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Anatomy of a Deal: Entrepreneurial
October 10, 2023
By Joseph Heim and Jamie Franz
![Joe Heim-Jamie Franz_Culain_150 Joe Heim-Jamie Franz_Culain_150](/images/default-source/default-album/joe-heim-jamie-franz_culain_150.jpg?sfvrsn=b9edef6d_0)
Joseph Heim and Jamie Franz (pictured, left to right) of Culain Capital illustrate a recent deal and how being creative is critical to victory.
Breathless tales of the fearsome warrior Cú Chulainn have been told for centuries. His legendary exploits share similarities with Achilles and Hercules, and even with more modern-day heroes like Iron Man and the Hulk. Known as the “Hound of Culann” in Irish mythology, Cú Chulainn remains Ireland’s best-known folk hero for his unstoppable rage, inhuman strength, iron will and ability of taking on many foes at once. It is from Cú Chulainn that Culain Capital draws our namesake and provides our colleagues
with the inspiration and veracity to design and structure specialty
finance deals for small and mid-sized businesses nationwide.
The team at Culain Capital promotes factoring as a funding philosophy where the amount of the advance is primarily based on the value of the company’s collateral as opposed to traditional financing that is primarily based on the company and its credit worthiness. In contrast, in a conventional commercial loan, the lender focuses its credit analysis on an assessment of the financial condition of the company – meaning its ability to generate strong cash flow and the strength of the balance sheet.
In factoring, the focus shifts from assessing the borrower’s overall cash flow to assessing the collateral value of the accounts receivable. In factoring, the key credit decisions are effectively based on an evaluation of the collateral. It is not primarily based on traditional cash flow and balance sheet ratios. Not to say that the condition of the
company is irrelevant in a factoring relationship, rather the traditional assessment of the financial statements take a back seat in importance to an assessment of the collateral. To a factor, the likelihood of borrower failure is less important than the liquidation value of the collateral.
Factoring is a robust solution for companies that are a start-up, experiencing rapid growth or in distress. Factoring provides short-term funding and benefits a company’s working capital cycle by providing improved cash flow when the company can immediately receive an advance while allowing the account debtor the normal terms of sale. Cash flow increases and allows the company to take advantage of supplier discounts, increase inventory and meet seasonal funding requirements. In addition, the company can experience an increase in sales when the factor extends credit, provides funding and assume the credit risk. This allows the company to provide more services or sell more merchandise to customers than they would otherwise. The company might extend longer terms of sales to customers, enabling them to generate new business or do more business with existing customers.
Like warriors evaluating their options on the battlefield, the professionals involved in a secured finance transaction understand that the anatomy of a finance deal is complicated and challenging because of the many fundamentals to be considered. These fundamentals include the preferred financing means, accounting policies, strength of account debtors, control of cash, daily monitoring, and consistent communication. A proper deal structure will lead to a productive relationship and the successful funding of critical working capital. To illustrate how members of Culain Capital evaluate these fundamentals, let’s examine the anatomy of a recently closed accounts receivable factoring facility.
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