Asset-Based Financing – 3 Financing Strategies For Your Small Business

When you were a kid you might have had a hobby or a special collection that was your pride and joy. Perhaps it was a baseball card collection, and every Saturday on allowance day you found yourself at the local sports store salivating over the Mickey Mantle rookie card. You dreamt of that card, but the price tag didn’t quite fit in with your financial portfolio that included $5 for mowing the lawn once a week. In present day, you realize that card could have done more than completed your prized collection, you could have used it as collateral for a loan. Well not really, but you get the point, that collateral for your loan can come in many forms, but it’s up to you to research your assets in order to gain the financing you desire.

Accounts Receivable Financing- One of the most common methods to achieve financing is known as accounts receivable financing. It involves a secured loan wherein the accounts receivable are used as collateral in exchange for a cash sum that will be paid within a short term period. Typically this type of financing is used to assist businesses with a short term cash problem. The lender considers the “age” of the accounts, meaning the older the account the lesser the value. For accounts less than thirty days old, a lender will allot about 75 percent of the appraised or face value. The lender will also consider credit and past payment history when deciding on a loan-to-value ratio. As the business collects the receivables, the proceeds are used to repay the loan or line of credit. There is also a monthly interest rate that will be calculated through applying a daily rate to the receivables left standing each day (the less the outstanding receivables, the lower the interest charge).

Inventory Financing- Inventory financing is another popular option which involves using the business’s current inventory as collateral in exchange for a secured loan. The average lender will allot a percentage of 60 to 80 percent of the value of your inventory. If you are a manufacturer with more raw materials, component pieces, and unfinished products, it is likely you could only receive up to 30 percent. The lender will want collateral that can quickly and easily secure funds in the event that you default on the loan. This type of loan is more ideal for short-term loans and offers interest rates similar to those found in accounts receivable lending.

Factoring Financing- Factoring is the third category of most popular forms of asset-based financing. This is the sale of accounts receivable, or selling your future payment invoices in order to obtain funding now. The factor company will purchase the offered invoices and takes control over collecting on the payments when due. You receive an infusion of cash immediately and don’t have to worry if a future account goes delinquent on their payment. The factoring company will use their own resources to gain payment, including customer debt collection fees.

It is not a particularly common method used for the long-term, but can be more suited to growing businesses with short term or temporary cash flow issues. Another mark in the “positive” column is the fact that there is no debt involved in factoring financing. You are selling those invoices and therefore conducting a transaction that is final.

On the other hand, the factoring company will discount the amount you will gain from this sale. Traditional loans will typically be less expensive than the costs of factoring. The upfront cash price for accounts receivable is typically 70 percent to 90 percent of face value, depending upon the credit history of the customers and the nature of your business. Another issue with utilizing factoring is the possible harm to customer relations. The collection actions taken by the factor company may endanger an ongoing business relationship with one of your customers. A factor company has little interest in preserving your future relationship with the debtor and some companies may be overzealous in collecting receivables.

You can find the plan that would be most suitable to your company, but first take inventory of those assets. Know what you have, appraise its worth, and find that Mickey Mantle equivalent that will be the final piece to this part of your funding puzzle. Beyond that, deciding what method of procuring finances is best for you and your business is of the utmost importance. The fact that you are doing your research and reading this article is a particularly smart step to take. It demonstrates that you are taking a proactive role in your business affairs.

For more on these topics visit Dyer Consulting Group.

Property Investment Loans and the Luxury Home Market Still Suffering

Both the luxury homes and the investment property market are still feeling the pinch of the credit crisis, with loans hard to come by and substantial excess inventory. The process of arranging loans to buy property has been drastically affected since the Lehman Brothers crash, and most lenders have increased their lending criteria by a substantial margin.

It is unlikely that a borrower will be able to arrange financing without at least a 25% deposit available. When one takes into consideration the increases in charges and fees to arrange a loan, realistically this needs to be closer to 30%. Until such times as the commercial property losses accrued and coming due over the next 18 months have been declared, lending is going to remain restricted and the markets will continue to devalue.

Some markets may recover sooner than others, but the problem of overbuilding – particularly in the “luxury” segment is likely to continue to cause a problem for some time. With the end of the 125% “jumbo loans,” and a return to rational lending, one has to wonder how much of the current inventory is going to be unsalable.

It is hard to accurately predict where the turn around point will be – and there will be one, but many are calling that point and have been calling it almost since the downturn began. But – I feel this problem is still unresolved and this one is too big to “hype,” our way out of. The underlying fundamentals: lack of credit, upcoming banking losses in the commercial property sector, and rising unemployment have not changed.

How to Protect Yourself When Getting a Loan

There are many ways to protect yourself if you are seeking a commercial loan or a refinance loan.

First, do some research online about both a commercial loan and a refinance loan. Find out your mortgage options, and also check and copy your credit report so you will be more prepared to negotiate for your commercial or refinance loans.

You should interview several lending company’s and keep a journal of what terms they are offering for a new commercial loan or a refinance loan.

Always price the other property in the area, the price should be comparable. Hire a licensed qualified home inspector, and before you sign the contract on either a commercial or refinance loan, decide who will be responsible for any repairs, the buyer, or the seller.

Never lie on the loan application for any reason. Lying on a commercial or a refinance loan application is fraud and is a criminal offense.

Never borrow more money than you can afford to pay back, or that will make your payments larger than necessary. You do not want to end up losing your property, and the equity in it.

When taking out a commercial loan, or a refinance loan, never sign a blank document. If while reading the contract, you put a cross through the blank spaces, someone cannot add information after you sign. You will be liable for any surprises they might add.

Do not sign anything you do not understand. Take your contract to a real estate professional or an attorney skilled in commercial or refinance loans.

Always, if buying a government home, state honestly your intention to occupy the home, or if you plan to fix it up to rent or resell. Your commercial loan may be turned down if they find you have not been truthful.

Some people get refinance loans to get a lower finance rate, and often borrow more money against the equity in their home. Some lenders may make this sound too good to seem possible. If so, it generally has some kind of catch.

Make sure a refinance loan to pay off bills or for home improvement is the best plan for you, and do not let yourself be talked into something you do not want to do. Some lending companies offer a very low financing option, only for you to learn later that there is a large balloon payment due at the end of the loan. They sometimes also add more finance, but put it into your payment to fool you.

Remember, there are many good, honest lenders that can help you with a commercial loan or a refinance loan. There are also dishonest people who will try to undermine you and trick you into financing more money than what you have planned. Stick to your original budget, and do not sign a contract if it is not exactly what was presented to you. This is a business where the representatives are paid by commission, so make sure you are trusting of this person. Asking friends or the Better Business Bureau is a good place to reference lending companies if they have had bad marks, or are considered a good business you can trust.