Deborah Larrison: Access to capital is an essential component to sustain and grow your
business. I’d like to thank you for taking the time to join me, Deborah Larrison, Managing Director of Global Wealth and Investment Management Custom Credit, to learn about a variety of solutions from Bank of America that are available for your clients.
At Bank of America, we have traditional sources of liquidity that can be accessed through our business banking channel, but today I’d like to focus with you on some alternatives for business owners — to refinance existing loans and create access to liquidity and provide capital to explore new opportunities.
As a Merrill client, you have access to Bank of America credit products that allow you to use business or personal assets to support your privately held company liquidity needs — options that give you flexibility beyond taking out a traditional business loan. Today, we’ll be discussing lending alternatives such as our customized credit solutions which rely primarily on you, the owner of the business, as the borrower or guarantor. We’ll also discuss our standard securities-based lending which uses your investments as collateral.
The right lending solution depends on your business and personal situations. Nontraditional business loans may help support operations through business expansion, offering you an alternative way to put money into your business by tapping into additional sources of liquidity with potentially more flexible terms and rates than the traditional business loan may offer.
Some uses of these loans range from starting a business. For instance, providing start-up capital, maybe covering initial operating costs or setting up and furnishing your office or facility. You may from time to time need additional liquidity for managing your business, perhaps to cover taxes, maintain your inventory or finance accounts payable. Of course, it’s growing your business, so the merger or acquisition of a competitor, expanding business operations, starting a new business line or acquiring new equipment. These loans can take the form of a securities-based loan, where the loan is secured by marketable securities with a daily mark to market against the collateral pool or other forms of customized loans which can use a wider range of collateral, including art, hedge funds, real estate or other assets. Where we focus is the individual client’s strength and from there, we structure the loan for the client with our goals and objectives in mind.
Customized lending requires a personal guarantee of the individual owner of the business. We look for a primary and secondary source of repayment. It’s important to note the primary focus is on the individual owner and not the business operations. When a client with the right profile is willing to give a personal guarantee, the interest rates can be more attractive than a traditional business loan. As always, it’s important to consult your tax, legal or other independent advisers about the right structure for you and your business. If you were the borrower, it’s important to think about how the funds are made available to the business and any potential impact on the entity structure, ownership, tax basis and similar considerations.
Another very important point is that when a client has substantial equity in a business and would be prepared to continue to support the business if credit issues develop. In other words, the client would walk away then — whether or not the owner has provided a personal guarantee of pledged assets to support the loan becomes less important. When you think about personal recourse for loans to your business, this does not imply weakness. Quite the contrary, personal recourse is a substantial strength that can be leveraged for your business’s needs. We work with clients who have well-rounded balance sheets and by viewing the loan primarily based on your personal balance sheet liquidity, we may be better able to work through slumps in the business as long as you personally are able to meet the loan covenants and other requirements.
Now, let’s review the types of loans we can offer in a little more detail. The first type is a securities-based loan. Securities-based loans are efficient. They can take the form of our standard securities-based loan which is an uncommitted demand facility, meaning it has no fixed repayment schedule and principal payments are not a requirement as long as sufficient collateral coverage is maintained. Also, interest payments can be capitalized if there’s sufficient collateral coverage. These loans use standard bank forms and, therefore, the loan documents are not negotiable.
Another type of securities-based loan is a committed customized facility. This type of loan may allow the borrower to receive a higher advanced rate against the underlying securities and generally requires monthly interest payments. These loans have terms whereby the balance is due at maturity. These loans also allow for customization of loan documents, which some clients find helpful.
What these types of loans have in common are simplified access to funds, flexible terms and repayment options, and competitive variable and fixed rates. However, there are risks in pledging marketable securities which need to be carefully considered. Some considerations are that personal assets are used as collateral. There may be some restrictions on the use of funds, the risk of collateral call should the market value of the securities drop below the minimum requirements, and unless the securities-based loan is customized, their demand and uncommitted.
In addition to securities-based loans, customized loans can be structured using a wide range of potential collateral. The most common types of loans we see for business owners are real estate, and we offer tailored loan terms, flexible structures and repayment options.
Some other types of collateral the clients use are art and yacht, essentially borrowing against assets that do not generate cash flow to investing those that do. At Bank of America, we’re leaders in art and yacht lending.
Now, I would like to share with you how Merrill business owners can use these nontraditional lending options. In our first example, the clients purchased a small business and needed cash for some business expenses and other projects that were underway. Since the business was new and couldn’t qualify for a traditional commercial loan, they used their personal assets as collateral for a standardized securities-based line of credit.
In this next example, a client was looking to make some strategic business investments but needed to act quickly. Since he already had a personal standard securities-based line of credit with Bank of America, he decided to use that existing line to fund his business expenses by booking two 5-year term loans, thereby taking advantage of the current low interest rates and what can be described as an efficient and expedient process.
Earlier, I mentioned there are customized lending options that allow loans to be structured using a wide range of assets, Bank of America being a leader in art and yacht lending. As you can see in this next scenario, an executive of a publicly held company was looking for access to liquidity for the business and although they had substantial assets, they also had a yacht that they preferred to leverage for a line of credit rather than leverage the stock of the company. The revolving line of credit gave them access to liquidity as needed.
We finance a lot of real estate transactions using customized lending. In this situation, a client had purchased a multi-story commercial building for cash which needed improvements and some tenant upgrades. After infusing additional personal liquidity to achieve net operating income as a result of the improvements, the client needed cash to support additional recent real estate investments. We were able to structure a customized loan for $11 million using their commercial real estate, which allowed them to extract value from the upgraded property and deploy the loan proceeds into another opportunity in new income-producing real estate investments.
In our final example, we have a client looking to acquire a new business. The acquirer was next generation and was able to support the loan from liquidity and assets in a trust. This acquisition was the first and the client has gone on to acquire other commercial properties, building out a robust portfolio of self-storage facilities.
As you can see, there are lots of reasons for, as well as ways to achieve, active liquidity. There are also important risks to consider. Please take a moment to review them.
As we bring this session to a close, I’d like to leave you with a few things to consider doing next. Review your current credit facilities for opportunities to refinance at lower rates or apply additional leverage. Ask yourself, do you have existing loans coming due, or other opportunities
to restructure your overall debt to reduce debt service and improve cash flow? Assess your ability to access liquidity, and review your cash flow projections to ensure adequate resources for operations and opportunities. Are traditional commercial loan options as available or attractive? Is there an opportunity to complement them? Think about potential growth opportunities. Are there strategic growth or attractive investment opportunities you’d like to pursue? Are you looking for credit solutions that can help you be the first to market?
Thank you again for your time. As you think about these things, please reach out to a Merrill advisor who can bring in credit specialists that can help you review your current situation needs and identify solutions you may not have been aware of to help you meet your goals.
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Disclosures
The material presented at this seminar should be regarded as educational information only and is not intended to provide specific advice. If you have questions regarding your particular situation, please contact your legal or tax advisor.
Bank of America, Merrill and their affiliates and advisors do not provide legal, tax or accounting advice. You should consult your legal and/or tax advisors before making any financial decisions.
This material does not take into account your particular investment objectives, financial situations or needs and is not intended as a recommendation, offer or solicitation for the purchase or sale of any security, financial instrument, or strategy. Before acting on any information in this material, you should consider whether it is suitable for your particular circumstances and, if necessary, seek professional advice. Any opinions expressed herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue.
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