Solid and ongoing management of trade spending is critical in order to qualify for, and reap the optimal benefits of debt financing. Banks and finance houses offering credit lines, asset-based lending and factoring will often thoroughly analyze both a company's actual trade spend results and its ability to keep those expenses under control and/or predictable into the future.

1. MEI Webinar Keith Kohler, K² Financing

2. Introduction K² Financing Financing: focus on debt origination Services: strategy; CFO for rent Making the Numbers Work for You Projects www.k2financing.com

3. Objective and the Goal The Objective: Offer relevant information and perspective to assist you inunderstanding how trade spending effects your initial and ongoing eligibility for debt financing The Goal: The application of these lessons to your business to result in successful or optimal financing

4. Topics to Cover Term Sheet structures for debt financing The financier’s perspective Case Studies How to Obtain the Best Results

5. Before You Seek Any Financing What is your level of financial acumen?? 0. Complete focus on product or idea Simple calculations e.g. costs, expenses Embrace your financial statements Establish a financial rhythm Understand the outsider’s view “Make the Numbers Work for You”

6. Sources of Debt Financing Bank offerings Lines of credit Term Loans SBA Loan Programs Large guarantee fees (typically 2% of the loan amount) Wide variety of amounts available (usually $50,000 to several million) The funding bank applies its own underwriting criteria; the SBA is just a guarantor Local Economic Development Organizations Microlenders Specialty finance products Asset-based lending Factoring

7. Eligibility Requirements: Debt Commercial Banks Minimum two years in business Repayment ability (based upon profitability and/or cash flow) Quality of collateral Personal Guarantees Other Debt Funding Sources Quality of accounts receivable (credit risk) Overall balance sheet strength (profitability not always required) Minimum revenue level typically of $1 million Personal or Validity Guarantees

8. Docs for Debt Providers Accountant-reviewed tax returns Accounting software good enough for analysis, but not for closing a deal Accurate Interim statements Balance Sheet Profit and Loss Aging Accounts Receivable Report Aging Accounts Payable Report Ownership Structure Articles of Incorporation

9. Deal Structure: Lines of Credit Avg. base interest: ranges from prime (long ago) to prime +3-4% variable with floor (today) Annual fee: ¼% to 1% (very negotiable) Closing Costs: vary due to complexity/approvals Personal Guarantees Quarterly Reporting Requirements “Bad results” or risk (as perceived by the bank) can cause the line to be called in, not renewed, or capped Higher than expected or out of control/unknown trade spend can contribute (case study: CA food company “L”)

10. Deal Structure: Asset-based lending Average base interest rate: 8% - 12% variable Annual fee: ½% to 1% (negotiable) Accounts Receivable handling fees: ¼% to 1% Lockbox Requirement Advance Rate: 70-80% of eligible A/R Closing / diligence (cash flow analysis) Dilution – the real issue “Not to exceed 5%” (blended basis) If higher, will reduce the advance rate Could jeopardize renewal or ability to increase funding The problem with grocery (case study: SoCal juice company)

11. Deal Structure: Factoring Avg. fee/period: 1.25% - 2% per 30 days Term: 12-24 months (more often 18-24) Initiation Fee: usually nominal Lockbox Requirement Advance Rate: 70-80% of eligible A/R Closing / diligence (cash flow analysis) Dilution – the real issue “Not to exceed 5%” (blended basis) If higher, will reduce the advance rate What if you cannot predict? (case study: CA juice company)

12. Case Study: SoCal food company Summary of Income Statement Items

13. Conclusions Continuously track your historical and expected trade spend Understand the differences by channel Know how current and expected trade spend will effect your cash requirements for operating and for future growth Getting the right debt instrument is all about timing, preparation, and understanding what the financier wants Find the right financing partners Shop the deal Do your diligence (as much as they do with you) Deals must be managed actively Always seek more favorable terms if you “qualify” Always be proactive is there are issues or surprises

14. Into the Future… Can I help you with… financing or preparing yourself for the process? offering perspective on your current and future trade spending requirements? The starting point: a review of your core financial statements (Bal. Sh., P&L, A/R, A/P)

15. Thank you for your participation! Keith Kohler, K² Financing keith@k2financing.com, 305-519-9455