americas Inc. MUFG Union Bank, N.A. provides an array of financial services to individuals, small businesses, middle-market companies, and major corporations. As of December 31, 2016, MUFG Union Bank, N.A. operated 365 branches, comprised primarily of retail banking branches in the West Coast states, along with commercial branches in Texas, Illinois, New York and Georgia, as well as two international offices. MUFG Securities Americas Inc. is a registered securities broker-dealer which engages in capital markets origination transactions, private placements, collateralized financings, securities borrowing and lending transactions, and domestic and foreign debt and equities securities transactions. MUFG Americas Holdings Corporation is owned by The Bank of Tokyo-Mitsubishi UFJ, Ltd. and Mitsubishi UFJ Financial Group, Inc., one of the world’s leading financial groups. The Bank of Tokyo-Mitsubishi UFJ, Ltd. is a wholly-owned subsidiary of Mitsubishi UFJ Financial Group, Inc. www.unionbank.com or www.mufgamericas.com.

Rise Line Launches Middle-Market Lending Platform Rise Line Business Credit, affiliated with LANDC Investment, launched a lower

REGISTRATION IS OPEN FOR CFA’S ANNUAL CONVENTION IN CHICAGO! WWW.CFA.COM

middle-market asset-based lending platform to fund businesses. Rise Line is led by Gaurang Vyas and Dan O’Rourke. Rise Line Business Credit has launched a lower middle-market asset-based lending platform for businesses looking for capital to fund their operations, acquisitions, and restructuring activities. Led by founders Gaurang Vyas and Dan O’Rourke, Rise Line is an affiliated company of LANDC Investment, a holding company with interests in the financial services sector. Rise Line’s Advisory Board includes prominent industry veteran, Paul Martin, who has successfully launched and developed various lending platforms. Rise Line addresses capital needs for companies that have been left with limited options in recent years due to tighter regulations at banks and migration of incumbent non-bank lenders to larger transactions. Rise Line offers $1 million to $15 million in asset-based revolvers, term loans, and special-situation financing for qualified businesses in the U.S. “We see terrific opportunities to provide tailored capital solutions to lower middle-market companies that are underserved and largely ignored by the market,” said Dan O’Rourke, chief executive officer at Rise Line. “Our clients take many forms, including companies looking for growth capital or those seeking capital to assist a turnaround effort.” “Rise Line was formed to provide a broad institutional product suite to lower middle-market companies while offering investors secured credit exposure to generate favorable risk-adjusted returns,” said Gaurang Vyas, founder and managing principal at Rise Line. “Our team has been active for over 25 years in the secured lending sector and has an aggregate experience of lending and syndicating over $7 billion in loans. We see this initial lending platform to be a springboard for a larger effort over time, adding additional business lines to the specialty finance platform.”

Scargo Hill Capital, LLC, a new institutional asset manager focused on providing assetbased, senior-secured direct lending to the retail and consumer product sectors, announced that Arena Investors, L.P. (Arena) has joined SB Capital Group (an affiliate of Schottenstein) and 360 Merchant Solutions in a strategic partnership to fund the firm and its investments. The partnership by Arena, SB Capital Group and 360 Merchant Solutions provides Scargo Hill with the capital to finance senior-secured private credit investments that address a substantial market dislocation in the lower middle-market, especially across emerging growth retail companies, consumer wholesale brands and companies in situations requiring transition capital. “Arena actively seeks to partner with industry experts and proven asset managers that provide access to niche origination strategies and unique investment opportunities and this is exactly what SB Capital Group, 360 Merchant Solutions and the Scargo Hill team bring to the market,” said Scott Gold, managing director of Arena Investors. “We are excited about our partnership to capitalize Scargo Hill. This investment will complement Arena’s industry expertise in asset-based consumer and retail finance.” “As seasoned private credit investors, we view Arena’s investment in Scargo Hill as further market validation of our platform and approach,” said Andrew H. Moser, managing partner and chief executive officer, Scargo Hill Capital. Scargo Hill will utilize the funding to provide tailored senior-secured capital to lower middle-market companies concentrated on retail, consumer products and the broader supply chain. The firm’s primary focus is on providing transition capital to fuel ‘turn-ups’, emerging companies and consumer brands.

“We believe that we are uniquely equipped to fill the void left by many lenders, providing borrowers with timely, relevant capital solutions,” said Thomas J. Lynch, managing partner and chief risk officer, Scargo Hill Capital. Scargo Hill Capital is an institutional asset management platform focused on providing senior secured direct lending to lower middle-market companies across retail, consumer products and the broader supply chain. Scargo Hill offers working capital solutions that provide maximum liquidity and flexibility with the goal to help its borrowers and investors achieve their goals. The firm ideally targets transaction sizes under $25 million but will consider larger, value-add transactions. www.scargohillcapital.com Arena, headquartered New York with offices in California and Canada, is a global investment firm and merchant capital provider that seeks to generate attractive, risk-adjusted, stable, and uncorrelated returns by opportunistically investing across the entire credit spectrum in areas where conventional sources of capital are scarce. Arena employs a team of 38 professionals who originate, structure and manage credit investments in asset-based, cash flow and special situation financings. Arena was formed in partnership with The Westaim Corporation, a publicly traded Canadian holding company that focuses on the financial services industry. www. arenafinco.com. SB Capital Group, a Schottenstein affiliate, is a leader in the field of asset recovery, rescue finance, restructuring and strategic store closing events. With principals who are equity holders in retail enterprises, consumer products, franchising, licensing and real property, SB Capital Group leverages resources and depth of experience to provide services across a wide spectrum of industries. www.sbcapitalgroup.com. 360 Merchant Solutions is one of the country’s leading consulting, business evaluation, asset acquisition, and asset

disposition firms for wholesalers, manufacturers, and retailers. In addition to helping companies maximize asset yield, 360 manages operational and human resources issues, real estate relationships, and other critical areas that are impacted when companies go through a transitional period.

IN MEMORIAM CFA Mourns the Loss of Jim Rothman

INDUSTRY NEWS

Arena Investors, LP, SB Capital Group and 360 Merchant Solutions Enter Into Strategic Partnership to Fund Scargo Hill Capital

The Commercial Finance Association was informed of the passing of James Rothman, 56, who was involved with the CFA for many years. Jim moved to Florida (Miami/ Dade area) in 1985 where he opened FidelCor, then went onto Bell Atlantic, a short-term equipment financing subsidiary. He then worked at TempFunds, which was purchased by Capital Business Credit and became Capital Temp Funds. Jim also had an interim role at Wells Fargo Capital Finance and then went on to work at Crestmark. Jim then worked at Crossroads Financial for two years, and, most recently, at GMA USA and Corefund Capital. Jim died peacefully in his home with his girlfriend, Meg, by his side. He was born in Mount Vernon, NY. Son of the late David and Barbara Rothman, Jim is survived by his beautiful twins Eliana and Danielle. He is also survived by his two sisters, Roberta and Deborah Rothman and his niece and Goddaughter Hannah Rothman. Always loving and generous to his children, Meg and entire extended family. Jim was loyal to his friends and colleagues. Jim had been active with The March of Dimes for over nine years and served as President of his Boca Raton chapter three times. In lieu of flowers the family has kindly asked for donations in his memory to The March of Dimes - South Florida Chapter.

THE SECURED LENDER MAY 2017 11

FUNDING FOR INDEPENDENT COMMERCIAL FINANCE COMPANIES By Tim Stute

REGISTRATION IS OPEN FOR CFAâ&#x20AC;&#x2122;S ANNUAL CONVENTION IN CHICAGO! WWW.CFA.COM

Where to Look for Junior Capital in Todayâ&#x20AC;&#x2122;s Capital-Rich Environment Tim Stute of Houlihan Lokeyâ&#x20AC;&#x2122;s Financial Institutions Group discusses how knowing your strategic goals and understanding how they mesh with the various players in the institutional capital market will help entrepreneurial finance companies navigate their options.

THE SECURED LENDER MAY 2017 13

In the years after the Great Recession, as consumer and small business credit quality soared back to peak cleanliness and investors sought consistent yield, institutional debt and equity investors plowed significant capital into the overall specialty finance sector. From junior debt to common equity, hedge funds, private equity firms, business development companies, and others have sought returns from steady operators in various domains of the specialty finance landscape, including the asset-based lending and accounts receivable factoring sectors. Today, these capital providers

in the commercial finance sector, many companies today supplement their equity capital with “friends and family” subordinated debt. This non-dilutive capital tends to be priced at rates lower than market, which today would mean below a 10% to 12% coupon, but is often limited in amount and future availability. The friendly subordinated debt investor is frequently situated in the capital structure above a very thin layer of true equity, meaning that the sub-debt holder is taking some level of equity risk without the requisite return upside. That said, the arrangement

route, but remember that this capital doesn’t only count as equity when clearly subordinated to your senior lender—it is also non-dilutive to the equity owners. And most institutional subordinated debt investors are anxious to invest further capital in later rounds. For the growing commercial finance company, this can be quite attractive when compared to the limitations of “passing the hat” or raising more common equity. Equity Capital and the Rise of the Family Office As it relates to junior capital, or

ypically, many of these groups want to see the opportunity to put at least $10 million to $20 million of capital to work—preferably even more. They will generally seek an all-in return of at least 14% to 16%, including fees. And some may seek equity upside via warrants or some other mechanism.

continue to seek good debt and equity investments. And, if anything, there appears to be even more capital on the sidelines looking for a home than at any point since the gloomy downturn of 2008 and 2009. The senior debt market for commercial finance companies is healthier than ever, yet it’s dominated by a select few big banks who truly understand asset-based lending and factoring. Smaller finance companies can find senior financing, too, perhaps with higher pricing and more restrictive borrowing base concentration and eligibility criteria, from a host of smaller banks and non-bank finance companies. But further down the capital structure is where more liquidity is looking to creep into the commercial finance sector. Subordinated Debt Availability As has been commonplace for decades

can be rewarding for both the investor who seeks a consistent cash coupon and the company which wants a lowmaintenance capital source. But what if your capital needs are greater, whether for organic growth, acquisitions, or even a desire to dividend-out some capital to shareholders? In today’s market, an abundance of investors are willing to invest junior capital into commercial finance companies. These parties include hedge funds, dedicated mezzanine funds, and business development companies, among others. Typically, many of these groups want to see the opportunity to put at least $10 million to $20 million of capital to work—preferably even more. They will generally seek an all-in return of at least 14% to 16%, including fees. And some may seek equity upside via warrants or some other mechanism. The pricing may seem high compared to the “friends and family”

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equity, most companies at this point are familiar with the role of private equity firms and hedge funds as a capital partner for management teams, particularly given the influx of this capital type in recent years to independent commercial finance companies such as North Mill Capital, LSQ Funding, and Gibraltar Business Capital. These investors generally look to write sizable checks and want to see balance sheet and earnings growth—sometimes quick, substantial growth—before looking to exit the investment three to seven years down the road. Most private equity firms seek an annual return on their investment of over 20%, including the return from exit proceeds. To be fair, there is plenty to like about private equity partners. First of all, most private equity sponsors are willing to invest incremental capital to support company growth, whether organic or via acquisition.

Many companies in the commercial finance sector do not have access to that type of capital. Second, private equity firms generally look to partner with management, giving senior executives the opportunity to invest alongside them while also providing incentives to deliver outsized returns to the private equity sponsor on the capital they invested. Those incentives tend to be in the form of stock grants, options, or some equity upside over and above the capital the executive already has at risk. In summary, if all goes according to plan, management teams have the opportunity to generate significant wealth when partnering with a private equity firm, growing the business, and delivering on a successful exit. While several private equity firms are active in the commercial finance sector, and thus known to many operators, a lesser-known capital provider that often may provide an interesting funding alternative is that of the single-family investment office. It was this type of investor which partnered with Stewart Chesters and Rob Meyers at Republic Business Credit last year, helping them to complete a management-led buyout. A single-family office is a private company that manages investments and trust accounts for a single family. The company’s investment capital is the family’s own wealth, often accumulated over many years and generations. Because singlefamily offices are driven solely by the return and capital needs and preferences of their respective underlying families, there is no standard for how they should be structured and, thus, no standard for how they invest their capital, what returns they should seek, or how long they are willing to keep their capital invested in any one company. Some single-family offices are lean vehicles that focus exclusively on investing with a minimal workforce of professionals, while others are large, robust organizations with in-house staff, numerous vendor relationships,

and a broad platform of services. While it’s hard to accurately gauge, estimates of the number of single-family offices range from a few thousand to more than ten thousand. When compared to the typical private equity investment parameters described above, the flexibility of a single-family office is sometimes hard to beat. For example, without a burning liquidity need, a single-family office may be willing to keep its capital in a company more permanently. In addition, the single-family office may be content to earn annual cash-on-cash returns on their investment rather than focusing on an exit. This stability from an equity partner can not only serve to ease management’s mindset around strategic direction but, also allow for consistency in messaging to both the company’s target market and its employees. Another area of flexibility from single-family office investors is that of the form of capital they invest. Because a single-family office may be more focused on annual cash return than on long-term capital appreciation, it may be amenable to investing with a debt instrument that will subordinate to a senior credit facility, providing for equity-like treatment without dilution to the company’s stockholders.

mercial finance company navigate the options. TSL Tim Stute is a managing director in Houlihan Lokey’s Financial Institutions Group. He has approximately 20 years of experience providing capital markets and M&A advisory services to the financial institutions sector with a particular emphasis on the specialty finance industry, including equipment leasing and lending companies, asset-based lenders, accounts receivable factoring companies, SBA 7(a) lenders, and non-mortgage consumer lenders. Stute is based in the firm’s Washington, D.C., office. For more information, please visit www.HL.com. Note: Statements and opinions expressed herein are solely those of the author and may not coincide with those of Houlihan Lokey.

Summary Whatever your current capital needs, it’s important to know that the overall market is flush with liquidity. While senior financing continues to be available to good performers, the continued emergence of other institutional investors focused on the lower part of the capital structure gives commercial finance operators greater alternatives today than just a few years ago—and certainly a greater plethora of options as compared to before the Great Recession. Knowing your strategic goals and understanding how they mesh with the investment criteria of the various players in the institutional capital market will help today’s com-

THE SECURED LENDER MAY 2017 15

Atypical Collateral Can Endanger an M&A BY ROBERT WOOD, CPA

The competitive environment has led to decreasing interest rates, increasing advance rates and, in many cases, a less-than-comprehensive due diligence effort by lenders. “Atypical” collateral in financing deals is being included in deals to make the deals more attractive. Robert Wood of Freed Maxick discusses three types of atypical collateral: unbilled receivables, in-transit inventory and work-in-progress (WIP) inventory.

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According to The Deloitte M&A Index for 2016, global merger and acquisition activity has reached its highest peak in almost a decade—about $4 trillion annually. Clearly the pace is brisk and the number of deals is soaring. Not surprisingly, many new lenders have entered this arena—including private equity firms that enjoy fewer regulatory restrictions than banking institutions. In the past few years, as the competition for new deals has grown exponentially, lenders have had to become more creative and flexible to increase their deal flow. This pace and competitive environment has led to decreasing interest rates, increasing advance rates and, in many cases, a less than comprehensive due diligence effort by lenders. The potential for lender losses on bad loans is exacerbated because lenders are including “atypical” collateral in financing deals to make the deals more attractive. A few examples of these types of atypical collateral included in recent financings are unbilled receivables, in-transit inventory, and work-inprogress (WIP) inventory. From a due-diligence perspective, these three types of collateral require an additional level of analysis to assess their functionality and credibility. There are various tests and strategies to ensure integrity of these types of collateral which may be critical for structuring sound deals and assessing their potential for realizing projected return on investment. Unbilled Receivables Due diligence on unbilled receivables should be based on a few simple questions: How long does it take to issue an invoice, and is the unbilled invoice amount representative of the amount that is ultimately billed and collected? When considering funding transactions, lenders need to observe and assess the limits on the timeframe it takes to invoice—because without limits, the value of this collateral is questionable. Without a time limit, management has free reign to post to

this account with no fear of collateral limitation. Additional analysis is required to assess the credibility of the dollar amount of unbilled receivables, which can be easily inflated or could be missing external documentation. From a risk perspective, unbilled receivables can be more risky to the lender due to their subjective nature and reliance on internal documentation that cannot be easily verified with a customer without extensive analysis and intrusion. If untested, this collateral could lead to an overstatement in a collateral-poor situation. To test the credibility of unbilled receivables as collateral, it would be prudent to obtain an unbilled report from two to three months prior to the borrowing base date. From this report, the field auditor should select the largest unbilled jobs and have management provide the ultimate invoice associated with the unbilled amount. The field auditor should also perform a lag calculation from the date the unbilled item was posted to the report and the date that the unbilled item is invoiced. If the lag is in excess of 30 days, it is recommended that it be ineligible for consideration as collateral to persuade the borrower to invoice timely. Also the field auditor should compare the unbilled amount to the invoiced amount to determine that the invoiced amount is equal to or greater than the unbilled amount. Since the unbilled amount is often a subjective posting to the unbilled account, the risk for overstatement can be high. If the unbilled amount is higher, compare the amounts for all tested items and include an ineligible percentage for the current unbilled report. From a practical perspective, the lender should be aware that to liquidate unbilled accounts receivable, borrower personnel may be required to remain employed to convert the unbilled receivables to an invoiced amount to allow collection by the lender from the customer.

In-transit Inventory As the name implies, this is material moving between two or more locations, usually separated geographically, normally from an overseas vendor. Declaring this type of inventory as credible collateral to fund an M&A transaction should raise several red flags and hurdles for lenders. For in-transit inventory, if adequate documentation is not required by the lender, reports can be subject to subjective amounts and potential manipulation. For example, there may be legal hurdles to consider such as: 1. Is the inventory purchased subject to a Letter of Credit? Has the borrower fulfilled this requirement? Will there be additional costs to the lender to obtain access to these goods in a liquidation scenario? 2. In-transit from a location outside of the US. Are there additional costs to bring the goods to a domestic warehouse? 3. Has title passed to the borrower? Is the transaction FOB Shipping point? If it is not, the vendor could delay or refuse shipment. If it is, then the borrower takes risk of shipment and is responsible for cargo insurance. 4. Does the agent have cargo insurance? The insurance must be in effect during shipment, adequate to the extent of the shipment, and preferably naming the lender as a loss payee in the event of lack of delivery. 5. Is there a negotiable Bill of Lading? If the bill of lading is nonnegotiable, the carrier would have to deliver to the consignee in the document. The lender would want to ensure that the lender is the named party to ensure access to the collateral as required. Although this would be beneficial from a securitization perspective, it would be cumbersome to endorse all bills of lading to the borrower depending on the number of transactions THE SECURED LENDER MAY 2017 17

involved. For a negotiable bill of lading, the holder of the paper would have rights to the collateral. Therefore, the borrower would be required to send these to the lender, which may or may not be feasible. Problems can also arise from the control methods utilized in the tracking and accounting of in-transit inventory, making their value as loan collateral questionable. For example, documentation using only Excel spreadsheets can be troublesome because these are subject to manual manipulation, which can lead to inflated collateral values that can cause an unacceptable level of lender risk and exposure. Fairly significant fraud can be identified from this means of reporting collateral. To assess the credibility and risk levels of this type of collateral, the lender should obtain proof of vendor documentation as well as verify the existence of marine insurance if the inventory is shipped in cargo vessels. The field auditor should be required to test a sample of in-transit inventory as of a borrower base date to ensure that adequate documentation is in place regarding a valid purchase order, shipping documentation including bills of lading, insurance, and valuation of inventory in the form of a vendor invoice. In a liquidation scenario, for in-transit inventory there are legal issues, insurance, and additional costs to bring the inventory to the company dock, including customs, duties, demurrage, and domestic transport that may be required of the lender to bring the collateral into a position to be liquidated. Work-In-Process Inventory Work-in-process inventory can be difficult to liquidate due to its limited marketability, as it has changed in form from a raw material and is not in a completed form for a finished good. Therefore, the inventory would require additional work to be in a form

functional for liquidation. For workin-process inventory, the reporting structure for the inventory is crucial. Often this inventory is not maintained on a perpetual report and is included as a static value on the general ledger. Many companies will only estimate WIP inventory amounts based on a subjective assessment of that inventory on a monthly basis. Lending on that valuation could negatively impact the lender’s collateral position. Therefore, it is critical that the borrower be required to maintain a fully integrated perpetual reporting system that can be valued and tested at any point in time. Also, the quantity and costing should be specifically identified to specific inventory rather than to a large group or pool of collateral. If the inventory is not maintained on a perpetual system, the risks are obvious, including the possibility of subjective valuation and only a periodic valuation without the ability to determine the valuation at a specific selected date. Investigation of whether the inventory is integrated to the general ledger is important, as this opens the possibility of subjective valuation easily inflatable by management. There are many opportunities for questionable WIP valuation, so knowing the collateral and the system is crucial. For example, lending risk can be minimized if the inventory valuation is updated on a timely basis. In fact, it should be updated daily in some fashion, through transfers from raw materials (RM) and relief to finished goods (FG) during production. If a lender funding an M&A transaction finds that the valuation of WIP inventory is only done on a monthly basis (or less frequently), the valuation used for assessing its value as collateral is most likely not current. The field auditor should assess the perpetual system to ensure that it is integrated and updated routinely. Testing should include quantity and costing testing. Any difficulties observed through testing of this collat-

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eral could impact the collateral value in a liquidation scenario. For WIP inventory, there may be a long conversion process requiring personnel to be maintained on the payroll to make this inventory in a liquidation form. Also, additional costs may be required for parts/outside labor to turn the inventory into a finished good. Special Categories The three above collateral categories do not fit the “normal” ABL templates and would require special testing. If the lender is going to routinely include this collateral, standard procedures need to be enacted. Last, there are certain collateral categories excluded from scopes because they don’t fit the testing standard of collateral. These should, however, be analyzed, as they are other examples of atypical collateral that should be assessed in the lender’s due diligence. Even though competitive pressures may be motivating some lenders to take due diligence shortcuts, spending more time and effort now when it comes to atypical collateral may result in lower exposure and an overall better quality of lending going forward. TSL Bob Wood, CPA, is a principal at Freed Maxick, a Top 100 CPA firm headquartered in Buffalo, NY. Wood is a member of the firm’s Asset-based Lending Team, bringing a wealth of experience in accounting, tax, specialized risk management, and consulting services to banks and savings institutions, trust organizations, credit unions, mortgage companies, and finance and leasing companies nationwide. He can be reached at 716.857.2651 or at bob.wood@freedmaxick.com.

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THE ENTREPRENEURIAL LENDER’S GUIDE TO RAISING CAPITAL By John D. Cochran and Benjamin P. Kaplan

Finding the right capital partner can make all the difference. John Cochran and Benjamin Kaplan of Lovell Minnick set out guidelines for entrepreneurial lenders seeking to raise capital.

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Raising capital is a challenge, even for the most seasoned veterans. While there is no silver bullet to overcome this challenge, we hope that readers seeking to raise capital can glean insight from our perspective, which is informed by nearly twenty years of investing in and working closely with financial services businesses and the entrepreneurs who lead them. Throughout our experience working with these companies and reviewing countless other investment opportunities, we have developed some viewpoints and a framework that we hope readers will find helpful and thought-provoking. While our viewpoints and framework are informed by our unique experience, unexpected developments are inevitable in the capital raising process. Every process takes on a life of its own, so this article is intended to serve as a general primer rather than a prescriptive guide throughout the lifecycle of a business. With that said, to start off we have distilled our thoughts into four key components. First is understanding business characteristics that investors generally seek. Second is an assessment of capital structure alternatives. Third is how to choose the right capital partner or partners. And fourth is how to manage the capital raising process. To begin, investors in lending businesses generally look for certain business characteristics. Almost always, these will include an operationally sound business model backed by a solid team. Operationally sound business models reflect sustainable transaction economics, a focused strategy, and robust underwriting (compliance with applicable regulations is another point worth mentioning, but a point too broad to cover here). A solid team with functional and relevant experience is necessary to support these “key” business characteristics. In our experience, without the team, sustainable transaction economics, focused strategy, and robust underwriting never seem to fall into place to ultimately support and sustain an operationally sound business model.

We will now address each of these key characteristics that support a strong business model, along with some considerations regarding the team backing them. Sustainable transaction economics require cost-effective client acquisition strategies. If customer acquisition costs exceed the net lifetime value of a client, raising capital will be a challenging and a potentially fruitless endeavor. If executed correctly, segmenting the market and devising a cost-effective acquisition strategy targeted towards the most strategic prospects should yield highly profitable client relationships. For an entrepreneurial business, sustainable transaction economics are oftentimes easier to achieve when an industry-specific or product-oriented strategy is employed. Entrepreneurial businesses can rarely be good at all things, or even so-so at all things. Therefore, an entrepreneur should focus on profitable industry verticals or sub-verticals, or niche products where a specialist touch can differentiate the business relative to competition. In any event, sustainable transaction economics do not add too much without a robust underwriting strategy. A robust underwriting strategy requires a holistic approach to accessing and corroborating relevant data, and then analyzing the data with the assistance of a credit model to inform pricing and structuring decisions. An investor will measure the quality and consistency of a company’s underwriting process. In today’s benign, low-rate environment, newer lenders need to continually test and monitor the effectiveness of their underwriting strategy to ensure that strong portfolio performance is attributable to their underwriting process and not merely the cyclically low default environment. A strong team is an imperative to support the aforementioned business characteristics. In our experience, if there isn’t a strong team, sustainable transaction economics, a focused strategy, and robust underwriting are simply lacking. A solid team is not one person

THE SECURED LENDER MAY 2017 21

who wears all the hats. Given the diverse complexities unique to the world of lending, a solid team should possess relevant experience across finance and accounting; sales and marketing; credit and risk; regulatory, compliance, and legal; and operations and technology. No one person can handle all of these in the world of lending. Therefore, it is important to focus on building a sustainable and well-rounded organizational structure. If there isn’t a strong team, there isn’t a strong business. A sound business model and strong team mean little to an entrepreneur seeking to raise capital if it isn’t communicated well—communication is paramount. Entrepreneurs with comprehensive data will find it easier to convey and support key business characteristics with data, and data should help support the characteristics key to success. One of the first things a sophisticated capital provider will want to see to substantiate a business model is granular portfolio performance (in addition to well-kept and audited financials). This includes cumulative static loss curves by vintage cohorts and comprehensive portfolio stratification. Portfolio stratification can take on many different flavors, but some examples include yield, initial loan/ lease size, product type, term/maturity, amortized cost, delinquency/default data, credit scores, financial profiles, time in business, guarantees, geography, and industry. Consistent tracking of all pertinent data, inclusive of declined applicants, is key to maintaining a robust data set that will help any business continually improve over time. This requires a robust and integrated system infrastructure that can leverage data to gain insights, which will be an appealing consideration to capital providers. Now we transition to the second component to assess the various capital structures an entrepreneur should consider in light of business strategy, along with some of the tradeoffs associated with them.

The capital hierarchy of a lender is generally comprised of three components: senior debt, subordinated debt, and equity. Early on, equity will generally come from friends and family as well as the entrepreneur directly. At this stage, there is usually only senior debt provider in the capital structure, if any. But as lenders scale, capital structures become more complicated, and we will provide some examples to highlight considerations. Foremost, equity is almost universally required for any debt provider. Without equity (i.e., skin in the game), an entrepreneur is misaligned with creditors. Therefore, an entrepreneur always needs a material amount of equity investment from its own pocket as well as any equity investors with whom it partners if it wants to raise capital from a lender finance partner. Lender finance partners are generally segmented between senior and junior lenders. These lenders will generally advance capital up to predetermined percentage of asset value. While a senior lender finance partner may only advance up to a certain percentage of assets, a junior lender can slot in behind them before additional equity funding is needed. Let’s consider a theoretical $100 million portfolio where a senior lender is advancing the first $80 million, or 80%. In this scenario, absent a junior lender finance partner, equity would be required to backfill the remaining $20 million, or 20%. However, junior lender partners exist who are willing to bridge a portion of the gap between the senior partner and the equity. An example would be a junior lender willing to fund an incremental $10 million from 80% (where the senior lender “detaches”) to 90%, but this comes at a cost, given their higher risk exposure in a downside scenario. Junior lenders usually come into play when portfolios mature and an entrepreneur can point to consistent performance that warrants additional leverage in lieu of additional equity. Let’s revert to the theoretical $100-million portfolio and add some as-

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sumptions to crystalize some relevant considerations: $80 million in senior debt at 5%, $10 million of junior debt at 10%, and $10 million of equity. If the theoretical portfolio is expected to yield 12% after losses, it should generate $12 million in interest income, less $4 million in senior interest expense ($80 million x 5%), less $1 million in junior interest expense ($10 million x 10%). This leaves $7 million in net interest income. In this scenario, the senior and junior lenders create a very efficient capital structure, maximizing returns to a minimal amount of equity deployed. However, this also creates a highly-leveraged capital structure with substantial cash interest obligations. In this theoretical example with a $100-million portfolio, if a company is paying $3 million, or 3% of loan volume to acquire customers, and another $3 million in operating expenses, it would only have $1 million in operating profit, which imposes a tight leash on any business of that scale. If losses in the portfolio increase even slightly, the business may lose money, jeopardizing lender covenant compliance. This, in turn, can result in further portfolio problems and a race to the bottom. To mitigate the risk of such an outcome, while less capital-efficient, a lender can employ a lower-leverage equity structure with additional equity. For example, if one were to remove the junior lender and reduce the senior lender advance rate to 70%, they could generate the same expected $12 million in interest income and only incur $3.5 million in interest expense, for net interest income of $8.5 million. However, this would require $30 million of equity, providing substantial additional cushion for unanticipated underperformance. The challenge here is the incremental equity is likely harder to raise, and while it gives the business more financial flexibility, less leverage in the capital structure can constrain the ability to grow. It also diminishes the return on equity as well as the less regularly discussed probability cost of financial distress.

An entrepreneur needs to think hard about finding the optimal capital structure to fit the strategy employed. In general, earlier stage businesses should limit the use of leverage and increase the use of equity. Once a business has proven itself over the years and worked through credit cycles, it can pay to increase leverage. Having reviewed the general capital structures available to entrepreneurs we will now move to the third component regarding the selection of capital partner. When considering capital providers, an entrepreneur should develop a sense for the type of capital partner they’re looking for. This can take on various dynamics depending on the lifecycle of a business. First and foremost, every business requires equity to get things off the ground and to establish a preliminary track record, as well as to align interests with respect to lender finance partners. Unless an entrepreneur has relevant experience and demonstrated capacity to lead a financial company, third-party equity from an institutional investor is unlikely; friends and family of the entrepreneur directly will need to fund this preliminary equity. However, as businesses grow and the case for institutional equity builds, entrepreneurs should consider investors who have industry-specific experience. These investors will understand the complexities they confront, be able to share informed advice, and leverage relationships. Additionally, the right institutional equity investor can lend immediate credibility with lender finance partners. Moving beyond equity, senior lenders can range from hedge funds and private credit funds to banks. Hedge funds and private credit funds tend to lend higher-cost money to earlier stage businesses where business models, underwriting, and teams may not be as developed. These partners are important to get off the ground and build a track record. Banks tend to lend more cheaply to established businesses, and they can provide credibility as well. Banks’ lower cost of capital might carry

more strings, including tighter covenants, higher capital requirements, and increased monitoring. While these can challenge businesses, the lower cost of capital and organizational discipline developed tend to outweigh costs. Finally, junior lenders tend to be friends and family or credit funds. In the earlier stages of a lender, friends and family capital may be easier to access than capital from an institutional investor. Oftentimes, friends and family will lend amounts below the minimum thresholds of institutional investors, and will do so with fewer strings attached and a shorter investment process. Despite these benefits, this capital generally can’t scale with growth. Furthermore, friends and family capital is generally more complex to administer, given the interactions with multiple individuals vs. a singular institutional investor. Finally, friends and family exposes businesses to varied personal issues and conflicts that friends and family oftentimes encounter in life. A consideration for junior lenders is the need to establish intercreditor agreements with a senior lender. Working with lenders who know the “rules of the road” helps to streamline what can be a surprisingly complicated and timeconsuming process. Entrepreneurs need to consider what capital structure fits their business and strategy best, which brings us to the fourth and last component regarding the capital raising process. Capital raising is a long and arduous process that requires a lot of work above and beyond that of running a business. In light of this, an entrepreneur should have a game plan regarding the type of capital and partner they seek, as well as the information they wish to communicate. Talking to other entrepreneurs who have gone through the process before, as well as investors and investment bankers, can be one way to streamline the process. In most scenarios, an entrepreneur will need to “kiss many frogs” before it finds the right one, and this can be a very stressful exercise, and one that specialized

advisors may be in a position to facilitate. However, in the end, finding a knowledgeable, scalable capital partner can unlock substantial market opportunity and enable businesses to realize greater long-term success. TSL John D. Cochran is a partner of Lovell Minnick Partners LLC and a member of its Investment Committee. Cochran joined the Firm in 2008. Prior to joining LMP, Cochran was a Principal at SV Investment Partners (formerly Schroder Ventures US), a private equity firm focused on investing in mid-market business services companies. Prior to SV Investment Partners, he worked as an associate at J.W. Childs Associates. Cochran started his career in the financial services industry at Salomon Brothers Inc in the mergers and acquisitions group. He is a member of the Board of Directors of Seaside National Bank & Trust, Commercial Credit Inc., LSQ Group Holding LLC, and Currency Capital, LLC. Prior board positions include ALPS Holdings Inc., Mercer Advisors Inc., and PlanMember Financial Corporation. Cochran earned a B.A. degree in English from the University of California, Los Angeles, and an M.B.A. degree and Master degree in manufacturing systems engineering from Stanford University. Benjamin P. Kaplan joined the Los Angeles office of Lovell Minnick Partners LLC as a vice president in February 2016. Prior to LMP, Kaplan made private investments at the family office of a founding partner of a private equity fund. He also worked at several private equity firms including Riordan, Lewis & Hayden Equity Partners while earning his M.B.A. and J.D. degrees from the Northwestern University Kellogg School of Management and School of Law, respectively. Previously, Kaplan was an associate with Century Capital Management and a senior analyst at Raymond James & Associates. Kaplan received his Bachelor of Science in economics and finance, magna cum laude, from Boston College. He currently serves as Co-Chair of the Northwestern Pritzker School of Law Alumni Club of Los Angeles.

THE SECURED LENDER MAY 2017 23

Refinancing the Borrower Through an Assignment and Assumption: BY JASON I. MILLER In Part 1 of this two-part series, Jason I. Miller introduces the assignment and assumption structure and its benefits, discusses the factors a lender can use to determine whether it is ultimately a beneficial strategy to pursue under the circumstances, and begins to focus on key provisions typically found in an assignment and assumption agreement.

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When, Why, and

How

Todayâ&#x20AC;&#x2122;s two-edged lending environment of abundant liquidity and low credit standards has created soft pricing for secured lenders. This, coupled with the simultaneous pressure to close deals as quickly and inexpensively as possible, is compelling lenders to rethink their lending strategies. More and more often lately, lenders offering refinancing have been using a strategy of taking out the existing lender through an assignment of the loan and the underlying loan documents, documented by an assignment and assumption agreement. This strategy can, depending on several factors, be a quicker and more efficient path to closing a loan. This article outlines key points that a lender should consider when assessing whether this strategy is appropriate under the circumstances. Specifically, it focuses on core provisions typically found in assignment and assumption agreements and how the strategy compares with a typical payoff scenario. Benefits of Taking by Assignment The strategy of taking by assignment usually arises when one or both parties to the transaction are either looking to: 1. Close quickly; 2. Minimize or altogether avoid the hassle, expense, and potential delays involved with obtaining new consents, waivers, and other agreements from third parties; or 3. Trump intervening secured lenders by stepping into the shoes of the existing lender from a lien priority standpoint. Speed From a simplistic standpoint, if you could get comfortable with all the existing due diligence and legal documents under the existing lenderâ&#x20AC;&#x2122;s credit facility and then all you had to do to close was execute and deliver an assignment agreement, you could close within a matter of days. In reality, closing any transaction is almost

THE SECURED LENDER MAY 2017 25

never this simple; nonetheless, in its purest, most ideal form, it is clear how this strategy is attractive from a timing perspective. The more common scenario is that taking by assignment usually takes longer than simply signing and closing, yet is still less timeconsuming than a straight payoff with the new lender preparing and negotiating a full suite of new loan documents. It is important to note that most lenders will need to finish their customary diligence, KYC compliance, and background checks prior to taking an assignment, and such items as these can only be expedited so much. Furthermore, most lenders and their counsel will also require a review of the existing loan documentation. Any documents that may contain errors or omissions or may require updating due to the passage of time (e.g., disclosure schedules) may need to be amended or amended and restated. Preparing these amendments in advance of closing takes time and often starts to eat into the anticipated time savings. One loan document that the new lender will almost certainly want to amend and restate is the loan agreement. As any lender knows, a loan agreement, especially the longer and more detailed varieties, can be very personal to an institution. Banks, for example, may require internal approval to forgo their usual formulation of anti-money laundering (AML) and Patriot Act representations, warranties, and covenants. Asset-based lenders will likely have eligibility criteria or reporting requirements specific to the institution that must be contained in the document. These are only a few of the reasons why a lender might find the existing loan agreement insufficient for its purposes going forward. In sum, most new lenders taking by assignment will prepare an amended and restated loan agreement, in the form of their institution’s form loan agreement, in advance of closing so that it can be in place from the

closing date onwards. The amended and restated loan agreement is likely the most substantial agreement to be drafted and any complications or delays with its preparation or negotiation have the potential to reduce any anticipated time savings. Efficiency Often, parties to a proposed refinancing look back at the closing binder from the original closing and see an overwhelming number of third-party agreements, including landlord/warehouse/bailee waivers, deposit account control agreements, and intercreditor and subordination agreements. In this situation, assuming all of these agreements are fully assignable by their terms, the parties may decide that the most effective avenue to closing the deal is an assignment and assumption. A substantial amount of upfront diligence is necessary before a new lender can determine whether the strategy, under the circumstances, makes sense. The new lender and its counsel will need to work with the existing lender and its counsel to quickly obtain copies of existing loan documents. The new lender, who is unfamiliar with the legal file, will need to understand the full scope of the documentation, both pre- and post-closing. It is important to keep in mind during such a review that each lender’s risk tolerance is different. For instance, the existing lender may have purposely not sought to obtain certain third-party agreements that the new lender routinely requires. The new lender should not assume that the legal file is complete from its own perspective; instead, it will need to determine if and when it will require that any “missing” agreement or filing be obtained. If one or more of these agreements are so important that they must be delivered before closing, the likelihood of obtaining that agreement is something to consider in the overall decision as to whether taking by assignment is the right approach for the new lender.

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Regarding the existing file, each document should be reviewed to: 1. Confirm whether it is fully assignable or requires the prior written consent of the third party; 2. Ascertain whether the third party is entitled to notice of the assignment; and 3. Ensure it contains the same substantive legal benefits and protections the new lender would typically obtain for itself if starting from new, or at a minimum determine that the document is something it can “live with.” The new lender will also want to confirm that it is satisfied that the existing lender took all the necessary steps to properly perfect its lien on the collateral. Agreements requiring advanced notice or third-party consent will have the potential to be problematic. Similarly, agreements that are substantively insufficient in their current form would need to be amended, either before or after the assignment. In such a circumstance, obtaining the third party’s signature may be problematic. If, however, the new lender can smoothly advance past these considerations, it should be relatively easy to proceed. Any third party not entitled to notice or consent need not be dealt with. Still, some new lenders may want to send a simple notice informing the third party of the assignment and of the new lender’s contact information. More cautious new lenders may add a closing condition that the third party countersign the notice to acknowledge the assignment and agree that it remains bound by the terms of the existing agreement. A common practical consideration, relating to deposit account control agreements covering a borrower’s collection accounts (into which it receives proceeds of collateral and subjects them to an automatic sweep), is that the new lender will need to notify the depositary bank of their wire instructions for the sweep.

Lien Priority The new lender will want to run updated UCC lien, tax, litigation, and judgment searches. To save money, they may check with the existing lender to obtain copies of any bring-down searches that may have been run at intervals since the closing date. Sometimes, particularly with distressed borrowers, updated lien search reveals intervening liens that are currently junior to those of the existing lender, but would be senior to those of the new lender if the new lender refinanced the borrower through a traditional payoff. In this scenario, the new lender may opt to use the strategy of taking by assignment to leapfrog the intervening lienholders. If drafted properly, the assignment and assumption agreement (discussed below), together with any necessary UCC assignments, delivery of possessory collateral, and other notices of assignment will be sufficient for the new lender to essentially step into the shoes of the existing lender and acquire its prior perfected lien status. Parties to the Assignment and Assumption 1. Existing lenders, as assignors (“Assignor”) 2. Existing agent (“Existing Agent”) 3. Existing letter of credit issuers (“LC Issuers”), if applicable 4. Existing swingline lenders (“Swingline Lenders”), if applicable 5. New lenders, as assignees (“Assignees”) 6. New agent (“New Agent”) 7. New letter of credit issuers, if applicable 8. New swingline lenders, if applicable 9. Borrower (“Borrowers”) 10. Guarantor (“Guarantors”) and other loan parties. Note that counsel should thoroughly review the file for any loan parties who may have joined the credit facility in any capacity after the original closing date to verify whether they are a party to the assignment and assumption.

Assignments, Resignations and Appointments ◗ Assignment by Lenders: – For an agreed purchase price (discussed below): ◗ All of each Assignor’s rights and obligations in its capacity as Lender under the credit agreement and the other loan documents in the amount and equal to the percentage interest identified later in the Agreement of all the outstanding rights and obligations under the respective facilities. ◗ All claims, suits, causes of action and any other right of each Assignor (in its capacity as Lender) against any person, whether known or unknown, arising under or in connection with the credit agreement, any of the other loan documents or the loan transactions governed thereby or in any way based on or related to any of the foregoing, including, but not limited to, contract claims, tort claims, malpractice claims, statutory, claims and all other claims at law or in equity related to the rights and obligations sold and assigned pursuant to first clause above (collectively, the “Assigned Interest”). – To the extent there are multiple tranches being assigned with multiple lenders on both sides of the transaction, it may be helpful to attach a schedule with a chart setting forth the various tranches, together with the various assignors and assignees thereof. – Each assignment is without recourse to Assignors and, except as expressly provided in the Assignment and Assumption, without representation or warranty by Assignors. – For clarity, the parties may wish to include a schedule listing all of the main loan documents being assigned. Be aware that, if this approach is pursued, a deep dive of the file may be necessary, especially if there have been multiple amendments and/or waivers, con-

sents and post-closing documents executed and delivered since the original closing date. ◗ Assignment by LC Issuers and Swingline Lenders: – To the extent applicable, LC Issuers and Swingline Lenders assigns their respective interests in such capacity to the new LC Issuers and Swingline Lenders. ◗ Assignment by and Resignation of Existing Agent and Assumption by and Appointment of New Agent: – The Existing Agent shall be discharged from all of its duties and obligations under the credit agreement and the other loan documents in its capacity(ies) as administrative agent and/or as collateral agent. – Borrowers and Assignors accept such resignations and waive any applicable notice requirements contained in the loan documents. – Assignees appoints a new administrative/collateral agent as the successor agent. Assignees and Borrowers accept and consent to the appointment. – There should be a statement that, from and after the effective date of the Assignment and Assumption, the fees payable by the Borrowers to the New Agent under the credit agreement, any fee letter, and any other loan documents shall be the same as those payable to the Existing Agent in such capacities. This ends Part 1 of this series. Part 2 will delineate additional specific items that should be in the assignment and assumption agreement. TSL Jason I. Miller is Of Counsel at Blank Rome LLP. He concentrates his practice in the area of commercial finance, with a particular focus on asset-based and cash-flow financing. He represents major national and international commercial banks, finance subsidiaries of banks, private equity groups, mezzanine lenders and independent factors and finance companies. He can be reached at JMiller@ BlankRome.com.

THE SECURED LENDER MAY 2017 27

Accessing Capital: Lenders And Trade Credit Insurance,

Fueling The Engine Together BY JOSEPH KETZNER SR.

Joseph Ketzner Sr. of Global Commercial Credit explains how lenders and trade credit insurance providers can work together to fuel the engine that drives the business.

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Professionals who have selected commercial finance, credit, accounts receivable and risk management as their chosen fields are constantly challenged with how to most effectively capitalize their business. Naturally, the best and most cost-effective way is the internal generation of cash flow from operations versus the consumption of invested capital. Most businesses, however, generally need to look externally to support their working capital and cash flow needs. With regard to trade credit insurance, if “catastrophic loss prevention” is the number one reason most businesses

which likely are outside of the lenders, own internal credit/risk management rules or comfort. The borrower/insured and lender jointly engage the trade credit insurer as a means to obtain capital. There are specific terms utilized in a fairly traditional commercial borrowing arrangement: “borrowing base”, “discount factors”, “eligible receivables”, “advance rate”, “cost of funds”, to name a few. The trade credit insurance cover is intended to help support the broadening of eligible receivables and advance rate. Translated: it enables the borrower access to higher levels of capital to fuel their business than would otherwise be

accounts receivable. A properly designed program covers this protracted timeline and should enable the lender to look at the pre-shipment period in a different light while defining the composition of the borrowing base. Your lender will appreciate the borrower’s efforts to anticipate and mitigate this risk.They should also leverage it. Several decades ago, I was asked by my previous employer to spend an extended period in Europe to garner a better understanding of the trade credit insurance markets and methods compared to the U.S. market. As I met with the major carriers, several of the

here are specific terms utilized in a fairly traditional commercial borrowing arrangement: “borrowing base”, “discount factors”, “eligible receivables”, “advance rate”, “cost of funds”, to name a few.

employ trade credit insurance; the number two reason is the “enhancement of the collateral” associated with accounts receivable and inventory attributed to a wide variety of financing solutions. These enhancements attributed to trade credit insurance can speak to the level of accessibility of capital as well as the cost of funds, and typically both. In many cases, the lender actually seeks a trade credit insurance solution to abate risks born by the borrower: concentrations, foreign, protracted terms of payment, weak buyer risk, etc. The utilization of trade credit insurance is typically applied in a very specific way associated with the lenders’ specific requirements. Somewhat one-dimensional in its application, this tends to be viewed as an added cost from the borrower’s perspective. However, the access to capital is the fundamental driver associated with the acquisition of trade credit insurance as a remedy for risks

available from the lender. Even if a company does not seek additional capital, but utilizes accounts receivable and inventory as part of its borrowing base, the company’s executives should discuss the impact on “cost of funds” or “covenants” with their lender if the collateral becomes enhanced. Lenders are sensitive to the same competitive pressures as most businesses and their best customers will always be pursued by others. These lenders also have an incentive for the base collateral to be enhanced and determine its impact on cost of funds, covenants, security, terms, etc. Most trade credit insurance programs assume the risk at the point which a legitimate order is accepted. While some companies might have inventory in stock to fulfill these orders, a larger segment of businesses must source the raw material, wait its delivery, design/ build/package the order and ship/deliver to their buyer before it converts to an

established brokers and a few of the major banks, borrowing enhancements became a very obvious point of differentiation. Every loan application specimen I reviewed had several questions associated with trade credit insurance: -Do you insure your accounts receivable? Y/N -If “Y”, whom do you insure your accounts receivable with? Name: _________________ I appreciate that in Europe, especially back in 1990, when I was assigned there, a higher percent of trade was cross-border. There were other differences associated with credit management capabilities, buyer information, risk appetite, etc., which also came into play. As for the trade credit insurance product, I saw little difference in content, provisions and pricing. Most carriers at that time either dominated

THE SECURED LENDER MAY 2017 29

in domestic, export or structured trade. This all changed over the next 10 years as large international players came into existence through acquisition and territorial green fields. When I returned to the U.S., I sought examples of typical commercial lending applications from many banks to see if these two questions were represented on their form. I think you know the answer. U.S. lenders were much more oriented to a restrictive view of the borrowing base: international accounts receivable, concentrations above a fixed percent, protracted past-due situations, extended payment terms, etc. were either excluded or limited. The underwriting focus would essentially be on “exclusions” as the eligible receivables would be significantly redefined. Once the loan officer completed a first pass, then they would likely establish advance rates of 75%-80% for eligible A/R and fewer than 50% for finished goods. Talk about covering your bet... As you might expect, banks were also going through their own version of consolidation and market re-positioning. This did enable several of the large global institutions to make headway in broadening acceptance of trade credit insurance in the U.S. As a result, the number of carriers and specialty brokers grew significantly over the past 25 years. However, I still believe that the vast majority of lenders remain reluctant to positively weight the value of trade credit insurance within their own internal credit processes and procedures. By nature, lenders will be disinclined to expand any assumption of exposure, especially since the A/R is only one aspect of their risk. Their primary focus will always be with the borrower and with the collateral taking a secondary position. Ideally, the banks would like to see a virtual financial guarantee associated with their loan, which would eliminate the risk of fraud, borrower financial failure, policy performance (compliance conditions), etc. as well as buyer default. Many of these risks fall outside the scope of trade credit insurance. Coming full circle, the decision

decision to utilize trade credit insurance should not be driven by the bank’s requirement of collateral enhancement. The decision should rest with the borrower and their acceptance that the cost of the premium for a trade credit insurance program should be viewed as an investment. The return on that investment is both measurable and significant, unlike any other insurance product. From the lender’s perspective, there is no additional cost, as the borrower is utilizing trade credit insurance for its own advantages for its own advantages when properly positioned. Let’s contemplate: If “catastrophic loss prevention” is the number one reason, and borrowing enhancement is number two, what are numbers 3, 4, and 5? The easiest to understand and most often expressed and demonstrated ROI is “safe sales expansion”. How to capture the lost sales opportunities to potential customers who represent more risk than a company should prudently take or available information support? Next, number three is sales expansion without increasing exposure to existing bad debt loss potential. These risk factors may be a function of exposure concentration, or information gaps, or terms of payment, or security, etc., but trade credit insurance provides opportunities to incrementally increase sales to new or existing customers. The number 4 reason, which has a very positive ROI, is about credit management augmentation. Many of these trade credit insurance carriers maintain information on millions of buyers found in scores of countries. As a result, the buyer’s risk is under constant surveillance as the monitoring process is ongoing at the macro-economic, sector, country and buyer level. The carriers typically have resources in the local markets with access to buyer information, speak the language, understand the culture, legal system and economic realities of the market, and the ability to mitigate potential losses in advance of default. Replicating these capabilities would be

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virtually impossible for any company. Utilizing trade credit insurance extends any business’ credit management capabilities. It is far more cost-advantaged to have these costs included with the premium of the insurance cover. The number five reason goes for both the insured and the lender, as it relates to balance sheet treatment associated with bad-debt reserves. Lenders, even more than borrowers, are under far greater scrutiny to comply with Basel III and to ensure capital adequacy and stress assessments are achieved. By enhancing the collateral, the lender has enhanced the loan; defaults are less likely, capital requirements diminished and enhanced compliance executed. Most of the major carriers hold very strong ratings which should alter the discussion of capital consumption as well. There are a slew of other reasons (reasons six through ten) why the effective utilization of a trade credit insurance program makes sense, but I’ll address them at a later date. Today, my mission was to ensure that the lender-borrower dialogue always included the trade credit insurance component to facilitate the most effective and cost advantaged access to working capital. Most importantly, the premium associated with a comprehensive trade credit insurance program should never be viewed as a cost; it’s an investment! TSL Joseph Ketzner Sr. is national sales director/regional vice president Eastern Region for Global Commercial Credit. Bringing a long reputation of customer service, Ketzner joined Global Commercial Credit following a 44-year career as an executive for Euler Hermes, the world’s leading credit insurance company. Prior to his career in the receivable management industry, he was a banker at Mercantile Trust in Baltimore, MD. He is considered one of the innovators of the industry and has helped develop many of the services and products offered today which focus on helping businesses grow profitably.

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The TSL Interview: Lin Chua

A Female Founder In The Fintech Space By Eileen Wubbe

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Lin Chua

Co-Founder, COO & Head of Capital Markets InterNex Capital

The fintech entrepreneur shares her story of launching InterNex, dispensing advice for novice business owners along the way. She highlights the importance of acting on big ideas, taking calculated risks, striving to continually improve and fostering a diverse network. How did you come up with the name InterNex Capital? CHUA: Nex stands for nexus. The name reflects our goal. InterNex connects small and mid-sized business owners to working capital through our technology and expertise. Tell us a bit about yourself and your entrepreneurial spirit. CHUA: I grew up in the 1970s in Singapore, a country that was going through immense change and development. That shaped my perspective when it comes to taking calculated risks, exploiting changing business dynamics and striving to continually improve and evolve. Iâ&#x20AC;&#x2122;m fortunate to come from a family of entrepreneurs. My father went to Australia as one of Singaporeâ&#x20AC;&#x2122;s first overseas scholars . He returned and founded different businesses, including leading a sovereign wealth fund. My brother established an ophthalmology practice, and my mother ran her own insurance business. She always encouraged us to work very hard, build long-term relationships and, importantly, to trust our instincts and not be afraid of taking the right risks.

THE SECURED LENDER MAY 2017

So, the need to start and build something new runs in my blood. When I was at Duke Law School, I secured an offer from the prestigious New York-based law firm of Simpson Thacher & Bartlett. I was very excited about the job – doing transactions – but knew that I had no aspirations to become a law firm partner. Even back then, I had other plans for myself. Years later, I turned down offers by bulge-bracket investment banks to join GE Capital because it gave me a unique opportunity to help start up an earlystage business within a large, global company. It was an opportunity to be a rookie entrepreneur -- surrounded by “best of the best” thinkers and operators who knew how to scale businesses. By the way, that’s when I first met Paul DeDomenico, InterNex CEO. Paul and I have worked together for more than a decade now, including the last two years as business partners at InterNex. How did you make the transition to start InterNex? CHUA: After almost a decade at GE Capital, I was at another ‘fork’ in my career journey. As true entrepreneurs, Paul and I had started discussing the concept of InterNex. At the same time, I was getting some interesting job offers, including a senior role at another major financial institution. When I spoke to a long-time friend about the pros and cons of the options, he said: ‘You’ve been thorough and methodical in your analysis of each choice. But what I haven’t heard is what do you, deep down, want to do yourself?’ The rest is history. InterNex is really about my co-founders and me realizing our dream. We are incredibly excited to run an enterprise that is focused on empowering and growing small businesses. And doing this in a way that marries best practices in finance and cutting-edge technologies. Looking back on the early days of starting up, what advice do you have for others wanting to become entrepreneurs? CHUA: The learning curve during the startup period of any business can be

steep. I’m a firm believer that you get at least one, if not more, nuggets of information from each person you meet. Be willing to meet and talk to a lot of people, more people than perhaps you had ever imagined it was possible to meet. Dare to be bold in your vision for your company, and be expressive in what you want to achieve. This is a particularly important one for female entrepreneurs. A startup is so unique because you get the opportunity to wear multiple hats and perform multiple roles. Understand your strengths, assess the situation and where you can add value, and then put yourself out there. Trust your gut. I don’t mean this in a vacuum. Trust your training, trust your expertise, trust your experience and trust your judgment and your instincts. Do not be afraid of failure. Finally, be prepared to work very, very hard. Remember that in a small organization, if one person is working 50 percent more and there’s only a small number of you, well, that’s a big impact for the entire organization. Every hour of work counts. When we interviewed InterNex CEO, Paul DeDomenico, he highlighted InterNex was going to focus on operationalizing the business, completing the first transactions and testing the plumbing of the platform. How has this process been going? How has feedback been from your clients and partners? CHUA: We’ve made tremendous progress. We arranged a funding facility of up to $100 million in September 2016. We also announced our strategic partnership with global business process leader Genpact and signed up many key partners in Q4. And our equity offering was oversubscribed early this year in 2017. We have successfully closed several transactions, met our growth milestones, and received encouraging feedback and input from our clients and our partners. Over the past few months, we’ve released highlights of some of our sample deals and the reactions of our happy clients. Our team has truly pulled together.

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What is the biggest challenge InterNex currently faces? CHUA: We focus on attracting and retaining excellent clients, the key word being “excellent”. Many young businesses run the risk of getting caught up in the “volume chase”. Sacrificing quality of your loans or borrowers simply to add volume is a dangerous path for lenders. At InterNex, we are not only focusing on customer acquisition, but we are also ensuring that our underwriting and portfolio management standards are maintained. We work hard to keep that a front and center goal. As we grow, we need to maintain the transparency, simplicity and agility of a startup. This means anticipating and being responsive to the needs of our clients and the market, avoiding complexity, making sure we keep collaborating well, and keeping our employees engaged and focused on one common goal. What are your goals for 2017? CHUA: 2016 was a foundational year for InterNex; we built our infrastructure and successfully secured funding. This year is all about growth and execution. I’m very excited about 2017 because we now can pivot to delivering on the goal we had in mind when we created InterNex: helping support the growth engine of the United States by providing small and mid-sized businesses with capital and providing stable income streams for institutions in a low-return world. On a personal note, I want to make sure to treasure and foster the relationships that really matter. I mean the family, friends, clients, investors, partners and employees who supported us as we went through the formative growth years for InterNex. InterNex has come so far with them behind us, and I have no doubt we will grow and scale InterNex with their continued support. TSL Eileen Wubbe is senior editor of The Secured Lender.

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what

WOULD YOU DO?

n this edition of What Would You Do?, the Chief Credit Officer of Overadvance Bank considers a prospect’s request to lend to the prospect and its affiliate, as co-borrowers, under a combined borrowing base. Share and Share Alike! Overadvance Bank is considering whether to extend a $100mm, senior secured, revolving loan facility to clothing retailer Colorful Clothing Inc. and its two wholly owned subsidiaries, Winter Wardrobes Inc. and the newly acquired Summer Styles Inc. Winter Wardrobes specializes in cold-weather clothing and accessories, while Summer Styles focuses on warm weather clothing and accessories. Colorful Clothing has been in business for over ten years. Until recently, however, the company focused only on cold-weather clothing, which it sold through Winter Wardrobes. While Winter Wardrobes generated consistent profits, its limited focus on cold weather clothing resulted in significant cash flow peaks and valleys during the year. In an effort to mitigate the seasonal fluctuations in its cash flow, and at the same time grow its business, last month Colorful Clothing acquired Summer Styles, whose cash flow peaks and valleys occurred during the opposite

times of the year. It is contemplated that Winter Wardrobes and Summer Styles will be co-borrowers under the proposed credit facility, jointly and severally liable for all advances and other obligations, and that Colorful Clothing will act as borrowing agent for the coborrowers. Given their opposite sales cycles, Winter Wardrobes’ working capital needs ramp-up in the summer, when it begins purchasing its inventory for the winter season. By contrast, Summer Styles’ working capital needs ramp-up in the winter, when it begins purchasing most of its inventory for the summer season. The Chief Financial Officer of Colorful Clothing wants to balance out the seasonal working capital needs and borrowing availability of Winter Wardrobes and Summer Styles. As such, in lieu of each co-borrower having its own separate borrowing base, the Chief Financial Officer proposes that the co-borrowers have a joint or combined borrowing base. This would allow each borrower to obtain revolving loans based on the other borrower’s eligible collateral. The Chief Credit Officer is familiar with the concept of a combined borrowing base. but he also knows they are not without risk. If you were the Chief Credit Officer, what would you do? The Chief Credit Officer knows that the most straightforward approach for an asset-based credit facility is for the lender to simply “lend to the assets”, meaning, loans are made to a borrower based only on the eligible collateral (i.e., receivables, inventory, etc.) of that borrower. This, of course, requires that the eligible collateral of a borrower be sufficient to support its projected borrowing needs. However, as is true of Winter Wardrobes and Summer Styles, this if often not

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the case. To the extent a company with insufficient eligible collateral is borrowing from the lender based on the eligible collateral of another company, the “asset-rich” company is effectively guaranteeing the loan to the weaker company and the lender is relying on the enforceability of that guaranty to obtain repayment of the loan. So, in our example, if Summer Styles borrows against the eligible collateral of Winter Wardrobe to finance purchases of seasonal inventory or other working capital needs, Winter Wardrobes is effectively guarantying that loan and Overadvance Bank will be relying on the enforceability of that guaranty to obtain repayment of the loan to Summer Styles. The Chief Credit Officer recalls that one of the basic legal risks to an intercompany guarantee is the potential that the guarantee is attacked as a fraudulent transfer. The elements of a fraudulent transfer in the context of a guarantee are generally that: (1) the guarantor was insolvent when it made the guaranty or was rendered insolvent because of the guaranty and (2) the guarantor did not receive “reasonably equivalent value” in exchange for giving the guaranty. The Chief Credit Officer has no reason to believe that either Summer Styles or Winter Wardrobes is currently insolvent or would be rendered insolvent as a result of the proposed credit facility. However, he knows from experience that the solvency test is not always so clear-cut. As such, he does not wish to ignore the second prong of the fraudulent transfer test– namely, whether Summer Styles and Winter Wardrobes are receiving reasonably equivalent value in exchange for giving their guarantees of the other borrower.

Reasonably equivalent value measures the benefit received by the guarantor in exchange for giving the guaranty against the liability incurred by the guarantor under the guaranty. The analysis is extremely fact-sensitive. As a practical matter, a guarantor receives little, if any, direct economic benefit in exchange for giving a guaranty. Therefore, courts will generally consider the value of any indirect benefits received by the guarantor. The most straightforward indirect benefit is when the guarantor receives from the borrower some of the loan proceeds (i.e., a subsidiary guarantees a loan to its parent and then the parent downstreams a portion of the loan proceeds to the subsidiary). Indirect benefits might also include, for example, any synergies realized by the guarantor from strengthening the corporate group as a whole, an increased ability to borrow working capital, the safeguarding of an important source of supply or customer for the guarantor. In our case, the joint borrowing base is designed to benefit each of Summer Styles and Winter Wardrobes, as each will benefit by the ability to borrow against the eligible collateral of the other. In exchange for allowing Summer Styles to borrow against eligible collateral of Winter Wardrobe, Winter Wardrobes would get the ability to borrow against the eligible collateral of Summer Styles. But what if Summer Styles, after borrowing against the eligible collateral of Winter Wardrobes, collapses and goes out of business before reaching the summer season. In that example, Winter Wardrobes might not realize the benefit of borrowing against eligible collateral of Summer Styles, in which case Overadvance Bank might need to rely on other indirect benefits

such as corporate synergies. After careful consideration, the Chief Credit Officer decides to accommodate Colorful Clothingâ&#x20AC;&#x2122;s request that the Bank lend against a combined borrowing base shared by Winter Wardrobes and Summer Styles. He reasons that both borrowers are solvent, based on their most recent interim and annual financial statements, that both borrowers are well established with a history of profitability and that, based on the financial projections, each borrower anticipates needing roughly the same amount of loans from the eligible collateral of its co-borrower. We hope you enjoyed the column and, of course, are always interested in your feedback. As such, if you have any scenarios you would like to see discussed in a future column, please let us know at Dfiorillo@otterbourg. com or Jcretella@otterbourg.com. TSL Dan Fiorillo and Jim Cretella are Members of the law firm Otterbourg P.C.

â&#x20AC;&#x153;In our case, the joint borrowing base is designed to benefit each of Summer Styles and Winter Wardrobes, as each will benefit by the ability to borrow against the eligible collateral of the other. In exchange for allowing Summer Styles to borrow against eligible collateral of Winter Wardrobes, Winter Wardrobes would get the ability to borrow against the eligible collateral of Summer Styles.â&#x20AC;?

THE SECURED LENDER MAY 2017 37

the cfa brief AMONG CFA MEMBERS

CFA NEWS IN PRINT

Briar Capital: Texas-based Briar Capital, an asset-based lender for companies unable to meet more stringent lending requirements of commercial banks, has opened an Atlanta office where it will provide working capital, equipment and real estate financing to small and mid-market companies. Jeff Appleton, a 30-year veteran of asset-based lending, has been named senior vice president for the firm’s new Alpharetta office at 555 North Point Center East. Prior to joining Briar Capital, Appleton served in executive lending positions with JPMorgan Chase & Co., TD Bank and Wells Fargo. Headquartered in Houston, Briar Capital also staffs offices in Dallas, San Antonio and Phoenix. “We’ve had our eye on the Atlanta market for quite some time,” notes Tim McCabe, president and chief operating officer for Briar Capital. “There are still many loans in the area which banks simply won’t consider either because a business has overextended itself, has outgrown its working capital or perhaps has experienced a downturn due to internal or external factors. In other words, the business has become ‘unbankable.’” By partnering with an asset-based lender with an underwriting criteria focused on collateral, not cash

flow or profitability, Appleton says a commercial bank can maintain its relationship with the customer by continuing to offer treasury management services until the borrower gets on firmer footing. CIT Group Inc. (NYSE: CIT) announced that CIT Capital Equipment Financing, a leading provider of equipment financing, has added several new members to its team. “We continue to build our team to be a best-in-class originations group in the capital equipment sector,” said Eric Miller, group head and managing director of CIT Capital Equipment Finance. “We increased direct originations 400 percent in 2016. These additional hires with regional expertise should position us well to continue to provide financing solutions to meet the needs of our valued middle-market customers. We expect to continue to grow in 2017.” These new hires build on last year’s announcement that CIT Capital Equipment Finance expanded its market presence: Robert Haynes joins as director of originations, Mountain region, based in Denver. Before joining CIT, Haynes held positions of increasing responsibility at NHB Bank, Bank of the West and Transamerica Finance Corporation, where he focused on direct originations and relationship management. Haynes can be reached by emailing robert.haynes@cit.com. David Hicks joins as director of originations, Mid-South region, based in Nashville, Tenn. Hicks has held origination roles at GE Capital, Macquarie Equipment Capital, and the former Banc One Leasing (JPMorgan Chase), as well as managerial roles at Fifth Third Bank and Cadence Bank. Hicks can be reached by emailing david.hicks@cit.com.

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Tim McNeely joins as director of originations, Pacific Northwest region, based in Sacramento, CA. Prior to joining CIT, McNeely held roles of increasing responsibility with GE Capital, Siemens Financial Services, Capital One, AIG, and Rabbank. McNeely can be reached by emailing timothy.mcneely@cit.com. Michael Ollio joins as director of indirect originations, based in Pittsburgh, PA, where he will cover banks, captives, and independents. Before joining CIT, Ollio held roles at PNC Bank and PNC Equipment Finance, as well as Siemens Financial Services. Ollio can be reached by emailing michael.ollio@cit.com. Jason Sullivan joins as director of originations, Southeast region, based in Charleston, SC. Before joining CIT, Sullivan held positions of increasing responsibility at Bank of America Merrill Lynch and GE Commercial Finance where he focused on direct originations and relationship management. Sullivan can be reached by emailing jason.sullivan@cit.com. Crestmark: Kelly L. Collins joins Crestmark as vice president, business development officer, for the East Division. Based in North Carolina, Collins is responsible for helping small and medium-sized businesses in the Carolinas access financing, and for creating greater awareness for Crestmark’s brand within her territory. She reports to James Farrell, first vice president, East Division sales manager. Collins joins Crestmark from Amerisource Funding, where she was a regional market manager for the Southeast Region, and the company’s 2015 Top Producer. Previously, Collins worked at: Presidential Financial Corp., where she was president of the Carolinas Region; High Point Bank,

where she was the vice president, commercial loan officer; Capital Factors Corporation, where she was vice president, new business development officer for North Carolina and Virginia; First Factors Corporation, where she held several positions, including loan portfolio manager; and NCNB where she worked as a commercial loan officer. ENGS Commercial Finance Co., an industry-leading commercial finance company, announced the addition of new team members to the company’s Factoring Division, ENGS Commercial Capital (ECC). Joining the company are Nicole Montrone, vice president, sales; Leslye Campos, vice president, operations; Azurdee Ramasar, assistant vice president, portfolio manager; Richard Nevin, business development manager; Erin Kilpatrick, senior account executive and Charlise Bentley, operations associate. Tania Daniel, managing director of ENGS Commercial Capital, commented, “Each individual has strong ties and relationships within the factoring industry and will be instrumental in the success of ECC. We are creating a powerhouse team, and these individuals are making us stronger. They are knowledgeable, dedicated and passionate about the business and will do a great job building this division and assisting our team going forward.” Campos is responsible for the operations team and brings over 25 years of managerial experience, most recently from LSQ Funding. Montrone brings over 20 years of commercial finance experience, most recently from AmeriFactors Financial Group, and is responsible for inside sales efforts. With over 11 years of experience, most recently from LSQ Funding, Ramasar has worked directly

with businesses to help leverage their cash flow and working capital needs and will be responsible for operations and portfolio management. Nevin has extensive sales and consulting experience and will be responsible for developing new business relations. Kilpatrick brings over six years of strong trucking-specific factoring experience and will be responsible for managing new and existing accounts. Bentley will be responsible for the content and management of the operations team and will assist in developing new customer relationships. Hitachi Business Finance: Thomas Bayer has joined the team as an origination leader. Bayer will concentrate his efforts on asset-based lending and syndicated credit deals locally in

the Northeast region and across the United States. “Tom is a great addition to our team. He has an extensive background in the banking industry that will prove to be instrumental as we work to bring awareness to the Hitachi Business Finance name in the Northeast,” states Mike Semanco, president and COO. In his role, Bayer is responsible for managing and expanding relationships with financial institutions, regional banks, and other lending institutions in syndicated transactions, with typical hold positions ranging from $5 - $25 million. Additionally, he will be working with entrepreneurial business owners looking for assetbased financing solutions. The addition of Bayer furthers the

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the cfa brief

company’s plans to expand its seniorsecured financing capabilities. As an alternative to traditional lending institutions, Hitachi Business Finance provides flexible cash solutions including factoring, asset-based lines of credit, lender finance, and syndicated credit opportunities. Bayer represents Hitachi Business Finance, which is part of the Commercial Finance division of Hitachi Capital America Corp., (HCA). He is based in HCA’s Norwalk, CT corporate headquarters and can be reached at tbayer@hitachibusinessfinance.com or (203) 956-3249. He brings more than 30 years of experience in asset-based lending with growing companies. Most recently, he was with UBS Investment Bank, where he served as an executive director. Bayer also worked at Royal Bank of Scotland Business Capital and Webster Business Credit Corporation. Bayer has a bachelor of science in accounting from New York University. Lighthouse Financial Corp.: Mark Walling has been promoted to executive vice president. In this position, he will continue his duties as chief credit officer ensuring that Lighthouse adheres to established credit policy and procedures. In addition, Walling will continue to serve the credit committee in an underwriting and credit decision capacity while assisting with day-to-day loan management operations. The promotion is in recognition of Walling’s exemplary service to Lighthouse. Walling has more than 32 years of experience in accounting, financial analysis, loan underwriting, loan documentation and loan administration, with nearly 24 of those years spent with Lighthouse. His career at Lighthouse has included time spent as an account executive, underwriter

and senior credit officer. Earlier in his career, Walling worked in accounting at Guilford Mills. Walling holds a BS in accounting from High Point University and a MBA from the University of North Carolina at Greensboro. Commenting on Walling’s promotion, Lighthouse president J. Brad Leach said, “Mark has been an integral team member, not only helping Lighthouse maintain credit discipline, but also providing critical credit insight when making decisions within the portfolio and with regard to new client transactions. His broad level of experience at Lighthouse provides the entire team with an invaluable resource, and we are lucky to have him on our team.” Walling is located in the corporate offices in Greensboro and can be contacted by phone at (336) 272-9766 or by e-mail at mwalling@lighthousefinancial.net. Rosenthal & Rosenthal, Inc.: Ying Yang has been appointed as vice president. In her role, Ying will be responsible for business development across the firm’s divisions, with a particular focus on growing the West Coast client base. The appointment was effective March 13, 2017. Ying is an experienced commercial finance executive, having spent over 13 years at CIT Commercial Services sourcing and closing factoring and asset-based lending transactions. “We’re thrilled to welcome Ying to the Rosenthal team and are fortunate to add yet another strong player to our already talented bench,” said Peter Rosenthal, president of Rosenthal. “With her solution-driven mindset, strong grasp of the credit environment and proven track record in the factoring and asset-based lending space, I know Ying will be a perfect addition to our West Coast division.”

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Fluent in Mandarin, Ying joins Rosenthal from CIT, where she served in a variety of roles, most recently as vice president of business development for the Western Region. During her tenure at CIT, she held a number of other positions, including credit analyst, account executive and senior underwriter. She previously managed the underwriting team, which structured and closed factoring programs and facilities across the apparel, footwear, accessories, textile, furniture, home furnishing, consumer electronics and houseware industries. “No one is more knowledgeable or trusted in this industry than Rosenthal,” said Ying. “I’m excited to be a part of expanding Rosenthal’s presence throughout the U.S. and around the world and look forward to our future success together.” Rosenthal & Rosenthal (www.rosenthalinc.com) is the leading factoring, asset-based lending and purchase order financing firm in the United States. Founded in 1938 by Imre J. Rosenthal, the firm is now led by the second and third generations of the Rosenthal family. As a privately held company, Rosenthal is committed to providing personalized service and flexible lending to clients across a broad range of industries, including manufacturing, apparel, food and beverage, gift and home, technology, jewelry, accessories, real estate and more. Sallyport Commercial Finance: Greg Dyson has joined as national sales manager. Dyson has over 20 years’ experience providing creative finance solutions to growing companies nationwide. Believing in the entrepreneurial spirit and focusing on the needs of the client, Dyson is dedicated to providing sound financial solutions through accounts receivable financ-

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www.Provident.Bank ing and asset-based lending to the small and middle-market businesses with annual revenues up to $100MM. He has committed himself to the highest level of service and integrity to help companies grow. Building key relationships within the financial community and conveying a “winwin” philosophy has proven successful to his partnerships and clients. Sterling National Bank: Thomas Pergola has joined Sterling’s Commercial Banking team as senior vice president and managing director. He will report to Ray Guanlao, senior manager director and team leader at Sterling. Pergola will aid in managing team sales and service efforts to grow and retain Sterling’s valued client relationships. He will maintain a portfolio

of relationships with target segments that lead to loans, deposits and other revenue-generating products and services. Pergola has extensive experience in client management, real estate financing and commercial lending. He most recently was senior vice president of BankUnited, where he specialized in managing a portfolio of real estate clients and high quality loan assets. Prior to joining BankUnited, he was senior vice president of JPMorgan Chase Bank, where he oversaw investment real estate transactions for the Northeast middle market. TD Bank: Ted Hopkinson has been named head of U.S. Corporate and specialty banking, reporting to TD Bank chief operating officer Greg

Braca. Based in Philadelphia, PA, Hopkinson directs the U.S. strategy for corporate banking, in partnership with TD Securities, as well as commercial real estate, healthcare, equipment finance and asset-based lending. Hopkinson joined TD Bank Group in 1988 and has held a variety of positions throughout his career in commercial, corporate and investment banking. Most recently, Hopkinson served as head of corporate banking, where he was instrumental in driving the growth strategy for the business. Hopkinson’s appointment follows the promotion of Braca as chief operating officer and transition into the chief executive officer role on June 1, 2017. “Ted brings a wealth of knowledge,

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the cfa brief

and I’m confident he will be instrumental as TD continues to expand our corporate and specialty banking business,” said Greg Braca, chief operating officer, TD Bank. “Ted’s track record in corporate and specialty lending will enable us to deliver a full suite of unique financing solutions to corporate and specialty banking clients.” “I’m thrilled to take on this senior leadership role within TD Bank, driving the growth of our Corporate and specialty banking businesses, as long-term strategic financial partners to our rapidly expanding portfolio of clients. Each of our businesses within corporate and specialty banking has enormous potential for growth as we can deliver a dedicated suite of products that specifically address client needs,” Hopkinson said.

Hopkinson holds a bachelor degree from the University of Toronto, and resides in Bryn Mawr, PA, with his family. TD Bank, America’s Most Convenient Bank, is one of the 10 largest banks in the U.S., providing more than 8.9 million customers with a full range of retail, small business and commercial banking products and services at more than 1,275 convenient locations throughout the Northeast, MidAtlantic, Metro D.C., the Carolinas and Florida. In addition, TD Bank and its subsidiaries offer customized private banking and wealth management services through TD Wealth®, and vehicle financing and dealer commercial services through TD Auto Finance. www.tdbank.com

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TD Bank, America’s Most Convenient Bank, is a member of TD Bank Group and a subsidiary of The Toronto-Dominion Bank of Toronto, Canada, a top 10 financial services company in North America. The Toronto-Dominion Bank trades on the New York and Toronto stock exchanges under the ticker symbol “TD”. www.td.com Wells Fargo: Veteran commercial banker Grant Friesth will head the Central Division for middle-market banking. Friesth, who previously led middle-market banking in Iowa, now also manages Nebraska, North Dakota, and South Dakota operations. As senior vice president and division leader, Friesth brings nearly 30 years of banking experience to the role, leading more than 30 team members in four states who primarily serve privately held, family-owned businesses with annual revenues of greater than $20 million. Companies of this size – referred to as “middlemarket” by the company – are a driving force in the central U.S. and the nation’s economy, reporting an average revenue growth of 6.9 percent in the fourth quarter of 2016 and a strong year of overall growth, according to the National Center for the Middle-market. “Grant will build on the hundreds of existing strong relationships within the division’s vibrant middlemarket by adding new customers, especially putting Wells Fargo’s food and agribusiness expertise to work,” said MaryLou Barreiro, Mountain Midwest Region head for Wells Fargo middle-market banking. “Grant has made a habit of leading dynamic teams that exceed customer expectations. He has a knack for developing innovative strategies for winning new customers and helping existing customers reach their financial goals.”

Based in Des Moines, Friesth started his career in 1989 with Norwest Bank in Minneapolis. Most recently as regional vice president for middlemarket banking in Iowa, Friesth led statewide teams to double-digit loan commitment, new customer, and profitability growth. Previously, he served as a business development officer for Wells Fargo business credit, middlemarket banking relationship manager, loan team lead, and commercial banking team lead. Grant earned his bachelor’s degree in finance from the University of Iowa and his MBA from the University of Arizona. A native of Iowa, Friesth serves on the Iowa Events Center Hotel and Greater Des Moines Partnership Regional Economic Development boards. He also previously served on the YMCA’s Riverfront board, the West Des Moines Soccer Board, and with the Central Presbyterian Deacons. Wells Fargo serves its customers and strengthens the local communities across the division through philanthropy and volunteerism. In 2015, the finance services company contributed $5.27 million to nearly 1,036 nonprofits and schools. An additional $1.93 million was donated to Iowa, Nebraska, North Dakota, and South Dakota schools through Wells Fargo’s team member matching gift program. Wells Fargo team members contributed $6.6 million through an annual Community Support and United Way Campaign and volunteered more than 204,500 hours. About Wells Fargo Middle-market Banking Wells Fargo is No. 1 in total middlemarket banking share in the U.S. and has the most primary banking relationships with middle-market companies with $25 million to $500 million in annual sales.* With 140

offices in 38 states and four Canadian provinces, Wells Fargo middle-market banking provides local service and decision-making for businesses with $20 million to $500 million-plus in annual sales. Asset-based lending, traditional secured loans, and capital markets provide access to working capital for day-to-day operations and growth. Expertise and services are available to specialty industries, including technology, food and agribusiness, healthcare, government, higher education, clean technology, and environmental services. Watch stories about successful middle-market companies at http://wholesalebanking.wf.com/ cmbg-success-stories.

market performance among companies with $25MM-<$500MM in sales for both primary bank market share and total market share (primary + up to 3 additional banks used).

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THE SECURED LENDER MAY 2017 43

CHAPTER NEWS

the cfa brief

Atlanta The Chapter held an Atlanta Braves vs. New York Mets outing at SunTrust Park on May 4 and a Cinco de Mayo Tennis Event on May 5. The Chapter will hold an educational lunch at Greenberg Traurig on June 7 and a Summer Social with TMA on June 22. Save the dates for September 26 for a golf outing at Rivermont Country Club and an Educational Breakfast at the offices of McGuireWoods on October 19. The Chapter’s Holiday Party with TMA will be held on December 7. For more information visit community.cfa.com/atlantachapter California On September 19, the Chapter will hold a Women of CFCC Event (location: TBD) and on October 4 there will be a panel discussion at the Luxe Summit Hotel. On November 15 there will be a Sponsor Panel at the Center Club-Orange County and on December 13 a holiday party at the Sheraton Universal hotel. For more information visit community.cfa.com/californiachapter. Charlotte The Chapter held a panel and lunch on Supply Chain Finance - How it works and its impact on the Commercial Finance Industry, on April 25 at The Palm in Charlotte. Rodney Schansman, chief executive officer, was the presenter. Schansman serves as Ftrans’ CEO and member of the board of directors and is responsible for leadership and strategic direction of the company. He is a 25-year veteran of commercial finance,

healthcare finance and private equity. As a 15-year veteran and senior vice president of Bank of America specialized lending group, Rodney’s experience spans the operating disciplines of commercial finance including underwriting, origination, technology and funding. After growing BofA’s specialized lending portfolio to $1 billion in net funds employed and selling it to GMAC in 2000, Schansman spent three years as an SVP with Bank of America Equity Partners deploying the bank’s capital in strategic investments. He co-founded Finacity, Inc. (with JV partners Kleiner Perkins, Euler ACI and Texas Pacific Group), a technologyenabled receivables securitization company. Schansman has also led the start-up of several other healthcare financing companies including Inworks Servicing, a healthcare payment cycle management and funding company, and Prime Revenue, a vendor finance technology company. On May 23, the Chapter will hold an Economic Update by John Silvia, managing director and the chief economist for Wells Fargo, at The Palm Restaurant. For more information, visit community.cfa.com/charlottechapter

Europe The Chapter held an event on May 3 at Duff & Phelps in London featuring a moderated interactive panel with key UK-based debt advisors looking at: What does ABL need to do to move the needle? The panel consisted of Marc Finer, associate director, Debt Advisory, KPMG; Tim Metzgen, managing director, Marlborough Partners; Floris Hovingh, head of Alternative Capital Solutions, Deloitte and Ken Goldsbrough, managing director, Duff & Phelps, served as moderator. The event concluded with a reception.

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Florida The Chapter held a Masters in Finance: Spring Social and Tournament Viewing Party on April 6 at Mucho Tequila & Tacos, in Orlando, FL and a spring happy hour in Ft. Lauderdale at Yolo. On April 25, the Chapter held a Women in Finance happy hour at Ceviche Tapas Bar in Orlando. All proceeds from this event went to Summer of Dreams, a free, 10-week program for homeless students in Orange, Seminole and Osceola counties that provides resources to bridge the gap during summer break. The Chapter held a Tampa luncheon at The Center Club, on April 26, and the next luncheon will be held May 31, also at The Center Club. For more information visit community.cfa.com/floridachapter Houston The Chapter held a YoPro! Happy Hour at Armadillo Palace on May 23 in Houston, TX. For more information, visit community.cfa.com/houstonchapter Michigan CFA’s Michigan Chapter, along with the RMA East Michigan Chapter YP and ACG Detroit NextGen groups, watched March Madness basketball games at Tequila Blue in Royal Oak, MI on March 16. Guests participated in a friendly bracket competition for a chance to win prizes during the event. For more information, visit community.cfa.com/michiganchapter MidSouth On March 30 the Chapter watched the Nashville Predators take on the Arizona Coyotes at the Bridgestone Arena in Nashville, TN. For more information, visit community.cfa.com/midsouthchapter MidWest The Chapter held a Spring Educational

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Panel on The Changing Landscape of Retail on May 4, 2017 at The Standard Club in Chicago. The panel discussed how the retail landscape is evolving and the resulting trends of retail disruption. Panelists explored in-depth the threats, challenges, and opportunities the retail sector is facing in today’s e-commerce world. Panelists included Gilles Benchaya, senior partner, Richter Consulting; Benjamin Northman, executive vice president, Hilco Global; Larry Ridgway, senior vice president of Citizens Bank and Don Rothman, senior partner, Riemer & Braunstein. Mike Egan, chief credit officer of Monroe Capital, serviced as moderator. The Chapter’s 23rd Annual Cubs Outing will be held on Monday, May 22. Chapter attendees will watch from the Budweiser Patio at Wrigley Field. Save the dates for the Chapter’s 28th Annual Golf Invitational at Haborside International Golf Center in Chicago on July 20 and the 1st Annual Brewers Outing, held at the ATI Deck in Miller Park in Milwaukee. For more information, visit community.cfa.com/midwestchapter Minnesota The Chapter held a meeting on April 12 discussing Challenging Loans & Lessons Learned, “A Trip Down Memory Lane”, Ron Jost, vice president banking director, North Central Equity; Ron Mitchellette, founder, Michellette & Associates; Bud Hamilton, a turnaround consultant and Jack Hart, LBA Financial. The meeting was held at IDS Center in Minneapolis, MN. For more information, visit community.cfa.com/minnesotachapter New Jersey The Chapter will hold a dinner and presentation on Technology and the Future of Commercial Finance Professionals on May 9 at Wilentz, Goldman & Spitzer, P.A. in Woodbridge, NJ. Paul H.

Gemino Healthcare Finance. . . . . . . . . . . . . . . . . . . www.gemino.com. . . . . . . . . . . . . . . . . . . . . . . . Page 7 Hilco Global. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . www.hilcoglobal.com. . . . . . . . . . . . . . . . . . . . BC HPD Software, LLC. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . www.hpdsoftware.com. . . . . . . . . . . . . . . . . . IBC Provident Bank. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . www.provident.bank.com. . . . . . . . . . . . . . . Page 41 RapidAdvance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . www.rapidadvance.com. . . . . . . . . . . . . . . . . IFC William Stucky & Associates, Inc.. . . . . . . . . . . . . . www.stuckynet.com. . . . . . . . . . . . . . . . . . . . . Page 1 Utica Leaseco. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . www.uticaleaseco.com. . . . . . . . . . . . . . . . . . Page 42 Webster Business Credit. . . . . . . . . . . . . . . . . . . . . . . www.websterbank.com . . . . . . . . . . . . . . . . . Page 47 Wells Fargo Capital Finance. . . . . . . . . . . . . . . . . . . www.wellsfargocapitalfinance.com. . . . Page 2

Shur, Esq., Wilentz, Goldman & Spitzer P.A., was moderator and speaker, and the panelists were: Joe Accardi, NY/NJ Market Leader – ABL Division, Santander; John Azzinaro, chief operating officer of Real Time Consultants Inc.; and Clarence Kehoe, CPA, executive partner, Anchin, Block & Anchin LLP. The Chapter’s joint Golf & Tennis Outing with the TMA will be held on May 30 at Essex County Country Club in West Orange, NJ. For more information, visit community.cfa.com/newjerseychapter New York The Chapter will hold its 6th Annual Softball Outing in Central Park on May 17 in Central Park on The Great Lawn, Field #1. Registration, lunch and warm-ups will be held from 11:30-12:30, and the game begins at 12:30. A happy hour will follow the game at a nearby establishment. For more information, visit community.cfa.com/newyorkchapter Philadelphia The Chapter held its Day One at the Masters Networking Event at Fox and Hound in Philadelphia on April 6.

For more information, visit community.cfa.com/philadelphiachapter Raleigh-Durham The Chapter held a spring networking happy hour at Lynnwood Brewing Concern, in Raleigh, NC on May 2. CFA members and guest enjoyed networking over some of Raleigh’s best craft beer and offerings from the Chirba Food Truck. For more information, visit community.cfa.com/raleighdurhamchapter Southwest The Chapter held a Healthcare Financing Lunch & Learn on April 27 at Polsinelli. A Middle-market Update will be held at The Crescent Club in Dallas, TX on May 17. Save the dates for August 30 for the Chapter’s Sporting Clay Challenge at Elm Fork Shooting Range in Dallas, TX and PEGapalooza 2017, Dealmaker Wine & Whiskey Tasting on November 15 at 015 at Trinity Groves in Dallas, TX. For more information, visit www.cfasw.org For more information on CFA Chapters, please visit cfa.connectedcommunity. org/chaptersmain

THE SECURED LENDER MAY 2017 45

CALENDAR

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May 4, 11 and 18, 2017 Essentials of UCC- 3-Part Series Three intensive workshops at your desk May 8 – 10, 2017 Advanced Legal Issues Workshop Otterbourg PC New York, NY May 9, 2017 CFA’s New Jersey Chapter - Technology and the Future of Commercial Finance Professionals Wilentz, Goldman & Spitzer, P.A. Woodbridge, NJ May 11, 18 and 25, 2017 Essentials of UCC - Three intensive workshops at your desk May 15, 2017 CFA’s Philadelphia Chapter – 23rd Annual Golf Outing Cedarbrook Country Club Blue Bell, PA May 17, 2017 CFA’s Southwest Chapter 2017 Middle-market Update The Crescent Club Dallas, TX May 17 – 19, 2017 CFA’s Independent Finance & Factoring Roundtable Driskill Hotel Austin, TX May 22, 2017 CFA’s Midwest Chapter – Annual Cubs Outing Budweiser Patio, Wrigley Field Chicago, IL

May 23, 2017 CFA’s Charlotte Chapter Economic Update by John Silvia The Palm Restaurant Charlotte, NC May 23, 2017 CFA’s Houston Chapter – YoPro! Happy Hour Armadillo Palace Houston, TX May 23 – 25, 2017 CFA’s Operations Bootcamp Location TBD Chicago, IL May 23 – 26, 2017 CFA’s Field Examiner School Location TBD Chicago, IL May 30, 2017 CFA’s New Jersey Chapter and New Jersey TMA: Golf and Tennis Outing Essex County Country Club West Orange, NJ May 31, 2017 CFA’s Florida Chapter – Tampa Luncheon Joint meeting with TMA/SBRN: Technology Panel The Center Club Tampa, FL June 6, 2017 CFA’s Europe Chapter – pre-ILC Chapter meeting Reed Smith London, UK June 6-8, 2017 CFA’s International Lending Conference Jones Day London, UK

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June 7, 2017 CFA’s Atlanta Chapter – Educational Event Greenberg Traurig Atlanta, GA June 7 – 8, 2017 CFA’s 2017 Leadership Program Greenberg Traurig Atlanta, GA June 13 – 16, 2017 CFA’s Advanced Collateral Control Virtual Workshop June 20 – 22, 2017 CFA’s Summer Loan Documentation Workshop Exact location TBD New York, NY June 20 – 22, 2017 CFA’s Summer For What it’s Worth – All You Need to Know About Inventory Exact location TBD New York, NY June 22, 2017 CFA’s Atlanta Chapter Summer Social with TMA June 21 – 23, 2017 CFA’s Chapter Leader’s Summit Kimpton Hotel Van Zandt Austin, TX July 11 – July 27, 2017 CFA’s Summer Underwriting Fundamentals Virtual Workshops July 12, 2017 CFA’s California Chapter - Summer Party Sheraton Universal Universal City, CA July 13, 2017 CFA’s Southwest Chapter – PEGapalooza Denver Denver, CO

July 20, 2017 CFA’s MidWest Chapter – Annual Golf Invitational Haborside International Golf Center Chicago, IL August 10, 2017 CFA’s MidWest Chapter – Annual Brewers Outing ATI Deck, Miller Park Milwaukee, WI August 30, 2017 CFA’s Southwest Chapter - Sporting Clay Challenge at Elm Fork Elm Fork Shooting Range Dallas, TX September 19, 2017 CFA’s California Chapter Women of CFCC Event Location: TBD

September 26, 2017 CFA’s Atlanta Chapter – Golf Outing Rivermont Country Club Johns Creek, GA

October 2017 CFA’s California Chapter Annual Fall Golf Classic Date and Location: TBD

September 2017 Annual Cross-Border Lending Summit New York, NY

October 19, 2017 CFA’s Atlanta Chapter – Educational Breakfast Event McGuireWoods Atlanta, GA

October 4, 2017 CFA’s California Chapter Hot Topic Panel Discussion Luxe Summit Hotel Los Angeles, CA October 12, 2017 CFA’s Philadelphia Chapter – Educational Event Drexel University Philadelphia, PA

November 8 – 10, 2017 CFA’s 73rd Annual Convention Sheraton Chicago Hotel & Towers Chicago, IL November 15, 2017 Sponsor Panel Center Club - Orange County Costa Mesa, CA

The liquidity you need. The responsiveness you deserve. Webster Bank’s asset-based lending professionals listen to what matters most to you and then tailor flexible lending solutions that match your specific business needs. This kind of responsive expertise is how we’ve grown to be one of the largest banking organizations in the Northeast*… one relationship at a time.

locations: Atlanta, Baltimore, Boston, Chicago, Connecticut, New York, Philadelphia call: Warren Mino at (212) 806.4501 email: wmino@websterbcc.com *Source: National Information Center. All credit facilities are subject to the normal credit approval process. Webster Business Credit Corporation is a wholly owned subsidiary of Webster Bank, N.A. Member FDIC. The Webster symbol is a registered trademark in the U.S. ©2017 Webster Financial Corporation. All rights reserved. Equal Housing Lender

THE SECURED LENDER MAY 2017 47

revolver

TSL OPINION COLUMN

obyn Barrett of FSW Funding discusses how asset-based lending remains an industry built on relationships Guess what? Relationship lending is alive and well. Also good news: robots won’t replace us any time soon. Sometimes this can be hard to believe since it seems the hot topic at every commercial finance meeting or networking event is how to obtain and retain clients. Do we use the traditional model of marketing, such as business development officers on the street, or do we use technology, such as Internet search words and social media? The easy answer is we have to use a mix of the two methods – traditional marketing and technology – but the quandary is what mix. The Internet is Not the Best Place to Find Deals Whenever I ask a prospect how they found my company and the answer is the Internet, I am immediately suspect. Why? We don’t spend money on search words because it is not financially feasible. While we can use marketing dollars to get the word out about our companies and what we offer, we will never be able to compete against the technology companies that are driving up the cost of pay-perclick search words. Technology companies are spending millions of dollars each month to get in front of potential

prospects. I don’t know many assetbased lenders that are willing to spend at least a million a month just on Internet marketing. ABL Lenders and Factors are Relationship Lenders ABL lenders and factor prospects each have a story and the lending decision cannot be extrapolated from a few bank statements and data points. Underwriting these deals may have multiple hurdles for lenders such as competing UCC filings and negotiating intercreditor agreements. All of these issues take time and require a lender who can work to find a solution. These prospects are not served well by FinTechs and the only way asset-based lenders and factors will find these prospects is good old-fashioned marketing. That means having good sales people in the field and a good network of brokers and referral sources. Relationship Lenders are Community Lenders ABL lenders and factors all sell the same thing, money, so we need to differentiate ourselves at the local level via public relations, company website and perhaps targeted social media. The problem with social media is there is so much information out there that your message just gets lost. Thus, I am a firm believer in public relations, company website and sales people. Public relations are more than press releases and can be used as a marketing tool to build a positive reputation via a strategy to give back to the community. This doesn’t mean big dollars and can be as simple as organizing and promoting a food drive. The goal is to deliver good news and build a trustworthy reputation. Unless you have an unlimited marketing budget and can get your website to the top of every search engine,

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your website’s primary goal is to be informational. Your website is the first impression a prospect may have of your company, so make it great. Sales people are the foot soldiers and do all the really heavy lifting of getting deals in the door. Whether your company is regional or national, you will need to have sales people that can find the deals and sell a prospect on your company. Sales people are your ambassadors to the communities you serve and will be the first step to building relationships with prospects. At the end of the day, people want to do business with people they like and trust. This is why people have a favorite grocery store, restaurant or dry cleaner. We have favorites because we want to align ourselves with companies and people that share our values. Differentiating your company as a relationship lender will attract better prospects and keep clients retention up. TSL Robyn Barrett founded FSW Funding and brought with her over 25 years of experience in finance with an emphasis on asset-based lending. Prior to founding FSW, Barrett worked for a national commercial finance company, FINOVA Capital Corporation, where she last served as assistant vice president, marketing for FINOVA Portfolio Services. Robyn also worked as a senior underwriter and senior analyst, where she gained knowledge in underwriting, sales, loan negotiations and management. Barrett is also a Certified Public Accountant and has a Master in Business Management.

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