Comply with Appendix 4C Mandates using a New Financing Innovation
Companies specified by the ASX, including mining, oil, and gas exploration entities, plus smaller businesses who have yet to turn a profit or achieve a critical threshold of positive operating cash flow, must submit cash flow statements to the market every three months. This is known as the Appendix 4C Mandate.
ASX companies under Appendix 4C mandates can use True Sale Based Financing (TBF) to convert longer term contracts with staggered cash flows into instant cash. The standard accounting treatment for True Sale makes it possible to substantially boost short-term cash flows for the quarter in which the True Sale transaction is recorded.
How Does True Sale Based Financing Work?
TBF is an innovative way to raise growth capital without any dilution or debt. It has five key characteristics that makes it an attractive option in the CFO’s tool box.
- Improve balance sheet and boost cash flows through a direct transfer of illiquid assets on the balance sheet to a buyer in exchange for liquid cash. An asset in this context could mean intellectual property, accounts receivables, annual contracts, or multi-year contracts. The fast-forwarded cash flows from the future are recognized in the same quarter as when the True Sale transaction is consummated.
- No dilution through issuance of new shares, resulting in no changes to existing shareholders’ ownership.
- No new liabilities on the balance sheet unlike traditional loans (or) conventional revenue based financing.
- Enjoy relatively lower costs of capital from alternative financing vendors offering TBF who may perceive the assets they are buying to be more risk-mitigated. Full transfer of asset’s future cash flows protects the buyer from future claims from seller’s creditors (or) bankruptcy proceedings.
- Flexibility and Choice of Payment Terms: No need for the seller to repay until the customers pay according to their contract terms. This means that the seller has a lot of latitude to cherry-pick the contracts they want to sell —and even the specific future receipts within— based on the quantum and timing of cash flows, and the cash needs of the business over time.
Debt vs. Revenue Based Financing (RBF) vs. True Sale Based Financing (TBF)
Overall, True Sale Based Financing offers significant advantages to ASX listed companies that want to boost their cash flows and enterprise value while building more optionality for financing growth capital. Ratio has worked with several ASX based companies to help them comply with Appendix 4C mandates. To know more about how Ratio can help you with True Sale Based Financing, please schedule a meeting here.