Alternative Financing

Alternative bank financing has significantly increased since 2008. In contrast to bank lenders, alternative lenders typically place greater importance on a business’ growth potential, future revenues, and asset values rather than its historic profitability, balance sheet strength, or creditworthiness.

Alternative lending rates can be higher than traditional bank loans. However, the higher cost of funding may often be an acceptable or sole alternative in the absence of traditional financing. What follows is a rough sketch of the alternative lending landscape.

Factoring is the financing of account receivables. Factors are more focused on the receivables/collateral rather than the strength of the balance sheet. Factors lend funds up to a maximum of 80% of receivable value. Foreign receivables are generally excluded, as are stale receivables. Receivables older than 30 days and any receivable concentrations are usually discounted greater than 80%. Factors usually manage the bookkeeping and collections of receivables. Factors usually charge a fee plus interest.

Asset-Based Lending is the financing of assets such as inventory, equipment, machinery, real estate, and certain intangibles. Asset-based lenders will generally lend no greater than 70% of the assets’ value. Asset-based loans may be term or bridge loans. Asset-based lenders usually charge a closing fee and interest. Appraisal fees are required to establish the value of the asset(s).

Sale & Lease-Back Financing. This method of financing involves the simultaneous selling of real estate or equipment at a market value usually established by an appraisal and leasing the asset back at a market rate for 10 to 25 years. Financing is offset by a lease payment. Additionally, a tax liability may have to be recognized on the sale transaction.

Purchase Order Trade Financing is a fee-based, short-term loan. If the manufacturer’s credit is acceptable, the purchase order (PO) lender issues a Letter of Credit to the manufacturer guaranteeing payment for products meeting pre-established standards. Once the products are inspected they are shipped to the customer (often manufacturing facilities are overseas), and an invoice generated. At this point, the bank or other source of funds pays the PO lender for the funds advanced. Once the PO lender receives payment, it subtracts its fee and remits the balance to the business. PO financing can be a cost-effective alternative to maintaining inventory.

Non-Bank Financing

Cash flow financing is generally accessed by very small businesses that do not accept credit cards. The lenders utilize software to review online sales, banking transactions, bidding histories, shipping information, customer social media comments/ratings, and even restaurant health scores, when applicable. These metrics provide data evidencing consistent sale quantities, revenues, and quality. Loans are usually short-term and for small amounts. Annual effective interest rates can be hefty. However, loans can be funded within a day or two.

Merchant Cash Advances are based on credit/debit card and electronic payment-related revenue streams. Advances may be secured against cash or future credit card sales and typically do not require personal guarantees, liens, or collateral. Advances have no fixed payment schedule, and no business-use restrictions. Funds can be used for the purchase of new equipment, inventory, expansion, remodeling, payoff of debt or taxes, and emergency funding. Generally, restaurants and other retailers that do not have sales invoices utilize this form of financing. Annual interest rates can be onerous.

Nonbank Loans may be offered by finance companies or private lenders. Repayment terms may be based on a fixed amount and a percentage of cash flows in addition to a share of equity in the form of warrants. Generally, all terms are negotiated. Annual rates are usually significantly higher than traditional bank financing.

Community Development Financial Institutions (CDFIs) usually lend to micro and other non-creditworthy businesses. CDFIs can be likened to small community banks. CDFI financing is usually for small amounts and rates are higher than traditional loans.

Peer-to-Peer Lending/Investing, also known as social lending, is direct financing from investors, often accessed by new businesses. This form of lending/investing has grown as a direct result of the 2008 financial crisis and the resultant tightening of bank credit. Advances in online technology have facilitated its growth. Due to the absence of a financial intermediary, peer-to-peer lending/investing rates are generally lower than traditional financing sources. Peer-to-Peer lending/investing can be direct (a business receives funding from one lender) or indirect (several lenders pool funds).

Direct lending has the advantage of allowing the lender and investor to develop a relationship. The investing decision is generally based on a business’ credit rating, and business plan. Indirect lending is generally based on a business’ credit rating. Indirect lending distributes risk among lenders in the pool.

Non-bank lenders offer greater flexibility in evaluating collateral and cash flow. They may have a greater risk appetite and facilitate inherently riskier loans. Typically, non-bank lenders do not hold depository accounts. Non-bank lenders may not be as well known as their big-bank counterparts. To ensure that you are dealing with a reputable lender, be sure to research thoroughly the lender.

Despite the advantage that banks and credit unions have in the form of low cost of capital – almost 0% from customer deposits – alternative forms of financing have grown to fill the demand of small and mid-sized businesses in the last several years. This growth is certain to continue as alternative financing becomes more competitive, given the decreasing trend seen in these lenders’ cost of capital.

How the Best Entrepreneurs Manage Their Personal Economy

The most accomplished entrepreneurs follow key strategies in to achieve their business success. According to many experienced business coaches and professional technology advisors, one of the most important strategy is to learn how to effectively and wisely manage and control one’s personal economy during the growth of an entrepreneurial venture.

In fact, personal economy management is so crucial that this ability alone can make or break the growth and success of a business! The following are some insights for achieving these goals.

Flaws In The Common Views Of Money

So many people today are caught up in a consumer-driven lifestyle — one that is built around the addictive accumulation of trappings that make them appear to be “as successful as” their neighbors. To many people, it doesn’t matter how much consumer debt they accrue, or how their future is mortgaged, as long as they can be seen in the “right” car and the “right” clothes and vacationing in the “right” location… nothing else seems to matter!

Well, the truth is that sound personal economy does matter, and it matters a lot. Entrepreneurs who build million dollar incomes do not operate this way. Yes, I’ve mentioned that “the best entrepreneurs cultivate a positive and successful professional image,” but they don’t do so at the expense of a strong personal economy!

Image isn’t everything… because after all, images can be deceiving. Living on credit and surviving from paycheck to paycheck guarantees a lack of freedom, whereas creating a strong personal economy allows for infinitely greater time-freedom and financial freedom!

Creating A Thriving Personal Economy

Entrepreneurs who understand their own business are passionate about managing and controlling all of their assets, and money is one of the most important. While it has become more feasible to market a new business with no money, it is also true that as a business grows there will be more finances available to manage, or to mismanage.

The very purpose of creating a business of your own is to be able to create significant income for yourself and lead the kind of lifestyle you want. In order to make this happen, financial focus is a key ingredient. Financial focus is what leads entrepreneurs to forgo unwise purchases for the moment, and build a business that will provide income for them throughout the future. Ideally, an entrepreneur doesn’t rely on any outside source or sources over the course of their careers, which is an incredibly liberating idea!

Keeping Control Of Your Personal Economy

The most effective way to manage finances well is to maintain an element of control over them. This usually will mean steering clear of many popular financial tools, such as incurring debt and a reliance on money managers and financial institutions for advice. The most effective entrepreneurs are those who find themselves with a significant and regular income of their own creation, and with little or no debt to counteract their money! This requires financial discipline and the ability to think differently than most, but isn’t that what entrepreneurship is all about, in the long run?

Lawsuit Financing

Lawsuit financing is usually misunderstood as loans. In reality lawsuit finances or lawsuit funds are advances or investments made to avoid state laws against making excessive charges of interest. These lawsuit finances are available for appellate funding, attorney funding, expert witnesses and plaintiffs. Lawsuit finance helps those who have lost their jobs, have met with accidents, had personal injuries, faced sexual harassment, or are charged with malpractice.

When clients sometimes cannot even meet their basic requirements like rent and expenses, lawsuit financing helps them. Under such cases the lawsuit financing companies help by providing advances to the clients. Lawsuit finance is non-recourse in nature. Unlike a loan it is retrieved by the lawsuit financing company only when the verdict is in favor of the client. The lawsuit financing company can claim for the settlement of the money only after the final verdict or statement is known.

The lawsuit financing company has options like flat fee, where the lawsuit financing company decides beforehand what amount or share the client would pay after the final verdict is known. The lawsuit financing companies charge the plaintiffs with recurring fees that they have to pay until the verdict is made final. This recurring fee varies according to the case. It is usually collected on a monthly basis. The fee could be as low as 0.5% or could be as high as 15%.

Attorneys, their witnesses, and testimony can together convince the judge or jury to take your favor. In these situations, use expert witness funding. The attorney funding becomes essential when the plaintiff runs out off capital or the litigation costs exceed the expected amount. Then funding or financing becomes essential. The plaintiff funding is made as investments and not mere loans. If the plaintiff has received a monetary verdict but a trial is pending, then appellate financing is suggested.

A Different Solution for Business Inventory Financing

We feel sorry for you. Your firm is not in the service industry. They are the lucky ones with respect to inventory financing – there is no inventory! Unlike your business, which produces goods and carries inventory to meet customer order needs your services firms have no storage requirements!

If your firm has an investment in inventory then financing for that asset is often, if not always, vital. Financing via bank credit lines for the inventory component of your balance sheet is always difficult, if not in some cases impossible. Most business owners and financial managers know that of your two major current assets ( receivables and inventory ) that banks prefer receivable, aka a/r financing.

So how do you finance your inventory, and what are the requirements to get such a facility in place? The reality is that every business is different and your firm will have different categories of inventory – most commonly they are raw materials, work in progress, and finished goods.

Inventory financing in Canada is most often financed under an ABL facility. What is ABL is the next question our clients always ask. The acronym stands for asset based lending, and is a specialized type of financing that is mostly carried out by non bank institutions. Facility sizes tend to range from 250k and up, as it is not really economical for all parties (you and the lender) for finance amounts much under that.

Your ability to control, report, and purchase inventory most economically are key drivers in an inventory financing decision made by your inventory financier. Your ability to monitor, stock, and produce and bill and collect are the basic requirements for an inventory financing facility. We would point out that in many cases this facility also includes a receivable component, because, as we all known, inventory flows into a receivable which flows into… dare we say it… cash!

If you are unable to finance your inventory properly you can very easily get into what can best be describe as a ‘ cash trap ‘- and that’s not a good trap to be in. Typically each one thousand dollars of inventory on hand can cost you between 150 and 250 dollars per year when you take into account some obvious and not so obvious factors such as financing costs, storage, handling, insurance, and deterioration of the inventory which by its necessity forces you to do an asset write down.

The irony is of course that you can have too much inventory or too little, it’s a balance act.

When you arrange inventory financing you want to ensure you have reasonable levels of product – so you need to focus on both financing cost and order costs.

If you have inventory financing fast efficient turns are potentially more possible and you annual carrying costs can be dramatically reduced- don’t forget that the cash you invest in inventory could be put to work elsewhere and in many cases earn, for example, at least 12% more in profits. That’s a very typical number for a manufacturer.

Financing inventory is a challenge – you want to be able to take advantage of volume discounts, but at the same time limit your investment in inventory while satisfying customer order needs. Whew! That’s a real teeter totter don’t you think?!

Speak to a trusted, credible and experienced business financing advisor who can guide you through inventory financing in a manner that supports your business and industry. Beating the inventory financing challenge is a solid financial accomplishment.

The Best Way to Understand Personal Finance

When we are trying to understand Personal Finance, the best thing to do is to understand what Personal Finance is NOT.

Many people think that accounting and personal finance are the same, but Personal Finance is NOT Accounting.

On the surface they may seem the same; they both have something to do with money. However, the definitions will help us better understand the differences.

Merriam-Webster’s definition of accounting is “the system of recording and summarizing business and financial transactions and analyzing, verifying, and reporting the results.”

Based on this definition, we see that accounting is the process of analysing and recording what you have already done with your money.

This is why having an accountant is usually not enough when it comes to your personal finances.

Accountants generally don’t concern themselves with personal finance (there are some exceptions to this rule). Unless your accountant is also a financial advisor or coach, he or she will likely just look at what you have done with your money at the end of the year and provide you with a report of their analysis.

This report is usually your tax return; what you owe the government or what the government owes you.

Very rarely does the accountant provide an individual with a Balance Sheet or Income Statement or a Net worth statement; all very helpful tools that are necessary to effectively manage your personal finances.

Personal Finance is looking at your finances from a more pro-active and goal oriented perspective. This is what provides the accountants with something to record, verify and analyze.

The Merriam-Webster’s (Concise Encyclopedia) definition of “Finance” is the “process of raising funds or capital for any kind of expenditure. Consumers, business firms, and governments often do not have the funds they need to make purchases or conduct their operations, while savers and investors have funds that could earn interest or dividends if put to productive use. Finance is the process of channeling funds from savers to users in the form of credit, loans, or invested capital through agencies including COMMERCIAL BANKS, SAVINGS AND LOAN ASSOCIATIONS, and such nonbank organizations as CREDIT UNIONS and investment companies. Finance can be divided into three broad areas: BUSINESS FINANCE, PERSONAL FINANCE, and public finance. All three involve generating budgets and managing funds for the optimum results”.

Personal Finance Simplified

By understanding the definition of “finance” we can break our “personal finance” down into 3 simple activities:-

1. The process of raising funds or capital for any kind of expenditure = Generating an Income.
A Business gets money through the sale of their products and services. This is labeled “revenue” or “income”. Some businesses will also invest a portion of their revenue to generate more income (interest income).

A Person gets money through a job, or a small business (self employment, sole proprietorship, network marketing or other small business venture). The money coming in can be a salary, hourly wage, or commission, and is also referred to as income.

A Government gets money through taxes that we pay. This is one of the main ways that the government generates an income that is then used to build infrastructure like roads, bridges, schools, hospitals etc for our cities.

2. Using our money to make purchases = Spending Money.
How much we spend relative to how much we make is what makes the difference between having optimum results in our personal finances. Making good spending decisions is critical to achieving financial wealth – regardless of how much you make.

3. Getting optimum results = Keeping as much of our money as possible
It’s not how much you MAKE that matters – its how much you KEEP that really matters when it comes to your personal finances.

This is the part of personal finance that virtually everyone finds the most challenging.

Often people who make large incomes (six figures or more) also tend to spend just as much (or more) which means they put themselves in debt and that debt starts to accrue interest. Before long that debt can start to grow exponentially and can destroy any hope they would have had to achieving wealth.

Personal Finance made simple

Personal Finance doesn’t need to be complicated if you keep this simple formula in mind:

INCOME – SPENDING = WHAT YOU KEEP

For Optimal Results you simply have to make more than what you spend and spend less than what you make so you can keep more for you and your family!

If you are not actively working towards an optimal result you will by default get less than optimal results

It really is that simple!

Now that you understand personal finance and WHAT you need to do, the next step is learning HOW to do this!

The best way to start is by following these 3 simple steps:-

1. Know what you want to achieve – “if you don’t know where you are going, any road will take you there” has become a very popular quote, probably because it is so true. One of the habits that Stephen Covey highlights in his book “7 Habits of Highly Successful People”, is to always start with the end in mind. Knowing where you want to go will be a big help in ensuring you get there.

2. Have a plan – that you can follow that will get you to your goals. Knowing how you will achieve your goals in a step by step plan is invaluable. Sometimes this is easier with the help of an advisor or a financial coach.

3. Use tools and resources – that will help you to stick to your plan and not become distracted by the things in life that could limit our incomes and make us spend more than we should. Don’t try and work it all out in your head! You will end up with a massive headache and your finances will become one gigantic dark fog!