Monday, July 25, 2011

Natural Finance Sales function and queue repayment speed

Natural Finance can help both mature established companies and startups.  Natural finance offers separate advantages to each.  For mature companies that need relatively little borrowing it is better interest rates, and for startups it is higher borrowing/investment capacity without ceding control of the enterprise.

Natural Finance uses 3 seperate loan queues.  Each with successive priority:  General unsecured queue has top repayment priority, the Secured queue has next priority, but receives regular payments covering interest and depreciation.  Finally, the management discretionary queue is typically used for deferred employee compensation.

While all contributions above a few months expenses are destined to go to repaying the top priority loans in the top priority queue, there are a couple of mechanisms that can be used to bypass this order.  In the case of startups, natural finance comptrollership will insist on management sharing the risk of the venture by taking very small salaries, and deferring most of their compensation.  An automated, formula-based, increase in employee compensation is fair to employees and management, and ensures their motivation to bring in revenue available to repay loan investors.

As a rule of thumb, setting aside up to 20% of gross profit (actual percentage depends on company, prospects, salaries) to pay for sales incentives, deferred salary avoidance and past deferred salaries (split among those 3 at management's discretion) can ensure that a company capable of repaying its debt strives towards obtaining the revenue to do so, and can retain the talent to do so.  Not allowing some sales proceeds to go towards employee compensation can detract from employee commitment, especially if debt levels are very high, and expected payment of deferred compensation is 10 years or more.

The other mechanism to adjust payment flows is to accommodate loan investors' desire not to be paid too fast.  Depending on investor sentiment, at any time, management can set a target organic repayment rate for new loan projects.  These target repayment rates can range from 2 to 10 years.  Organic repayment means loans paid back from company income, as opposed to bought out by other investors.  Skipping over repayment of the first priority unsecured loan queue is only with the consent of those investors, and is typically the result of low company debt and high revenues and profits.  The profile of a mature company.

With these optional target repayment rates, an organization earning "too much" income can pay queues behind  the main unsecured queue.  Its optional and only occurs if there is investor demand for longer term loans.  Demand that typically is only present if future cashflows seem very certain.  The more important adjustment mechanism is management/employee rewards for revenue.  It ensures a balance between payroll austerity in startup/pre-revenue phase, and motivation and near term compensation for executing the organization's success plan.

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