Posts Tagged ‘purchase order financing’
Asset Based Lending In Vogue
May 6th, 2010
Some would say that 2010 is the year of the asset based lender, or at least that can be what it looks like for a lot of businesses trying to locate and secure financing.
Just to be clear, when I talk about asset based lending, this can cover off a lot of territory including such things as inventory financing, factoring, purchase order financing, equipment financing, private real estate mortgages, and asset based loan facilities that take some combination of receivables, inventory, equipment, and real estate as security.
As compared with corporate finance provided through traditional lenders like banks, the asset based loan providers are much more in tune with how to liquidate assets in order to get loan principal repaid if required.
In a typical, non recessionary market place, there are essentially three different categories of business financing provided by the capital markets to small and medium sized businesses. The first tier would comprise the corporate financing and small business lending programs provided by banks and larger financial institutions. The second tier is the business version of the sub prime market that is still institutionally driven, but with a focus on subordinate debt lending and higher risk corporate finance scenarios. The third tier is asset based lending where lending risk and the related rates are higher than traditional banking rates.
In the current market, the corporate and small business lending is slowly coming back, but remains very cautious. The sub prime lending tier is pretty much non existent, leaving the asset based lenders as the predominant lending option in many situations.
For the most part, asset based lending is used to finance growth, transition business ownership, and provide bridge funding for companies that have experienced a down turn in their financial performance and have hard asset equity to leverage to cash flow the business until financial results allow the business to return or acquire a lower cost corporate financing solution.
Major banks also have asset based divisions for medium sized businesses that are asset rich and require greater leverage than what traditional corporate financing can provide. But for the most part, asset based lending is focused on higher risk scenarios where some amount of operational uncertainty precludes traditional lenders from wanting to extend business capital.
In the current capital market, asset based lenders are seeing loan applications for lower risk scenarios than what they would typically be exposed to due to the lack of financing being provided by the other sources discussed above.
The result has been a considerable expansion of asset based loans particularly in the real estate market where private lenders continue to fill the void created by banks tightening up on their lending activities.
This is a hard transition for most business owners who feel that the economy is climbing out of the recession, but can’t get their bank or traditional lending sources to provide any new capital to their business operations.
For many, turning to a higher cost asset based lender is a hard pill to swallow as they feel their business should qualify for lower cost financing alternatives. But in the current market, growth and even survival is going to cost more with respect to business capital for many small and medium sized businesses and the sooner business owners make the adjustment, the faster they will be able to get access to commercial financing.
This is not to say that asset based lending is the only solution or best solution, but the current reality is that these higher cost financing options may be the only option available in certain cases, making their consideration more critical to the business owner.
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Business FinancingBridge Financing Basics
December 15th, 2009
What Is Bridge Financing, And When Should You Consider Using it?
Bridge financing is simply a short term loan that helps facilitate the completion of a transaction. The term bridge is used to illustrate that what you’re trying to finance has a clear and definite beginning point and ending point.
In many cases, bridge financing is sought to complete a transaction quickly so that more suitable longer term financing can be secured over a less compressed period of time.
In other cases, a bridge is strictly used for completing a transaction whereby when the entire transaction has successfully closed, proceeds from the transactions will be used to pay back the bridge.
Conventional debt financing programs like factoring, inventory financing, purchase order financing, private mortgages, and other forms of asset based lending are basically bridge loans in disguise.
The key characteristics of most bridge loans is that they are a more expensive form of debt financing, but that they can also be put into place rather quickly and are designed to manage the risks associated with an incomplete transaction.
In order to secure a bridge, the borrower typically has to have something of value to pledge that the bridge financier would be interested. The most common form of security is real estate. A Bridge secured by real estate can potentially be used for all sorts of purposes in that if the underlying transaction or activity being funded is not successful, the lender will just realize on the real estate security.
Other forms of assets can be used to secure a bridge. In most cases, however, the lender will require possession and potentially legal control of the assets to protect their interests which is why real real estate tends to be the security of choice.
In terms of when to use a bridge, you need to go back to the earlier definition…the transaction or application of capital must have a clear beginning and ending.
If you can see clear to the other side of a transaction and all that stands in your way of a profit or ownership of a long term appreciating asset is capital, then a bridge should be considered. As long as the return potential of the transaction is greater than the cost of the bridge, a short term bridge loan may be a very shrewd financial decision.
The reasons why bridge loans aren’t considered more often is 1) individuals view them as too expensive and 2) people think that lower cost financing should be easy to come by.
There is no question that bridge financing can be pricey. This is opportunistic based lending that takes full advantage of the time pressures that cause deals to fall apart when traditional financing can’t be secured on a timely basis.
Which leads in to the second point.
Commercial financing for any type transaction that is not straight forward is almost never easy. The process can take way more time that you think and even when you get a commitment to fund, there can be several conditions that need to be met before any funds are advanced.
The notion of easy to secure financing kills more deals that you can image.
And that’s why bridge financing should always be considered either as a back up plan or as a short term form of financing that gets the deal done and buys time for you to find a more suitable longer term business finance solution.
From a cost point of view, which would you rather have? A smaller return or nothing? Most people will say they will take a smaller return if they had too, but don’t spend any time getting a bridge financing contingency in place because their so focused on getting traditional financing locked in by the deadline.
So in many cases, they end up with nothing.
Personally, I wouldn’t use bridge financing if I didn’t have to either. The trick is knowing when you need to bite the bullet and pay the piper, versus running out of time and driving your deal over a cliff.
Something to consider.
Business FinancingHow Do You Secure Purchase Order Financing?
October 26th, 2009
How To Get Purchase Order Financing For Your Business?
Purchase order financing is a form of asset based business financing that business owners and managers utilize to cash flow profit earning opportunities.
A basic overview has the borrower holding a purchase order for delivery of goods to a customer and requires a financing advance against the purchase order to secure and potentially complete the finished goods in question.
In order know if your business could be eligible for purchase order financing, here are some generic requirements to consider.
1. The purchase order needs to be for a commodity good that has an easily identifiable market in terms of asset liquidation pathway and value. The best liquidation plan for most purchase order financiers is the customer list of the borrower. Existing customers are already buying the product from the source so its reasonable to presume that this would be the fastest and easiest way to move the product, especially if a discount was provided.
2. The issuer of the purchase order must be a credit worthy entity capable of honoring the purchase order if it is properly fulfilled. Some lenders will even go so far as having the issuer qualify for accounts receivable insurance before approving financing.
3. The product to be sold must have a profit margin of 20% or higher. In the event of any transactional or repayment issues, the lender will step in and liquidate its security for repayment and because the assets will be forced liquidated, there needs to be some margin in the product to allow for a likely discount under conditions of a forced sale. The second reason that a solid margin is required is to cover the cost of financing. Purchase order financing is not cheap and can range from 2% a month to upwards of 4% a month plus administration fees.
4. If raw material needs to be turned into finished goods, the amount of work required needs to be minor in nature. Lenders don’t want a bunch of money sunk into work in progress that may not be in a sale able form.
5. The supplier of the material that will likely be receiving proceeds directly from the purchase order financing lender, needs to be well established in terms of reputation and financial stability. Typically, a lender will want to see the borrower have some prior dealings with the supplier in question.
6. The issuer of the purchase order must be prepared to pay the lender directly once the goods written in the purchase order have been received by the P.O. issuer. The lender must be paid directly by the borrower’s customer, which is quite standard in asset based lending due to the high levels of leverage and risk involved.
7. If the supplier of goods is from another country, the lender may require a third party inspector to inspect the product during production and loading and have the borrower bear the cost of this activity.
These are just some basic things to consider with purchase order financing. There can be numerous variations to above but this provides a basic overview of what you need to have in place to be able to secure purchase order financing.
Business Financing