Debt can be a CPG company’s best friend, provided that they check all the boxes in terms of finding the right lender and debt option for them based on what they need that debt for. It’s a lot easier said than done, however, and you need to work with an expert to help you get through this. This is where people like Marshall Lebovits shine. With over 30 years of experience in the secured financing industry, Marshall devotes his career to helping CPG companies solve their financing needs for working capital and equipment acquisition. He focuses on non-dilutive asset-backed financing solutions. Sitting down with Elliot Begoun in this TIG Talk, he shares some valuable tips about debt financing that entrepreneurs in the CPG space need to know about. Listen in and take note of the important details as they will mean a lot for your plans to scale.

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Listen to the podcast here

Debt Financing For Growing CPG Companies With Marshall Lebovits

This is another episode of TIG Talks. Our first episode of 2021, which is sure to be a better year than 2020. I know that set in a pretty low bar. I want to take a moment to introduce my guest and I’ll let him give a little bit of his background and what he does but I’m going to use an old term and say that he’s one of those people that is emblematic of this industry. It’s an industry that does give and pay it forward. Marshall is somebody that I know will always take a call, spend some time with an entrepreneur and give them good guidance whether or not that that entrepreneur is a fit for what he does. I appreciate that. The entrepreneurs speak with them regularly and do the same. Marshall, thanks for joining. Happy New Year and share a bit about what you do and how you help the founders in our industry.

Thank you for inviting me to join you at TIG Talks. I’m a big fan and it’s something I read regularly when I’m out on my daily walks. I’m Marshall Lebovits, I work with growing CPG companies and I help them solve their financing needs for working capital and equipment acquisition. I’ve got a gray beard and thinning hair. That comes from many years of experience in the secured financing industry, working deals, large and small, from $10,000 to over $100 million at a pop. My focus is non-dilutive, asset-backed financing solutions. In fact, in 2020, two of my CPG clients were included on the Inc. 5000 fastest-growing private companies list.

My clients usually have revenues of at least $250,000 and they have B2B accounts receivable, inventory purchase orders and equipment that can be offered to a lender as collateral for repayment of a loan. I’m also the Debt Advisor Specialist for adVentures Academy, which is run by Christie & Co, serving CPG entrepreneurs. I’m a business mentor through Project Potluck and Pacific Community Ventures. I’m co-chairing the efforts to launch a natural products networking group here in Los Angeles. If I’m not out hiking in Los Angeles to the National Parks with my wife, you can find me in my garden trying to coach my tomatoes to grow faster. My goal this 2021 is to get my cost of goods to produce below $20 a pound.

You’re not a very busy guy at all. That’s a blessing. Under $20 a pound for tomatoes, you can do it. I have faith in you. I’m going to dig right in. It’s the questions that we got through our online community. I’m going to start at the high level and work our way into the more specifics but I want to talk about, for all those reading, in layman’s terms, what is asset-backed or asset-based lending?

It’s quite simple. Asset-backed or asset-based financing is when the lender is offered collateral in support of a loan. That collateral is typically receivables inventory equipment, real estate or purchase orders. The lenders use asset-based finance when the cashflow of a company is less than pristine and they’re primarily relying on in the event of a default to foreclose on that collateral and make sure that they get to repay.

Many early-stage brands, I’m talking about brands with revenues of $2 million or less, believe that they don’t have access to debt other than personal debt or if they do, it’s terribly expensive. Is that a false belief or is that a reasonable belief?

There’s a little bit of truth in there. It can be expensive because when you’re not relying on cashflow at the end of the day, it’s your primary source of repayment. You’re taking on a little bit riskier of a borrowing customer. The truth is if you have the assets that I mentioned somebody will lend you money. You may not always the terms but there’s money available. You have to compare to your other options. Typically, the other options are something equity or some quasi-equity instrument. When you include not only the expectations returned that the investor is looking for and the dilution to the shareholder, it becomes a lot more expensive than even some of the highest price debt.

We had that conversation a lot. That’s important for founders to understand. Equity is your most expensive form of capital. It always is. Especially, the earlier you’re taking in giving up equity for capital, the more long-term with that capital is going to cost. Think about 1 or 2 points. It would mean at the end of arrived for your business if you’re able to guide it to a successful exit, that person who provided that capital to you is going to get an awfully big reward. Whereas debt, maybe a harder disservice or a little bit more frightening to some early on. If you can serve as it and if the economics make sense in the long run, it’ll turn out to be less expensive. Marshall, I like your take on this too. In the perfect world, which I have yet to find, if you look at capital and you look at both debt and equity, equity is the capital you should leverage for growth to build team, brand and brand awareness. Debt is the capital you should use the fund inventory, fund receivables and use it for true working capital needs. What’s your take on that?

My take on that is for early-stage CPG firms, you’re 100% right. A term that is bandied about quite frequently that honestly is a misnomer is the term working capital. Many people think working capital is the money that you need day-to-day. From a banking perspective, a lender’s perspective and working capital is the money that supports the buildup or the change of receivables and inventory for a timeframe of twelve months or less. As a lender, I would say, the debt can’t fund losses. That should fund working capital and investment in fixed assets that generate revenue. Everything else should be funded either through equity or some convertible note, which is a quasi-equity instrument.

That’s important. Here’s another question that came in from our online community. That was the worry around personal guarantees and validity guarantees. Can you talk a little bit about both?

I’m working on a deal where that was an issue. Another lender had asked a client of mine for a personal guarantee. In the event of the default, the personal guarantee does is the lender has the option to come against the guarantors for repayment of the loan. The validity guarantee, the lender’s ability to come after the guarantor is limited to situations of default and other kinds of illegal or deceitful business practices. As long as you’re not cooking the books, the lender in a validity guarantee is going to take the risk that in the event of a foreclosure, they can take the assets and make themselves whole.

What’s your coaching to a founder who comes to you and says, “Marshall, I’m interested in putting the deal together to fund to get some asset-backed financing. They’re asking me to sign a personal guarantee.” How do you advise a founder in that situation?

The first thing I want to know is who’s on the cap table? If there are venture capitalists, Angels that, in effect, create a cap table where the owners, the shareholders and the founders don’t have 100% of the ownership interest then immediately we should be looking at a validity guarantee as opposed to a personal guarantee. I understand the emotional commitment. I’ve been the owner who says, “Why would I want to guarantee 100% of a loan when I don’t own 100% of the company?” The other consideration is whether or not those founders are involved on a day-to-day basis and operations and they should have a better understanding of whether or not the company has the ability to repay its debts. I always try and, at a minimum, make sure that my clients only sign validity guarantees. In some cases, we’re successful in removing the requirement for guarantees altogether.

I do the same. My statement is there’s a lot of pressure being an entrepreneur in this space. One of the biggest risks that you’ll take as an entrepreneur is the risk of going too far and harming yourself in the financial security and future of your family. You have to ask yourself how far you’re willing to take it and whether that personal guarantee is something that makes sense for you and your family before you’re willing to do it. To me, that is a real moment for pause and reflection before you agreed to do that. You should look whenever possible to avoid it and working with somebody like Marshall can help you navigate that if it is critical.

Let me add one other point to that, Elliott. If the lender is asking for a personal guarantee, knowing that in most cases, if everything goes to hell in a handbasket, they’re not going to be able to make themselves whole by pursuing a personal guarantee. In many cases, you’ve got entrepreneurs who already are fully invested with everything they’ve got in the company. What they’re trying to say is, “Mr. or Ms. Entrepreneur, if you drive the car into the ditch, I don’t want you to give me the keys and walk away. I want you to be emotionally engaged in making sure that I can maximize the value when I foreclose on the assets.” That’s why more than any reason, they want that entrepreneur to give a personal guarantee.

It’s another form of making sure that you have skin in the game. For those of you who are reading this blog, you’re about to roll your eyes because I’m going to say one of my favorite words, which is empathy. It’s important that you engage in all of these types of conversations with empathy. Understanding from a lender’s perspective, what they care about, what they want, they’re signing on for risk like you’re signing on for risk. What they want to know, in most cases, is that you’re in it, you’re committed and you’re going to do everything possible to give them a chance of coming out whole.

They’re accepting the risk but they’re also wanting you to commit to that same level of risk and willingness to do what it takes. Part of it is sometimes putting that in ink but you can begin to avoid that necessity by entering the conversation from the get-go with an understanding that your responsibilities to do everything in your power as a businessperson to make you lendable. Another question that came in here had to do with equipment. Some founders are self-manufacturers and are looking to add equipment to their manufacturing facility. The question here is, do you recommend lease, buy or financing it through the equipment manufacturer?

That’s a complicated question. The reason being is I cut my teeth in the leasing world. It depends on what your goals are. Are your goals simply to match your payments over the life of the equipment or are you trying to achieve something different like balance sheet treatment or shift residual risk to a third party? The honest truth is when you invest in a fixed asset, you should always look to match the useful life of the equipment with the timeframe for which you’re paying for the equipment. Whether you use a loan or whether you use a leased instrument, if you can get financing that is cost-effective given the situation then finance it over that longer term of time.

The key is usually equipment of all of the assets is the easier. Again, Marshall, correct me if I’m full of crap but it’s easier to borrow against because it is a tangible asset.

You have to understand who you’re going after in terms of a funding source. If you go after a small ticket leasing company, they’re not looking at the equipment as collateral that they can foreclose on at the end of the day. It’s cashflow focused. They’re taking the equipment to have it but they’re not in the business of remarketing the equipment so that they can collect it out. Equipment financing tends to be a vehicle for financing when you’re a little bit stronger of credit and you’ve got historical cashflow you can point to is a way that you can repay the loan. There’s only a small handful of equipment lenders that I had found who are interested in the CPG space.

It’s not the typical call-up of one of the top 50 independent leasing companies in the country and sees who will bid on this because they look for cashflow first. If you go to a hard money lender who focuses on equipment, that’s different. They’re going to give you a percentage of the net orderly liquidation buying of the equipment and they’re going to charge you a hard rate. As long as the collateral is good and they can get it to appraise, they’ll lend you money if you’re looking for cost-effective equipment financing, only a couple of players like the CPG space, especially if you’re emerging growth and you haven’t yet got to break even.

I’m switching gears a bit, pun intended, since we’re talking about equipment. This is an instructive question, to prepare yourself to be able to work with a lender, what do you need to have in terms of having your back of the house in order? What do you need to be able to demonstrate and come to a meeting like that top with?

It varies by lender, often by how much you’re going to have to pay for the money. In accounts receivable factoring situations, some factors may not care much about anything except your receivables aging report. They might not even ask you for a P&L or a balance sheet because at the end of the day, they’re primarily looking to the creditworthiness of your customer as the source of repayment, so your financials don’t matter so much. On the other hand, as the price of the money gets lower and the terms get more borrower-friendly, you will have to provide a lot more financial information. Everything from historical income statements and balance sheets to cap tables, information on the asset that you’re trying to finance, as well as projections. Projections do matter to quite a few lenders, especially again, as the cost of the money becomes a little bit more attractive.

Jenny has a question here. She said, “Marshall, can you talk a bit about the cycle of PO invoice funding and growing that process as a business, the business and the needs grow?”

I can tell you that I’m working on some PO financing and production financing deals. As a matter of fact, on December 31st, 2020, we closed a PO financing for the production of toilet paper that will go into a well-known big-box retailer. I’m fresh off of that and closed a couple of production financing deals as well. PO financing again depends on a couple of things whether or not you’re going to be making the goods yourself. Is it going to be a third-party contract manufacturer or you’re doing it yourself? Do you need the lender to pay for work in process or you need them to fund your finished goods? Where are the finished goods coming from? Are they coming from overseas or domestic sources?

There’s a lot of information that you need to collect and understand everything included. Are you getting any kinds of payment terms from your vendors and suppliers, your contract manufacturers or when you’re going to collect on the receivables from the process of the sale? I don’t know if that’s the right answer but it’s a process. Anything else is you have to show how all the pieces of the puzzle fit together for the purchase order financier. They want to know everything from the inception of when you order your raw materials, how it’s going to be produced, how it gets to the warehouse and ultimately to the customer and then when you’re going to collect.

Jenny, feel free to add any ups to that if you have. A question that came in through our online community that I feel somewhat foolish for not asking straight up. Explain your role in the process. If a founder or an entrepreneur engages with you, Marshall, how do you help shepherd them through? I know the answer but it would be good for you to explain that to our audience.

That’s a great question and one that I often get asked. I am a success fee-only advisor that helps companies define what they need and introduces them to lenders that I believe are the most appropriate fit to help them reach their financing objectives. Usually, the process works where after someone introduces me to a client. I will talk with them for 30, 45, to 60 minutes, try to understand what they’re trying to accomplish and start thinking of the best ways to do that. I’ll review their financials often first, basic due diligence information and then I will go talk to a couple of lenders on a no-names basis and say, “I’ve got a project that looks like this. I believe that it’s a good fit for you for these reasons. Are you interested in this deal? If so, give me a high-level overview of what kinds of deal terms and pricing that we can expect.”

I’ll take that information back to the prospect. I’ll review it with them and say, “Do you want to work with me or would you like me to introduce you to one lender or multiple lenders? Are you already talking to other lenders?” I want to fit in. I would love to run the process exclusively because I’ve got enough resources to help create competition. Some of my clients basically want me to bring in 1 or 2 lenders to compete against the ones they’ve already found. If my lender is successful in closing the funding, that’s the only time I get paid and 99% of the time, the lender will pay me a commission.

I won’t ask anybody for any money even after the deal is closed. I’ve got a couple of deals where the borrowers were paying my fees. The lender put forth the best deal on the table but they don’t have fee agreements with me. All of that would be disclosed to a client before we even got started. We would enter into an agreement on what my compensation would be because we don’t want any surprises at closing. No one should ever get surprised about, how I’m going to get compensated? Everything is going to be transparent. The guy with the toilet paper deal asked me right before he signed the term, he said, “How are you going to get paid?” I said, “My cash commission is going to be paid by the lender but you’re going to owe me a rather large supply of toilet paper that’ll get me through the next year. It’s got to be two-ply and soft.”

That’s a premium. I’ve been sitting here and I’m thankful that my good buddy, Chuck, isn’t on this episode with me because we would be down the whole toilet paper joke for the balance of the episode. It could be meaningless for everybody.

Let me clarify one thing again. I help everybody. Anybody that wants to talk, I’ll help them. There’s no cost and there’s no obligation to use my services. My goal is to help entrepreneurs increase the probability. They’re going to be more successful. That’s the bottom line, if I can help you and make some money in the process. It’s a win-win but that’s not my only goal here in life.

I will say this and I’m not saying this to be nice to Marshall. There are a lot of people who say those kinds of things. “I’ll take a call. I’ll do what I can.” Marshall truly does take every call. Sometimes, I have to make I don’t abuse that willingness because you are more than generous with your time. There are two questions here and I’m going to keep them separate. The first is, what mistakes founders are making when it comes to debt? What do you see as things that are on the no-no list?

I’ll tell you the one that comes up most frequently with early-stage entrepreneurs, not so much the ones that have a little bit of experience behind them. I always warn people to be aware of the blanket lien. Let me explain what that is and why it matters. A blanket lien is when a lender files a security interest over all the assets of your business. In asset-based lending, the lender needs to know that they have a first priority interest in the assets they’re financing and often, in the case of some lenders, they also want a blanket lien.

If you’ve given that lien to an early-stage lender like an economic development corporation, an SBA lender, a bank lender then later on, when you come to work with a factor, asset-based lender and equipment leasing lender, they’re not going to be able to provide you with the working capital that you need because somebody else already has the priority on the lien. It’s something that a lot of the early-stage entrepreneurs may not be aware of, why would they, but it can get in the way quite often from them being able to access the funding that they need to grow through debt instruments.

How do they avoid that? I have seen that many times. Early on, they get things going. They got an SBA loan and sitting in the first position. What’s the coaching now either who are contemplating that? How do they go and negotiate their way out of it?

The first question is to be aware of the issue and simply ask. A lot of times, the economic development corporations and the SBAs need those liens because it checks a box in their due diligence and credit criteria. Often, they would be willing to release it under certain circumstances. The truth is, in many cases, you have no choice. If that’s who you seek funding from. You’re going to have to give up the blanket lien and there’s not a good way to structure around it once it’s there other than paying off that lender, which becomes problematic for many entrepreneurs because of the SBA money and the money from the economic development centers is cost-effective. They struggle with the idea of using higher cost money to pay off the low-cost SBA loans simply to release the blanket lien. It can create a conundrum from a lot for a lot of entrepreneurs.

We talk about this a lot with our brands. One of the things that I see as a common mistake, in general, founders look at their capital needs now. That’s not how you should look at capital, in my opinion. You need to look at your capital over the arc of time so that you don’t do anything now that impugns your ability to bring in the capital that you need later. That holds true for debt and equity. You need to think through your strategy. I recommend looking at five-year capital strategies and that requires that you have a five-year vision of revenue and expenses, all of those kinds of things. Having that understanding, it’s imperfect that nobody’s that clairvoyant to be able to predict but at least you have an arc of understanding of what those needs are going to be so that you can be more aware.

The other is to get good guidance on this stuff, whether it’s a combination of folks like Marshall, your advisors, attorney or all of the above. Don’t do this on your own. It’s complicated. Even the best-hearted lenders still have to do what’s in their best interest first in terms of protecting their principal. Again, you can find yourself and I’ve seen it many times, where deed now hurts your ability to do what you need to tomorrow. A couple of other questions I want to make sure we get to. One is time. A question that came in here is, on average, if I’m looking to get some asset back financing and so forth, how much time does it take when starting that process to close? I know that varies greatly but help paint a picture so that people understand when they should start that investigation.

As soon as you know you have a need. In some cases, being smart enough, as you said, to engage in a little bit longer-term planning. Let me give you some timeframes of some deals I’ve worked on and help you understand how long it takes to get that money and that will help you better understand when you need to start the process. Let’s talk toilet paper for a second. From the day that I got the first phone call, they were introduced to the lender that closed the deal within 24 to 36 hours. They had a term sheet by the end of the week. It was a question of going through due diligence to get to the first funding. I’m working on a deal for accounts receivable financing for a startup for a CPG product in the pet supplies space.

I got the first call, I want to say New Year’s Eve and we issued a term sheet for accounts receivable financing. I’ve done asset-based lines of credit, which are larger transactions and more complicated. I’ve seen again, working with the right resources where you can get term sheets out in a matter of days and close in as little as 3 to 4 weeks and everything aligns perfectly. That’s what you have to remember in any of these situations. Lenders need to get the information they need to have. It’s best to be prepared and not scrambling for information when you’re going to need the funding.

You’re also counting on the stars to align 100% correctly and that doesn’t always happen. It depends on the solution you need, how well prepared you are and the timing given a particular season. With the holidays approaching, everybody in the lender community gets busy, people go on vacations and stuff happens. Coronavirus happens and people aren’t available to help in a timely manner so it can stretch things out. Always give yourself the maximum amount of flexibility and timing that you can to get a deal done but understanding that you call the right people who can help you and you can shave some time off of that process.

I’m going to add to that a couple of things. First of all, I have the benefit of being able to be an observer. One of the observations is this. The best founders, compared to those that struggle, still encountered the same brick walls and clips as those that struggled. The difference is, they’ve lifted their head up high enough to be able to see those walls and clips coming before their toes are dangling over the edge. Therefore, instead of making reactive, immediate and often poor decisions, they’re able to make proactive, strategic, smart decisions. That’s a long-winded way of saying go to the damn well before you need the walk or start these relationships, start these conversations and learn your options. It’s always been easier to find money from people you already know and who know you. Begin that process earlier than you think you should and you’ll be in a much better position.

Elliot, let me have a follow-up to that. I sent you a presentation that you can share with all your audience. I have a slide in there called, The Best Advice Ever. The first piece of advice on there is start early and be prepared. Also, in that presentation, you will find a list of the basic due diligence information that most lenders are going to ask for. One of the things that I always give all of my prospects as a customized list based on the funding solution they’re going to need, all of the due diligence items that a lender might ask them for. It’s all about being prepared and starting early. It gives you your best chance of getting the most cost-effective capital in a timely manner.

I want to touch on this takeaway that Marshall has given. It’s a gift. It’s a real collection of actionable items. I say to all the guests that my goal and every TIG Talk is, every listener ends with some things that they can go do, investigate, follow up on and so forth and take action. Marshall to vet the heart with this so I appreciate it. Another question that came in here and this is a good one is how you know what the right amount of debt is, not so much in terms of what you need but what you can serve is how I’m interpreting this question. Is there a good rule of thumb of revenue to debtors that are good one of the many ratios that they should be looking at? How does an early-stage entrepreneur understand how much they should consider and how much they should not?

The first thing you have to realize when you’re trying to decide how much debt you’re going to use is what’s driving the need for that capital. The first thing you should realize is debt can’t fund losses. Debt should fund working capital. It should fund investment in fixed assets that generate revenue. When you’re talking about funding losses, that’s what you need equity for. What I use debt for, in addition to generating money to invest in fixed assets, is for working capital. Again, working capital is how you raise funds to cover the investment in receivables and inventory as you grow for a twelve-month timeframe. It gets down to having reasonable projections in detail and understanding what’s driving your need for money. You shouldn’t worry so much, particularly when you use asset-based financing, which is one of the reasons I like using asset-based financing for growing companies, is those that are self-liquidating loans.

You make a sale, you borrow against that invoice and receivable. The receivable comes in, it pays off the loan because the lenders are going to require that the money that you collect on those receivables goes into an account, which they can use to repay the loan and send you the balance quickly. I know it’s been talked about in your TIG Talks in the past, lockboxes, controlled accounts. The point is, it’s asset-based financing. These are self-liquidating loans. They should enable you to repay your debt obligations and then borrow the money again. It gets down to do you have a forecast that gives you enough robust information to know how much money you need to cover losses and how much you need to cover working capital needs.

The concept you talked about there is about the importance that they should be self-liquidating loans is critical and entrepreneurs need to understand that.

I read this in The Wall Street Journal. There was an article about the challenge of small businesses in borrowing money these days. There was a comment in there that says, “Loans cannot save a business that is not viable.” Again, that’s the perfect complement to what I said about the debt can’t fund losses. If you’re not viable, regardless of whether it’s caused by a pandemic, poor execution on your business plan or having a product that was a great idea but it doesn’t solve a big enough problem to be viable in the marketplace, you can’t borrow your way to viability.

That’s the road to ruin and it also has to do with unit economics. I see terrible unit economics fundamentals in the back of a business. Too often than not, the narrative that is being told either internally or externally is that scale will solve where you embed unit economics. In my experience, that’s rare because I’ll tell you what scale does also do. Scale often compresses price because as you build the ubiquity and find yourself in more conventional outlets, your price point typically goes down. The belief that you’re going to increase margin is diluted by the requirement to compress price, get through extended trade or through reducing the everyday price. I want to ask you a question of my own related to this. In general, give five pinpointed pieces of advice to those listening to open their eyes to what is both possible and at risk. Any thoughts on that? What would those five pieces of advice for you?

The five pieces of advice on what is possible?

In general, five gems. The ones that you go to and pull out every time saying, “Know these five things you’re in better shape than most.”

I would tell you that the top of my list is to talk to the right lenders. I was in a conversation a couple of years ago with a client. One that is successful now but at that time, they were still early-stage. They kept telling the lender that, “If you don’t get in today, it’ll be too late.” The lender didn’t know how to make sense because that’s typically the language you use with an investor potentially, not a lender. A lender isn’t ever going to get rich off of you. They’re simply going to get repaid with ever an appropriate amount of interest for the risk involved. The lender you have to work with now may be a higher cost lender than the one you will be deserving of in 12 to 18 months.

Don’t overreach if you will have to pay a little bit more for your money because you’re riskier than accept that and make sure that your business plan has a way to get you to a less risky profile and then you’ll get a lower cost lender. Talk to the right lenders. Another one is it’s not always who the cheapest is. You want to make sure that you go with a lender that gives you not only cost-effective funding but also one that reflects the risks that you are. They may be a little bit more expensive but in the case of a proposal that we submitted to a customer, they had two deals. We got close on the economics but one of the key features that we were able to get was no minimum term so that if this client does get stronger in the next 6 to 12 months then we can either negotiate a lower rate or they can leave without penalty and go to a lender that is more suitable for them.

Another bit of advice that is important is understanding how to talk the language of the lender and what their motivations and incentives are. I’ve been in calls where the prospective borrower told the lender, “I’m not going to need you in 90 days,” which is a big mistake. Most lenders aren’t transaction-driven. They’re still relationship-driven and they don’t want to think that you’re going to use them and throw them by the curb in 90 days. In some cases, I’ve had clients tell lenders that, “I never planned to make any money before I exit,” which obviously has come up in some of your TIG Talks. That has changed in the industry as well as that, you have to start thinking about making money at some point. Certain lenders will not be interested in working with you if it’s clear that you never have any intention of becoming profitable at some point and they can see it in the future. I don’t know if I’d hit on 4 or 5 or whether you want me to keep going.

They’re all damn good nuggets but the last one is so important. You got to have a path to profitability. You do and you have to be able to demonstrate that. The whole concept of capital efficiency and all of the things that we’ve been talking so much about. It’s not because I like talking about it. I work that way but it’s because of what’s changing and what’s happening in the marketplace. Speaking of what’s changing and happening in the marketplace, a great question here that they came through the online community is, what is happening in terms of having access to capital and lenders? What are you seeing over the last twelve months and what I’m putting on your Swami’s hat for your thoughts in terms of what explained to happen in the market in 2021?

In the asset-based funding world, there’s plenty of money if you’ve got the right deal. There has been some slight increase in rates but I don’t think it’s been significant. There are lots of good lenders out there who know the industry, who you don’t have to educate on the nuances of how to run a CPG company. They’re active. They have a lot of dry powder. They have good, strong books of business. They’re not struggling with customers taking a lot of their time because they’re losing money or heading in the wrong direction because of the pandemic.

It’s a good market. The bank market is a little different and not many of the clients I deal with are bank-worthy but there definitely is a tightening in the bank markets. You see rates go up there as well. It’s a different market. I have read the reports from the Federal Reserve. They do a quarterly survey about bank lending practices. All banks are tightening. They’re tightening their underwriting and they’re tightening their lending terms. They’re being tougher on loan covenants. The bank world was a little bit different than the asset-based lending world.

You mentioned the next question that came in, which is, can you explain what a covenant is?

A covenant is a performance metric which a lender will use to determine whether they need to invite you to the table to have that conversation. The conversation usually is you either need to do a lot better for us to keep you as a client or it’s time for you to find another home. A perfect example of a covenant is a ratio of cashflow or EBITDA to debt service, which is your obligations to service principal and interest for the coming year. That is a covenant that you see in a lot of transactions, particularly involving fixed assets.

That is what they call the debt service coverage ratio. You see that quite frequently with deals like this. The other one is a leverage ratio to determine whether or not the company has a sufficient cushion of equity to get through the hard times. You may see covenants that say, “I need you to maintain at all times a minimum level of tangible net worth.” They’re looking to see that you have the equity section of your balance sheet, the capital section. Do you have positive equity? Once they add back things like subordinated debt, convertible debt and those kinds of things. That’s a common covenant that I see in some transactions in the CPG space.

A covenant or your covenants are basically, to put it in real simple layman’s terms, the promises you were agreeing to and the promises you’re making to the lender you’re going to.

Covenant is, as I said, the occasion that they’re going to use to invite you for a conference call or a face-to-face meeting and say, “We haven’t talked to you in 90 days. We haven’t seen you. We haven’t reviewed your financials up until now because they were due on a quarterly basis. What’s going on? Are your sales down? Are your expenses up? Was there an extraordinary event that caused you not to perform as you anticipated? Tell us what’s going on.” It doesn’t mean they’re going to put you in default and foreclose the loan. It’s a chance for you to come, pour your heart and soul out and tell them what the heck is going on like you would with your board of directors.

One of the promises I make to the audiences here is that when we’re having a conversation, I bring in a subject matter expert. We geek out a bit and we use a term or we say something that we move on from but maybe isn’t widely known or used. I want to circle back and do it. You use the concept of subordinated debt. We should take a second and explain to the audience what that is.

No problem. When you borrow money, as I mentioned earlier, lenders are also are often going to ask you for a lien. Lenders want to have a first priority lien, which means in the event of a default and they’re first in line. In the subordinated loan, it’s where they’re not first in line. They’re second in line or third in line. Often, when a lender is evaluating the strength of your balance sheet will say that, “I will consider as equity anybody’s position that is subordinated or lesser than mine when it comes to a foreclosure situation.” Whether it’s convertible debt or subordinated debt, they’re willing to treat that as equity because it cushions their loan in the event something goes wrong.

One of the things that I would encourage everyone and we’re going to bring this to a close here in a second. I’ll let Marshall bring it home but the whole premise behind TIG Talks, the whole thing that I’m trying to accomplish is to change the disseminated information. If you can enter conversations where the language being used in those conversations is not foreign to you. You understand what’s being said and what’s being discussed. That puts you in a much better position of power. It puts you in a much better position to have a conversation that is likely going to yield the best results. We’re all guilty of it. We all use this industry lingo and every industry has it. It’s not necessarily intentional or malicious.

As an entrepreneur, that means you have a lot of disciplines to try to understand from the day-to-day aspects of your business from marketing, operations, manufacturing, distribution, to finance. You’re not going to be able to know it all but what you can do is stop when you don’t know something, ask, learn and make sure that you are getting that knowledge because that’s going to make you a more effective entrepreneur. Sorry for that soapbox moment. For the last couple of minutes, Marshall, how do people get ahold of you? Any last-minute advice and anything else you want to share?

The way they get ahold of me is either through email, my cell phone or LinkedIn. I’m available almost every day of the week. I prefer Monday to Friday but you got to do what you got to do in this business. I would love to be able to help some of the companies grow. At the end of the day, if you wanted to sum it up, there’s plenty of money out there. You have to understand that pick the right money for what you need now, except that it may be a little bit more expensive but you can grow or as you grow, you can change that out. Nothing is forever. What we’re trying to do is get you to various stages on the mountain so that at some point, you can hit the summit and declare victory. It’s important to know what you need and to understand the perspective of the lender. Once you can start to understand better their language and what they need, it’s a lot easier to match that up to what you need in order to achieve your goals.

Great advice. Again, I promise all of you, Marshall is a man of his words. He will take your call. He will offer you advice. If you’re even thinking about how to potentially work debt and asset back financing into your business’s growth plans, take him up on it. Don’t hesitate, reach out to him. Thanks. It’s a way to start the year. I appreciate it. Thanks, everybody, for joining. Again, please take a minute to throw us some love with a review or some stars. We’ll talk to everybody next time. Take care.

Important Links

• Marshall Lebovits – LinkedIn

• adVentures Academy

• Project Potluck

• Pacific Community Ventures

• Lockboxes – Retail Ready: Getting Your Products On The Shelf With Allison Ball episode

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