Any time you are going to utilizing equipment that you want to finance in rented or leased space where the financing is in the form of a lease, you’re likely going to need to get the landlord to sign a waiver.
The waiver is going to state that the leasing company has the right to come onto the landlord’s premise to collect their equipment in the event of a lessee default.
Because financing is in the form of a lease, the leasing company is actually the owner of the equipment as compared to an equipment loan where the business borrower would be the owner.
Why does this matter?
Well, first of all, it is going to be something that the landlord is going to have to sign. So while its not likely going to be a big deal in most cases, you can’t assume that your landlord or landlords will sign off. Therefore, it makes sense to broach this with them before you even apply for equipment lease financing otherwise you could be wasting valuable time.
And if this is a problem, then you will potentially need to be considering other options for financing sooner than later to make sure you don’t run into any timing issues or production or operational delays relating to getting equipment into place.
Where the landlord waiver can become an issue is when you are leasing assets that become attached to the third party rented facility.
A good example of this these days is high efficiency light upgrades.
This type of asset is a lease-able asset in many situations and is permanently affixed and installed into the landlords property.
When presented with a leasing waiver, the landlord may refuse to sign based on the risk that if their tenant defaults on the leasing payments that the leasing company can then come into the landlords building and remove all the lighting being financed.
This would leave the landlord without lights and a big potential mess and cost to deal with.
One way around this is to have both the building lease and the landlord waiver state specifically that in the event of a financing default related to building fixtures that the tenant would be responsible for making sure that the lighting was returned to its original condition prior to the tenant entering into their lease, or something to that effect.
This is an example of how financing needs to be coordinated among a number of different parties at times before being put into place. More specifically, when considering a landlord waiver we have a an applicant business, a leasing company, a landlord, an equipment vendor, and legal counsel for the leasing company and applicant at a minimum.
If you are looking to finance equipment that may require a landlord waiver, consider working with a financing specialist who is versed at coordinating the different parties involved in order to get the required financing in place.
How is that possible.
Well, first of all, you are going to have to pay a factor for their cost of financing, so in that sense its NOT free.
But, depending on the benefit you can gain in your cash flow from factoring, you may be able to reduce or completely eliminate the cost of factoring in with real dollar benefits.
Let me explain.
The scenario where the above will typically play out is in a market where the borrower is reselling goods and services.
Another characteristic of this market is that the primary end customers that drive the overall industry are slow to pay.
An example would be the oil patch where major oil companies (slow payers) are the cash flow stream either directly or indirectly for tier 1, 2, and 3 suppliers.
The credit risk is low overall due to the high credit rating of the main line oil companies, so its not going to be hard to get factoring.
And once you have factoring in place, you can go to your suppliers, who you are now paying in 60 to 120 days, right after the time you get paid from the oil companies, and offer them faster payment in exchange for early payment discounts.
These early payment discounts can be significant and collectively can equal or even exceed the cost of factoring.
So when factoring provides an 85% advance rate at the time of sale and you have a mark up of 25% or better, its easy to see how you can tell your suppliers, or at least main suppliers, that you can pay them in ten days or less if they can provide a big enough discount.
And for many of the vendors servicing this market, they are more than happy to be paid less faster as it greatly improves their cash flow, and cash flow uncertainty as well.
With a proper factoring account, a business can also be set up for growth which means larger annual purchasing from vendors which in turn can lead to even bigger discounts.
So while its easy to say that Factoring is too expensive at 12% to 24% per year, what good is cheaper money if you can’t get enough of it to fund all the sales that are available to you.
In the end, all business financing should be considered on a net effective cost basis.
Put another way, can you put more money in your pockets factoring than not factoring?
Getting hung up on the interest rate is a complete waste of time.
Sure, you should always strive to pay a lower cost of financing, but not if in doing so you are significantly delaying growth, or end up with greater restrictions on use of funds which ends up making you less net dollars.
If you need to work out a working capital financing scenario and would like to see if Factoring could work and its effective cost, then I suggest that you give me a call so we can go through your situation in some detail to see what might work.
And depending on the terms you give to your clients versus the timing related to paying vendors, suppliers, and operating accounts, there can be a gap in the time between when you need the money from a sale done on credit and when you’re actually going to get the money.
This funding gap is primary filled by financing your accounts receivable.
There are two basic ways to do this with a bunch of variations.
The lowest cost for of accounts receivable financing typically comes in the form of a bank margining account where a bank or institutional lender takes security over the accounts receivable, as well as anything else they can get their hands on like inventory and potentially equipment, and offers to advance to the business a certain percentage of the accounts receivable outstanding. The advance rules will vary by bank and each lender will also have lending covenants related to the monthly and annual balance sheet and income statement of the business.
Typically a margining account can only be secured by a well established business with at least three years of operations under its belt and fairly constant level of accounts receivable outstanding over the last 12 month period.
AR margining is primarily for companies that are very stable and not in any type of boom or bust position.
The other main category for accounts receivable financing is factoring or invoice discounting where a finance company is actually acquiring the right to collect the accounts receivable that is owed to your company.
Similar to a margining account, a factoring account provides an advance of accounts receivable outstanding to the business. Also similar to a margining account, most factors will not finance an accounts receivable invoice over 90 days past due.
That’s where the similarities end as there are many different forms of factoring whereas bank margining is fairly consistent from one lender to another.
Factors live more in the boom or bust parts of a business cycle although there can also be factoring that competes directly with the stable market space primarily reserved for margining.
Accounts receivable factoring, for the most part is notification versus non notification factoring. Notification means that your customer makes their payment directly to the factor whereas non notification has the customer still making payment directly to the business, but the payments are deposited into a joint account that the factor controls.
Notification factoring provides greater control to the factor and allows them to finance both highly distressed and high growth situations due to the factors control of collections of a legally completed sale.
There is also recourse and non recourse factoring. Recourse basically means that the factor will charge you back if an account becomes noncollectable, or is not collected by a certain point in time. Non recourse essentially means that once the factor purchases the receivable from you at a discount, that they take responsibility for collection and loss from than point forward.
Each version of factoring has its own business applications and there can be very large differences in pricing from on factoring program to another, largely due to what is being offered in terms of notification, recourse, and size of the transactions being factored as well as the overall facility.
Because there are so many different potential variations to accounts receivable financing, it can be very easy to get focused in on a funding option that is not ideal for your business.
This is certainly an area of business financing and asset based lending where some financing experience can come in handy in terms of both locating a suitable financing source and getting a facility up and running for your business.
If you have an accounts receivable financing need, I suggest that you give me a call and we can go over your requirements together and review different margining or factoring options available to you.