It all began with a simple request from a friend — a wholesaler to the retail sector — who always stayed at Edward King’s home in Dallas when he was in town so he could visit the clothing market there. He asked if King would be willing to put up a letter of credit in support of an upcoming delivery to JCPenney. “I knew his business was going well,” King said. “However, he didn’t have sufficient credit facilities to get the goods released.”
King wondered: How much of this is needed out there? His friend said many of his industry colleagues were importing goods and seeking letters of credit to get overseas factories to produce or ship goods. Once the deliveries arrived in the U.S., the businesses could borrow on more traditional credit lines. “So I came up with the idea that maybe this was a good way to make a living,” King said, laughing.
This story planted the seed of countless individual success stories behind the nearly $2 billion of capital that King Trade Capital (KTC) has amassed since Edward King founded the global purchase order/trade finance company in 1993. There’s the government contractor whose revenues rose from $30 million in revenue to $1.5 billion during the Iraq war, with KTC’s support; and the head of a toy maker who was doing $6 million annually before he approached KTC, only to grow to $50 million. Today, the toy maker, whose company is earning roughly $350 million, calls every year to tell King, “I still brag about how you guys helped, and I didn’t have to give up equity.”
In addition to the “fun” stories, King has his share of tales he blames for his gray hair. One project in Mexico estimated to take six months took two years. KTC was financing modernized power equipment for the national electric company. “Unfortunately, we realized it might take twice as long,” King said. “We didn’t think it would take four times.”
Each narrative makes up the colorful tapestry that King, a U.S. pioneer in global PO and trade finance, has woven over two decades. King attributes his success to a business niche that continues to be relevant, a lack of market exposure and just plain good fortune, humbly deflecting attention away from the fact that he built a wildly successful enterprise piece by piece from the ground up.
Early Days — Learning a New Discipline
In response to the needs of his wholesaler friend, King launched King Trade Capital in 1993 as an investment company specializing in purchase order, contract and project finance, with support from established high-net-worth investors. King had just sold Music Man, a group of retail CD and tape stores he founded in cities throughout the Southwest and on university campuses. Several of the investors involved in that enterprise were seeking new opportunities. King had been researching how to run a trade finance business, and was able to demonstrate the enormous earnings potential. Investors bought in. “I risked my little-bit-of-money along with their a-lot-of-bit-of-money,” King joked.
It’s one thing to start a business in a discipline you know well. But King was founding a company in a specialty foreign to him (no pun intended) — without a formal education or any extensive real-world experience. For an inexperienced entrepreneur, this leap may have meant certain death. But King relied on what he calls the “fundamentals of business” to get KTC off the ground. He consulted with trade finance experts to learn everything from how you get paid to which transactions are secure, since purchase order finance didn’t formally exist in the U.S. at the time.
“As we grew, we added people who understood cross-border, and incorporated a lot of that knowledge over time,” King said.
Needless to say, King cut his teeth on trade finance and helped pioneer PO finance in the U.S. As time went on, the KTC team matured and approached financings differently. Today, the group entertains deals they wouldn’t have attempted 20 years ago. At the same time, they pass on other transactions done in the early years, for the same reason: They better understand the risks.
“Certain industries are more difficult to finance because their orders are not as firm,” King explains. “So we tread more lightly in some sectors than we would have years ago. When people say, ‘You’ve got a purchase order, what risk can there be?’ Well, a purchase order is simply an indication of interest to buy your product. As much as your goods sell, you’ll get paid. Many retailers will bring in the goods, but if they don’t sell as well as they thought, they will often pay something less than expected. If you ask me what those sectors are, I would probably politically not say.”
KTC finances imported and exported goods. A significant book of business is on the import side, but KTC’s real specialization is export financing.
“We have an expertise and comfort level with foreign buyers because of how deeply we understand global trade,” King said. “We’ll provide financing to someone to build machines that could be going to a port in Dubai, for instance. We know how to structure those types of transactions. There’s a confidence that if the machines get shipped, everyone will get paid.”
Though independent formal rankings don’t exist for what KTC does — a hybrid of PO and trade finance — King says banks and financiers routinely tell him that KTC is the only company they approach for deals over $5 million because of its size, scope and follow-through. King’s primary competition isn’t from other PO companies, but rather from hedge funds and investors with bigger money pools.
The KTC team originates deals from a variety of third parties. Brokers may see opportunities, investment banks could be working on finance solutions; and bank/asset-based lenders and factors might approach KTC when they are unable to fund complex borrower scenarios.
“We get phone calls from intermediaries many times a day,” King says. “They highlight what the companies’ needs are, where they’re buying goods and where they’re selling goods. Our expertise and discipline is to understand the ability to perform, and then structure a solution based on the risks of the capital.”
Often bank lenders seek involvement if a business that has been flat for a few years makes a sudden turnaround. Buyers may be issuing large orders, but the company’s balance sheet is not as long as it once was.
“We’ll come in and enter into an intercreditor agreement in which we’ll take the risk of either manufacturing the inventory necessary to fill the orders, or provide financing to acquire the inventory,” King says. “And the bank won’t add to its risk exposure. They offer — through us — a solution to help the client deliver, and realize the sale and profits. The banks bring these opportunities to us because they are confident in our capabilities. They know we are honest. We are not in the business of stealing their business. We are in the business of helping their clients.”
This attitude has profited KTC, as banks have come to appreciate the group’s integrity, as well as its capital.
KTC prides itself on being an advocate of proper structuring in finance, and has developed best practices for PO, contract and project financings. The team pays attention to “key drivers,” e.g., cash-flow, delivery dates, inspections and quality/quantity needed.
“A lot of oversight goes into protecting the integrity of deliveries, and making sure that the end customer is getting what they want,” King says. “A big part of our risk mitigation is really keeping track of: What are the right things to watch? That changes. Different types of inventories. Different types of deliveries. Different places that might have weakness you just have to watch. We’re fortunate that we are pretty good at identifying companies that have the ability to structure their deliveries properly, get sound repayment terms from their end customers and perform… We’re sometimes just monitoring to make sure [the process is] going right because if you’re supposed to have a delivery in time for the Thanksgiving selling season, and you miss that, well, you’re going to have an upset retailer.”
Going the Distance
Over his 20-plus years in business, King has managed through a variety of crises (Think: 1997 Asian financial crisis, early 2000s dot-com bubble, Post-911 DJIA crash and the Great Recession). The seasoned business owner doesn’t let external turmoil shake him; he sticks to core principles.
That being said, the most recent period of economic strain was one of the more troubling times for King, and not for lack of activity. “As we managed through the Great Recession, it was unprecedented the amount of opportunities we saw. We were seeing businesses of a size that we had not seen before,” King said. “We finance small- to mid-size companies, and when we’re getting phone calls for people doing a billion-and-a-half dollars a year, and I suggest that they call one of the major banks to help them, and their response is, ‘Well, actually that bank gave me your name,’ that’s an environment to be concerned about.”
Though KTC was flush with profit-making potential, its clients were getting battered, “so we were a little bit concerned about their end customers’ ability to pay as well,” King said. In addition, many of the pitches presented to KTC came with added instability, given the companies’ credit problems. King remained evenhanded and conservative throughout the unsettling time.
“Over the years, people would comment that our business must do well when times are not good,” King said. “And my answer is, ‘Our business does well when times are good, and it does fine when times are bad. There are just different concerns at different times.’”
Perhaps, KTC’s true seal of approval comes from the large banks and high-net-worth investors that trust King’s company with their clients — and money. Investors actually approach King to give him capital.
E.B. Washburne is one of those long-time investors. Eighteen years ago, the Fredericksburg, TX-based hotel and restaurant owner was sharing office space in a building in Dallas with King. The two became fast friends as fellow entrepreneurs and financiers. “I’d had a little exposure to asset-based finance,” Washburne said. “My father had been in the factoring business, so I thought I knew all of the ins and outs. And Ed knew far more than I did. Every time I tried to look at something, he’d already been there. Ed had every base covered. It was just very impressive.”
Washburne began his financial relationship with KTC by supporting individual transactions. After a year of watching King in action, he offered the firm blanket investments. Washburne had no reservations about the fact that KTC was new to trade finance and PO finance. In his discussions with King about the real estate market, Washburne recognized a businessman with similar values. “We both had seen a lot of blowups in Dallas during the 1980s and early 1990s,” Washburne said. “What I liked about Ed [was] he and I were both risk averse. The irony is that Ed is in a business that is highly risky to some people, but it’s a calculated risk, not a pure risk. Preservation of capital was foremost in his mind, you know. Return of your money, not return on your money.”
Over the years, Washburne watched his returns grow, and saw King’s expertise in PO finance and trade finance boost countless businesses — from the manufacturer of holiday Lightsicles to a producer of fiber optics.
One difficult financing King faced 14 years ago stands out in Washburne’s mind:
“We had a great investment going backing someone who was bringing in this exercise equipment from China. It was the summer of 2001, and they were just shipping like crazy to all the major department stores, all the major sporting goods outlets. And 9/11 hit, and all of these stores, these big chains just said, ‘We’re not taking these anymore,’ even though the item was selling like crazy. I even called around to some of the sporting goods outlets and they said, ‘We can’t keep them on the shelves.’ But I think every major buyer throughout the country was using 9/11 as an excuse to cancel orders. Everyone just got scared the economy was going to crash. And Ed wound up with a warehouse full of this stuff. To his great credit, he worked and worked, and sold off all of that inventory. I mean, he was not in the business of selling these things. He wound up doing great for his company and for me and for his clients. It was a really interesting investment. That’s a classic case of where Ed works so hard and so well for his clients. I can’t imagine anybody else doing that.”
Washburne says King is more than a lender for clients, with the added value he provides in expertise, experience and creativity. He will refer companies he can’t directly finance, and is active civically with his local community. King reminds Washburne of a conscientious business owner of a bygone era. “In the old days, they were pillars of the community,” Washburne says. “Dallas is a huge town, but [King] stands out as a businessman who makes a difference.”
In the Genes
King’s equal measure of entrepreneurial ambition and business tenacity could be in the blood. His grandfather started White Motor Company, which manufactured White Steamers and later autos and trucks in Ohio. And his father, Rollin W. King, founded Southwest Airlines, hatching the idea for an airline that would grow to become the nation’s largest air carrier in terms of domestic passenger volume, based on the U.S. Department of Transportation’s most recent data.1
“I was young at the time, but I watched that. Just from growing up around that, it certainly helped,” King said. “My undertaking is rather basic compared to my dad or grandfather, but it’s all fun.”
PO Finance Expansion
Cross-border trade is growing, from King’s perspective. While he says the U.S. is the largest importer of goods and has been for years, more small- to mid-size businesses are exporting, which he says bodes well for KTC. What will continue to drive growth is harnessing human assets.
“You have to find the right people that have a skillset and knowledge base to provide our type of funding,” King says. “I’ve got a remarkable team that is very good at understanding our client companies’ businesses, their needs, and — candidly — is empathetic and supportive of what they are trying to accomplish.”
Some 10 employees make up King’s boutique firm, headquartered in Dallas with an office in New York City. The group is actively planning to add a team member in California.
Today, KTC’s PO finance and trade finance solutions help businesses based in Canada and the UK, as well as the U.S. A quick look at the portfolio transactions highlighted on KTC’s website reveals the scope of the company’s reach: a $22 million import financing to a women’s apparel company in NYC, a $10 million export PO financing for a Chinese steel plant, a $3.6 million domestic/export financing to a Dallas-based high-tech equipment manufacturer.
Dean Finnegan, CEO of MDI, launched the Robosapien robotics toy for WowWee in 2003 with PO financing from KTC. Finnegan said about KTC: “They would open a letter of credit with the factory, the product would ship from Asia, and the instant it hit the U.S., we would convert it into accounts receivable. The accounts receivable financing would pay off the PO financing. So it started the engine to generate my cash-flow. [The product] became the most sought after gift in 2003. We were sold out after Thanksgiving everywhere in the country. It was because Ed had agreed to step up and support us.”
In 2005, Finnegan again used PO financing from KTC to grow his Pandigital brand — reinventing digital photo frames and pioneering Android tablets — from nothing to $170 million in two years. He eventually transitioned to asset-based lending, qualifying for a $90 million asset-based credit line. “Ed gave me an opportunity to build up my credit and credibility,” Finnegan says. “If I wasn’t able to use PO financing with Ed, it would have been a completely different story. It’s like anything; you have to build a foundation for a house before you build a house. If I hadn’t had that foundation with PO financing, who knows what would have happened.”
Finnegan’s new enterprise, MDI, plans to use PO financing through KTC to launch a child’s safety cellphone called the Orbi in Q2/15. In addition to the attractive low cost of PO financing and its operational ease compared to the covenants and reporting requirements tied to traditional bank funding, Finnegan is comfortable with the KTC team and with King at the helm. He is grateful for the referral to KTC years ago. At the time, Finnegan had approached other factors. “Ed just struck me as the most credible, most reliable,” he said. “I checked him out with a few people, his references, and everybody just raved about him, so I chose him, and I chose wisely.”
In the lifecycle of a business, King says KTC provides a solution that often is just “a piece of the puzzle” in getting businesses off the ground or back on their feet. It may be a case of helping a company grow to where it can obtain ABL or more traditional financing. Other times, an enterprise will turn to KTC for the entire span of its functional life. Each story is unique with an unwritten ending. Just as KTC began with a leap of faith by King and investors, so the firm —steered by King’s steady hand — takes a shot on other businesses, backing a new generation of capital ventures, and the hopes and dreams of the entrepreneurs behind them.
Jill Hoffman is editor of ABF Journal.
1. U.S. Department of Transportation Office of the Assistant Secretary for Research and Technology. January 2014 U.S. Airline Systemwide Passengers Up 0.8 Percent from January 2013. Available at: http://www.rita.dot.gov/bts/press_releases/bts018_14 (Last accessed March 11, 2015.)