Posts Tagged ‘debt’
|Positioning Your Company for Debt Financing
Wednesday, February 10th, 2010
Positioning Your Company for Debt Financing
There was a time in the old days when going to the bank was the only way to get outside capital for your business. These days with the explosion of raising equity investment, many of the guidelines for running a company have been revolutionized. Unfortunately this new phenomenon is only true for companies with super "star power", because these companies have potential to create sky-rocket return earnings.
For everyone else, sticking to fundamentals is where it's at. Building your company incrementally, following a pre-prepared business plan, watching expenses, and increasing sales. When your company moves beyond its launch, it begins to operate much like a bank. On the financial side you will be making credit decisions
involving your customers. Some will have to pay C.O.D., some you will extend net 30 day terms. In this sense you are now becoming a banker for your customers.
Without getting into how inexpensive debt financing ultimately is compared to equity (try 20% annualized interest versus 20% ownership lock stock and barrel), in certain situations the time honored tradition of borrowing money can be the best solution for increasing growth or starting a company.
By knowing what commercial finance companies look for, you will become a much more attractive prospect.
- Concentration – This means putting all your eggs in one basket. Avoid going out and making a large sale to a customer and then not continuing your sales effort to find more customers. The risk of a problem developing with your main customer, or for whatever reason they are no longer buying from you can obviously be detrimental to your success. Finance companies look for incoming revenue to be spread evenly over a number of customers.
- Creditworthiness - Who are you lending your hard earned assets to? What kind of due diligence do you perform on new customers? The challenge here is whether to accept a lucrative sale with a company that could never get credit from any type of finance company. You are essentially telling yourself that you know better than the banker about loaning money. Finance companies will respect a business owner that has a thorough credit checking process and a number of stable credit worthy customers.
- Book keeping – While some businesses send out all their accounting to outside agencies, it is helpful to have a qualified book keeper on staff. When it comes time to seek financing, being able to produce an instant fiscal snapshot of your company will show the sophistication of your operation. Finance companies appreciate businesses that keep a close eye on their books.
- Taxes – Pay them. Using the Internal Revenue Service as your funder becomes expensive. Whenever you work with a finance company, you will be pledging assets as collateral, thus the nature of debt financing. When you fail to make tax payments, the government steps in and places a lien against those same assets essentially stepping into first position. This leaves the finance company with money outstanding to your business and no collateral to back it up. This places your entire relationship in default. When going to closing on financing expect to sign a form that allows the finance company to receive duplicate correspondence from the IRS. This is standard procedure to track tax problems. Owing taxes does not mean you cannot get financing. It is entirely possible to receive a subordinated debt agreement from the IRS which allows the finance company to work with you unencumbered.
- Bankruptcy – If you have ever entered into a bankruptcy proceeding whether personal or business, own up to it right away. It will come out, and being up front about the circumstances will enhance the necessity to overlook the past difficulties.
- Applications – Finance companies ask for a variety of information when performing their due diligence. Do not be alarmed, they are not trying to steal your secrets. They need to feel comfortable with you and your company. Each company has its own threshold for fact checking. Invariably the finance companies that do the most thorough job are the most reliable and safest to do business with. Finance companies like working with a business that takes the time to put a loan package together in advance of asking for financing. Typically you can start with; Interim Balance & Income Statement, Interim Profit & Loss Statement, Last Year End Statements, Accounts Payables Aging Report, Accounts Receivables Aging Report, and of course Tax Returns.
- Contracts – Be prepared for onerous language. Finance companies cannot sugar coat the reality that if something goes wrong they need to exercise their rights. They have to go into the relationship always thinking that the absolute worst case scenario will unfold. Once a finance company finds itself being defrauded, stolen from or payments not made without explanation, it's too late to insert stronger language for protection. By and large the language is standardized and walking from a deal to start shopping for less demanding legalisms won't produce much. Remember this, a contract is just paper in a file cabinet until you default on your agreement. Stay within what you agreed upon and all the tough language won't matter. Even if you start having financial difficulties, get in touch with your finance company immediately. You can greatly reduce the chance of default by showing that you are pro-active with your situation.
- Using the money for the right reasons – This sounds obvious but in certain cases it can be highly relevant. You hear a lot about going to the right Venture Capital Firm that would handle your type of investment. In some ways that holds true for debt finance companies. They tend to work within industries that they feel comfortable. Additionally the type of financing company will depend on your plans for the money. If you are trying to set up a new business infrastructure, then a working capital line of credit is not your best option. You will probably do better with a term style loan that will allow you to amortize the expense over a period of years.
- Management Integrity – Also like equity investment, get a good team together and hold onto them. Finance companies raise red flags when a long time Financial Officer who has been the contact person at the company since the inception of the relationship all of a sudden leaves without explanation. Again, always fearing the worst, the finance company could unjustly feel that something untoward was afoot and begin to scrutinize your account more closely. Even though finance companies are not part owners of your business, they are partners in your success just like your good customers. Keep them abreast of breaking news.
- Be Professional - Answer calls and messages expeditiously, be prepared with information, show up on time. When its crunch time and you need an extra fifty thousand dollars for a week to get a better deal from a vendor, you would be surprised how much mileage you can get by being a courteous and thoughtful customer to your finance company.
-from a speech given at SmartStart 2000 Albany Law School Science & Technology Center
Tags: business, companies, Company, credit, customers, debt, finance, financing, get, money, time
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Financing Using Equity vs Debt
Wednesday, February 10th, 2010
Financing Using Equity vs. Debt
Would financing be right for your business?
To find out click here!
At various times in the life of a company there are going to be requirements for outside assistance in order to grow the business. One requirement will be the need for additional capital. Choosing which financing vehicle is best for your company is very important. It's choosing the right tool to fix the problem.
Deciding whether to seek equity capital or debt financing is the first step. Usually companies trying to get equity capital are very early stage with little or no real assets. While companies on their way to a steady growth curve use debt financing.
The equity route
As the owner of a business idea, plan, or company – you hold ownership to a subjective value called equity. The equity of any type of property whether intellectual or physical is the value someone is willing to pay for it minus any liability attached to it. In business that could mean the value of an entity today measured in time and money invested versus the value in the future measured by comparable growth.
Once the owner and investor determine the "valuation" of the equity, the owner can then sell parts of the equity in order to raise capital. There are a variety of methods you can raise equity capital (Seed, Angel, Venture) and you should learn the pluses and minuses for each. An equity capitalist is interested in picking a company that shows great potential. They are expecting that there will be significant growth due to their involvement. That could mean that the company will grow tenfold within five years.
Without a doubt, first and foremost on any equity capitalist's due diligence list will be the management team. Even before the idea itself, it is commonly stated, great idea's with a bad team will get nowhere, whereas, bad idea's with a good team still have a chance to make it big. You should also realize, that once invested, the equity capitalist will be having an active role in the decision making of the company. Because they have "bought in" to your company they are now your partners, how active they become needs to be sorted out up front.
On the debt side
Conversely, raising capital through debt financing does not entail "selling" your equity, but instead works by "borrowing" against it. Debt financing is only available to business owners who have something of value that the lender can instantly liquidate. The debt finance company is not interested in becoming a partner in your endeavor, instead they are in business to make money from their money, letting you use it for periods of time.
Like equity financing there are a variety of methods available to raise debt financing. Traditional banking will always be the least costly source for your financing, but remember bankers are not in business to take on risk. When they ask for three years of company tax returns its because they want to see a steady reliable set of profitable growth numbers. Borrowing from the bank relies on two variables, the collateral that secures the loan, and your ability to repay the loan. You might have enough collateral, but if your business is losing money, the bank can't expect you to handle the added expense of loan payments.
Many early stage companies turn to private commercial financing which is better suited to deal with riskier issues. Factoring companies use the loans you make to customers (invoices for finished work) as the collateral for their funding. Here the emphasis will be the creditworthiness of your customers rather than the credit of your company. Equipment leasing companies will allow you to purchase new equipment and pay for it over time, usually three to five years.
Finally,
When seeking outside capital, whether equity or debt, remember that certain sources are familiar and like to work with particular industries. Take the time to look around and be sure that the source you are considering is well-aquatinted with your type of business.
- article appeared in the Business to Business Newspaper of Howard County & Columbia MD, May 1999.
Tags: business, capital, companies, Company, debt, equity, Factoring, financing, growth, money, value
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Glossary of Accounts Receivable Factoring Terms
Wednesday, February 10th, 2010
Glossary of Accounts Receivable Factoring Terms
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account: also known as the account debtor
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accounts payable: The amount of money a company owes for goods and services it has received; any accounts due and owing.
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account receivable: a balance due from a debtor on a current account.
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| accounts receivable: A collection of a company's outstanding invoices (invoices which have not yet been paid by the company's customers). |
| accounts receivable financing: the purchase of the face value of a companies accounts receivables or invoices by a factoring company at a discount in exchange for an immediate cash advance usually in the form of a wire transfer. Same as "financing accounts receivables". |
| accounts receivable aging report: a financial report showing how long invoices from each customer have been outstanding. |
| advance rate: the percentage of the face value amount of an invoice that a funding source will advance to a client. |
| articles of incorporation: a document filed with a U.S. state by the founders of a corporation. After approving the articles, the state issues a Certificate of Incorporation; the two documents together become the Charter of Incorporation. |
| asset: anything having commercial or exchange value that is owned by a business, institution or individual. A business' assets might include its real estate, equipment inventory, intellectual assets such as copyrights or trademarks, and accounts receivable. |
| assignability: the ability to assign (or sell) an income stream to another individual or business. |
| assignee: the person or business entity who is given, obtains, or buys the right to an asset. |
| assignment: the transfer of the rights, title or interest of any debt instrument that is properly owned by another party. |
| assignor: the person giving or selling an asset, and subsequently, forfeiting rights to that asset. |
| bad debt: any debt that is delinquent and has been written off as uncollectible. |
| balance and income statement: an accounting statement of financial condition that reports the company's assets, liabilities, and equity at a given point in time. |
| balance sheet: a financial statement that shows a business's current financial condition, with assets on the left side and liabilities and net worth on the right side. |
| bankruptcy: a state of insolvency of an individual or organization. The inability to pay debts. |
| beneficiary: The person or party entitled to receive the benefits, or proceeds, of the life insurance policy upon the death of the insured person. |
| bill of lading: A shipping document which gives instructions to the company transporting the goods. |
| bill of sale: A document used to transfer the title of certain goods from seller to buyer. |
| creditworthiness: the process of determining the credit limit assigned to each account debtor for the purposes of advancing funds against invoice(s) which they owe. |
| invoice: an itemized statement furnished to a purchaser by a seller and usually specifying the price of goods or services and the terms of sale. |
| cash flow: the flow of cash through a business. In business terms, cash flow involves the flow of cash into a company in the form of revenues, and out of the company in the form of expenses. |
| cash flow instrument: future payment or series of payments. Also called a debt instrument or income stream. |
| cash flow transaction: occurs whenever a funding source pays cash to an individual or business in exchange for an income stream. |
| chattel: any article of tangible property other than land, buildings, equipment, inventory, or other items annexed to such. |
| client: the business having the financing relationship with the lender. |
| collateral: something of value that is pledged as security to ensure the payment of a debt. Collateral is promised to a lender until a loan is repaid. If the borrower defaults, the lender has the right, by law, to seize the collateral. |
| collateral-based income streams: cash flow instruments that are secured by collateral. |
| collectible: refers to the funding source's ability to collect future income stream payments once they are purchased. |
| corporation: a legal entity, chartered by a U.S. state or the federal government, and separate and distinct from the persons who own it. It is regarded by the courts as an artificial person; it may own property, incur debts, sue or be sued. |
| credit insurance: third party insurance companies that underwrite the value of the outstanding invoice. Under the specific terms of the policy, unpaid invoices will be covered and proceeds will be given to the policy holder. |
| creditor: one who is owed payments on a debt by a debtor. |
| customer: the account debtor (end user) who does business with the client (vendor) |
| debt instrument: future payment or series of payments, or a debt that one party owes to another party. Also known as income streams or cash flow instruments. |
| debtor: one who owes something and makes payments to a creditor. |
| default: the omission or failure to perform or fulfill a legal duty, obligation, or promise (i.e. to pay a debt). |
| discount fee: the percentage of the face value of the invoice taken in exchange for making an advance on an invoice. |
| doing business as (dba): a legal statement filed when a person uses a name other than his or her own to operate a business. |
| due diligence: exhaustive research on a transaction, income stream, client, and/or payor; may involve credit checks, appraisals, UCC searches, lien searches, or on-site visits with clients. |
| equity: the value or interest an owner has in property over and above any indebtedness owed on the property. |
| escrow: the system by which money documents, personal property, or real property is held in trust for another party by a disinterested third party until the terms and conditions of the escrow instructions are completed or terminated. |
| face value: the total current principal balance on an invoice |
| factor: a funding source that specializes in funding accounts receivable. |
| factoring: the purchasing of accounts receivable from a business by a factor who assumes the risk of loss in return for some agreed discount. |
| factoring rate: same as discount fee; percentage of invoice amount a factor charges for funding an invoice. |
| financing: the act or process or an instance of raising or providing funds; also: the funds thus raised or provided. |
| financing accounts receivables: the purchase of the face value of a company's accounts receivables or invoices by a factoring company at a discount in exchange for an immediate cash advance usually in the form of a wire transfer. Same as "accounts receivable financing". |
| financing statement: the UCC document filed with local state authorities to designate the owner of rights to stated collateral. |
| foreclosure: a legal proceeding in court to seize property given as security for a debt that is in default. |
| government-based income: cash flows paid by a government entity, either directly or through a sub-contractor. |
| income stream: a future payment or series of payments, or a debt that one party owes to another party. Also known as a debt instrument or cash flow instrument. |
| institutional lenders: savings and loan associations, local and regional banks, mortgage companies, finance companies, and commercial lenders. |
| intangible personal property: something that has value but is not a tangible asset, for example, a trademark, copyright, patent, or trade secret. |
| investment-to-value ratio: a measure of how secure a creditor's position is and how likely the creditor is to recoup all of his or her money in the event of a foreclosure. |
| joint venture: a business entity established for a specific task, operation, or goal. |
| leverage: the ratio of debt to total assets. |
| limited liability company: a form of business structure designed to combine the best of corporate and partnership attributes into one entity. |
| loan-to-value ratio: a measure of how heavily mortgaged a property is and how likely the owner is to default on his or her debts. |
| notification: the process by which the factor notifies the account debtor that all proceeds due and owning must be paid directly to the factor by law. |
| partnership: a common form of joint ownership of a business. |
| payee: person or business that has the right to receive a payment or series of payments and is interested in selling that income stream for cash. Also called the seller or client. |
| payor: the person, company, or government responsible for making payments on an income stream. |
| partial: any part of a payment stream that is less than the full amount due. |
| personal guaranty: a contractual agreement between a funding source and a seller, whereby the seller assumes personal responsibility and liability for the obligations of the income stream. |
| portfolio: a group or package of income streams of the same type. |
| privately held: stock owned in the company by the business owners rather than shares sold in the public markets. |
| profit and loss statement: a financial statement that shows a historical record of a business's income and expenses. |
| promissory note: a written promise to pay a specified amount to a specified party over a certain period of time. |
| purchase and sale agreement: the actual contract between factor and client that legally sets out the terms and conditions for the financing relationship |
| replevin: a legal proceeding in court to seize property (other than real estate) given as security for a debt that is in default. |
| reserve: an amount a funding source holds in its account to cover potential payment defaults. It is tied to the advance and the discount fee. After the advance, the reserve is held until the debt is covered. The fee is deducted and the remainder of the reserve is refunded. |
| satisfaction: the discharge of an obligation by paying a party what is due, i.e., the satisfaction of an IRS lien or the satisfaction of a mortgage. |
| seasoning: the length of time payments have been made on a note or other debt instrument. |
| securitization: the bundling and resale of debt instruments to investors; permitted only for parties licensed and regulated by the SEC. |
| security interest: an interest in property, other than real estate, which is given as security for a debt or other obligation. A security interest is created by execution of a security agreement and one or more financing statements under the Uniform Commercial Code. |
| seller: the person or company that is holding a debt instrument and wants to sell it. |
| sign off: a legal acknowledgment from the account debtor on a bill as due and owing. |
| sole proprietorship: a business owned and operated by an individual. |
| subordination: the act of a creditor acknowledging in writing that a debt due him or her by a debtor shall be inferior to the debt due another creditor by the same debtor. |
| tangible property: property other than real estate, such as cars, boats, or other assets. |
| trial balance: a debit and credit worksheet in accounting showing the financial condition of the business at the period stated. |
| Uniform Commercial Code (UCC): rules of law that delineate the structure of obtaining security on collateral. The UCC determines who has rights to collateral that has been pledged in return for credit. |
| verification: the process of verifying the veracity (or truthfulness) of the invoice value from the customer. |
Tags: accounts, business, cash, Company, debt, income, party, property, receivable, stream, value
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