Bridge Financing Basics

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.

Equipment Leasing And Financing Products | Recessionary Impacts

How have Equipment Leasing And Financing Sources Been Impacted By The Recession?

As we move towards the end of the year, equipment leasing and financing companies are still dealing with the financial impacts of the current recession.

Like any type of lender, a leasing company requires a source of capital which is made up of a composition of equity that is debt leveraged to the max to achieve the largest potential money supply at the lowest possible cost.

In 2009, the cost of capital for many lease companies went up as many of their related funding sources added greater risk premiums into their cost of borrowing for leasing products.  Add to this the increased number of business failures and resulting lease facility losses from delinquent accounts and the result has been less lease companies with more conservative lending policies and higher rates.

The more conservative lending policies are largely driven by two things.  First, the unpredictable nature of recessionary impacts makes it harder for lenders and financiers to assess the credit worthiness of any particular applicant.  So current approvals are targeted to low to medium debt leveraged companies who have some ability to withstand and manage through any reductions or anomalies in their respective cash flow.

Second, equipment leasing can be largely based on the ability of the lessor to predictably be able to liquidate an asset if necessary in terms of the the time it takes, the costs incurred, and the net proceeds they can expect to receive.  During recessionary periods where business failures occur, the market can see significant increases in supply for used equipment.  This can result in lender or lessor losses as forced liquidation values drop.

While these financing conditions exist for all types of lenders, equipment finance companies as a whole are significantly impacted due to their smaller relative size which does not provide them with a large margin of error.

For the business owners, the noticeable changes when seeking equipment financing are that overall rates for leasing products are higher than they were a year ago.  All things being equal, an approved equipment loan tends to come at a cheaper cost of financing than a comparable equipment lease.  This typically is only relevant for “A” credit deals, as there aren’t many equipment loan products available for lower credit applications.

For lease financing, The “A” credit risk lenders are looking for A+ deals, the B Lenders are looking for A to A- deals, and the C Lenders are looking for B deals.

There is credit to be had, but it can be hard to locate if your application is a mid to higher level risk.  And the rules change constantly as lease companies monitor their portfolios and their liquidation pathways in the market.

While lending policies and rates have loosened up a bit over the last few months, expect equipment leasing options to continue with higher rates and tighter terms for the foreseeable future.

Construction Loans For Residential And Commercial Projects

Construction Loans Can Come In A Number Of Forms

Construction loans are typically a second mortgage registered against the property where the construction is taking place. If there isn’t sufficient value in the underlying property to secure construction financing, then other security would also have to be provided to the lender.

The basic premise of a construction loan is that money will be advanced to complete a predefined stage of work. Once the stage is completed and inspected, the property will have increased in value, providing additional security value for draws or advances for future stages of building.

Construction loan amounts as a percentage of the overall project cost can vary considerably depending on the lender and the specific project. For instance, some construction financing programs are capable of funding 100% of the building costs, where others require the borrower to provide an equity investment at the beginning or end of the project.

The equity portion can also vary considerably among lenders. For lower risk, lower cost construction financing, the equity portion required by the borrower will be higher and range from 50% of the total project costs up to 75%. In many cases, the key risk element that can separate lower cost lenders from higher costs lenders is the amount of equity the borrower has available to invest in the project.

Keep in mind also that the borrower will also need to cover off inspection, appraisal, legal, and administrative costs as well as any taxes associated with the construction project, which are all costs above and beyond the actual project costs considered for financing.

Construction capital products can also be quite specialized among residential home and commercial building applications. Larger, more complex commercial projects tend to have a smaller lender population that can be more international in nature as the related funding sources primarily focus on the same types of large projects over and over again.

Construction related capital may also be connected or disconnected from the longer term mortgage instrument. A connected construction financing facility will provide advances for construction and once the project is completed, the total advances will be immediately rolled into a long term mortgage.

A disconnected construction loan would be totally independent from the longer term mortgage and would likely involve two separate lenders, one for the construction portion, and one for the long term mortgage.

Because of the risks associated with any construction project, there is much greater lender interest in financing a completed building than one under construction, so its not uncommon for the construction financing piece to be stand alone capital that needs to be paid out by a separate lender.

Regardless of the size of construction loans, accurate estimates and solid project management are the keys to getting the projects completed within in the funding approved. Cost overruns and delays can result in capital shortfalls that may not be easily covered off.

Non Notification Funding Makes Factoring More User Friendly

Non Notification Versus Notification Factoring

As a quick overview, Factoring is a form of business financing whereby a finance company purchases your outstanding accounts receivable at a discount and provides you with an immediate advance against the outstanding invoices in order to increase business cash flow.

Factoring is more commonly used when traditional bank working capital facilities cannot provide sufficient leverage against good quality accounts receivable.

What I would call traditional factoring was based on a customer notification model and was very controlling on the part of the factor. With notification, the financing company or factor would basically take over the contact and collection process with your customer.

The factor would essentially inform your customer that certain invoices outstanding with the customer were sold to the factor. The factor would invoice the customer for payment, collect payment, and provide any residual balance after deduction of fees back to you.

For many companies that qualified for factoring, the notification and customer control process left them uneasy and in many cases resulted in businesses taking a pass on what otherwise would have been a great form of working capital financing for their business.

Business owners did not want their customers to get the wrong impression about the financial health of their business when all of a sudden a financing company gets directly involved in the collection process, nor did they want to risk customer service issues to a forced third party interface.

To better serve the market, Factors are now offering Non Notification financing to more and more of their clients.

Under Non Notification Factoring, the financing company does not contact your customer and lets you remain in control of the transaction including the collection process. Your customer would still issue payment to your business and you would in turn forward the check to the Factor to be cashed in a joint bank account with both yourself and the factor named on the account. Wire transfers would go directly into the joint account.

In this manner, the factor is controlling much of their risk at the end of the process with the cashing of checks or receipt of wire transfers.

A business still has to qualify for non notification financing with respective accounts receivable financing companies. There may be cases where some Factors only feel comfortable offering Notification financing based on the risk assessment for a given account.

But for those that do qualify, Non Notification Factoring can be a powerful financing tool for a growing business.

How Do You Secure Purchase Order Financing?

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 Loans Come In Many Forms

What Are The Different Types And Forms of Business Loans?

First of all, what is our working definition of a business loan.  For the purposes of this post, I will define it as a debt instrument with a stated rate of interest and defined period of repayment.

Any business loan is further defined by the purpose of its use, the security involved, and the timing of the related cash flow stream tagged for repayment of the principal and interest.

When the purpose is for working capital, business loans or debt instruments will come in forms that are short term in nature and are predominantly secured by short term assets like accounts receivable, inventory, and potentially equipment.

Working capital instruments for low leverage balance sheets and strong credit profiles will include lines of credit and term loans of 5 years of less.  Lines of credit will rise and fall with the cash requirements of the business, while term loans will have a fixed repayment term, drawing money out of cash flow for structured principal repayment.

For higher leveraged balance sheets and/or weaker credit, working capital can be provided through asset based business loans, inventory financing, accounts receivable factoring, and purchase order financing.

While all of the above are technically asset based loans, lets discuss each one separately.  The standard asset based loan provides working capital funds as a percentage of the liquidation value of accounts receivable, inventory, and equipment value, similar to a line of credit.  Unlike a line of credit, the leverage tends to be higher and is more closely managed by the lender through the lender collecting all the customer proceeds due to business and then continually adjusting the loan outstanding according to the current security value.  With a line of credit, there are balance sheet ratios that need to be maintained and reported on a monthly basis, but the cash is collected and managed by the business as long as the business owners and manager stay within the stated covenants.

Accounts receivable factoring is extended as a business loan on the strength of the customer that owes the receivable and provides the lender with rights against the receivable that’s outstanding.  There are many different forms of factoring and the rates can vary tremendously.

Inventory financing provides a business loan for the purchase of inventory and uses the inventory for security.  Some inventory financing models have the lender control the inventory in third party warehouses to protect their interest in the inventory while other inventory financing models will allow the inventory to remain on the business owner’s premise if the facilities and control systems can provide the lender with sufficient comfort.

Purchase order financing provides business loans based on an advance against the value of a customer purchase order.  The credit rating of the customer, the nature of the order, and the time period required to complete the transaction will determine the amount of purchase order financing.  For instance, most purchase orders are provided on the purchase of commodity goods that have an active market and can be readily liquidated by the lender to get their advanced funds back if required.  Inventory financing is also primarily provided on commodity type goods for the same reasons.  Both inventory financing and purchase order financing command higher rates of interest than traditional forms of working capital related business loans

Other forms of short term debt can be subordinate debt financing where a business loan is provided against assets that already have debt registered against them, but with sufficient security value available to secure additional capital in a second security position.  Because of the second position, the cost of these funds will be higher than the first position debt.

For intermediate term lending on the acquisition of assets with a useful life of 2 to 10 years, business loans come in the form of term loans or demand loans for equipment.  A demand loan can demand repayment at any time while a term loan cannot.  Equipment can also be financed through leasing which is different from a business loan in that the lease company retains the ownership of the assets acquired and/or provided as security while in the case of a business loan, the assets are owned by the business with security registered to the lender.

Longer term business loans for longer term life assets such as buildings and real estate are typically financed by commercial mortgage instruments.

There are still other forms of business loans such as convertible debentures and mezzanine financing that are more elaborate in nature and tend to be utilized when loan amounts are in the millions of dollars and more complex business enterprises are involved.

There are so many variations around all these forms of business loans, that each would require a separate discussion.

The point here is to remember that if the business has something of value than can be readily sold or liquidated in the market place for a predictable amount, then there is potentially a form of business loan available to that particular business.

How Important Is Personal Credit To Business Financing?

What Type Of Impact Does Business Credit And Personal Credit Have On Business Financing Decisions?

First of all, business financing decisions for debt capital tend to limit credit assessments to business credit if there are no personal guarantees required by business owners, shareholders, or third parties.  However, this is not an absolute rule, and in many cases, personal credit still creeps into the decision making process.

Why?

Because personal credit is a form of character assessment, reflecting how an individual carries through on the commitments he or she makes.

There may be ample financial support for debt financing, but a poor personal credit track record of a major owner of a business can still lead to an application decline.

In cases where the security offered by a business and any required covenants are not sufficient to secure the lender, then personal credit becomes even more of a major factor in credit decisions.

The third scenario when personal credit comes into play with business financing is when the business itself has very little or no established credit.  This can be very common with businesses under 3 years in existence and also in older businesses that work with smaller suppliers than don’t report their results to credit reporting agencies.

While I can follow the logic of utilizing personal credit reports when assessing business financing requests, the practice is far from reliable due to inaccuracies in personal credit reports.  Remember that the personal credit reporting agencies do verify the information placed in your credit report, so any errors can potentially impact a business financing credit decision for a business loan you may apply for.

This is yet another reason to regularly check you credit report for errors and take the time to make it as accurate as possible.

An Often Forgotten Source Of Business Acquisition Financing

Before Seeing Your Banker About Business Acquisition Financing, Perhaps You Should First Talk To the Vendor

More and more business acquisition financing is provided by the actual vendor or seller, not just your banker. And in many cases, bankers will not even entertain providing acquisition financing unless the vendor is contributing some amount of financing as well.

This is especially true with purchasing a small business where a good portion of the sale price is tied up in Goodwill. Most lenders will not finance 100% of the goodwill. Actually, most lenders won’t finance any goodwill without some amount of additional security, guarantee, or surety from the buyer.

The lenders logic is that if the vendor is so certain that the value for goodwill in the purchase price is valid, then they should have no problem providing the financing by basically deferring the portion of the proceeds earmarked to goodwill until an agreed upon time in the future.

There are a couple of other reasons why vendor financing is more common for acquisition financing than you may think.

First, any purchase and sale agreement I’ve ever seen always has some form of recourse present to protect the buyer against mispresentations of the seller and vise versa. By having the vendor provide some amount of financing towards the purchase, there is effectively a recourse fund in place which further protects both the buyer and any potential lender that also gets involved.

Second, by having an active stake in the business being sold in the form of a vendor loan , the vendor is highly motivated to provide a seamless transition to the new buyer as well as ongoing support if required.

Many times, the vendor will take the money and run after the completion of sale and payment of all the proceeds, leaving the buyer to deal with any unknowns or transitional problems that might arise. And depending on whose statistics you subscribe to, one of the top reasons for the failure of acquired businesses is due to poor ownership and management transition.

Vendors tend to not want to provide financing if they don’t have to, which only makes sense. However, failure to be open to vendor financing can also leave businesses unsold for several years as potential buyers are not able to secure enough lender financing without the vendor being involved.

Business Loans And Business Financing… What Lenders Don’t Tell You In Their Advertising

Ever since you were old enough to watch TV, you’ve been exposed to massive branding campaigns by Lenders for personal loans and financing, and business loans and financing.

The primary brainwashing we all receive is that your banker is your friend and that if you need a loan, come in and see him and he’ll help you out.

Right?

Its a fantastic marketing strategy driven by billions of dollars in advertising whereby we all have the major banks in our cities, regions, and countries branded into our brains.

The offshoot is that the major banks draw everyone into their marketing funnel and they keep the ones they want, which for business financing would roughly be 10% or less of those that apply.

Why so low?

Because major banks are low risk lenders that are looking for the low risk customers only.

They just don’t tell us that.

Now there are hundreds of thousands of lenders in the world outside of major banks and they do much the same thing, albeit on a smaller scale.

But the message is pretty much the same … Come and see us and we’ll help you out.  Or, if we see lots of people, we’ll be able to pick out the ones we’re looking for.

Basically, the general population is treated pretty much like cattle when it comes to business or personal financing… we’re driven in one direction and then redirected  in another.

Why?

There are a number of reasons.

First, in general, our society has a very low finance I.Q. due primarily to the fact that there is virtually no basic finance related education, so lenders would rather say they can help everyone than risk sending out a confusing message of what they really want in what I would call meaningful detail.

Second, a lender portfolio can be quite complex to manage and ever changing as the overall market place changes which causes their target to change.  So no lender wants to say this is what they’re looking for today, and then potentially need to change it tomorrow.  Its better to keep things vague.  So instead, they just keep rolling out the same “come on in, we can help anyone” message.

Third, Lenders are opportunists just like the rest of the world.  During the latest sub prime market fiasco, Major Banks cut back and in many cases stopped lending money, crippling the money supply.  They used the crisis to put pressure on the government to give them payouts and concessions to strengthen their balance sheets, otherwise the lack of available capital would further worsen the recession.

Asset based lenders did the same thing.  Because “A” Banks or Big Bank were pulling out of the market, more expensive asset based lenders were getting better qualify deals.  The smart ones were making a fortune taking on lower risk deals without lowering their fees.  But this also left a funding gap in the “B” and “C” Markets as its becomes a domino effect from the top down.

So keeping it vague, has always been the way to go.  And as a result, it can drive you around the bend trying to figure out exactly who can help you at any given point in time… who is currently relevant to your specific financing requirements.

So, what can you do to find the right source at the right time?

1.   Be realistic in the sense that no matter how much a lender may flip flop on their client selection, major banks, for example, are always going to be low risk lenders that are more focused on balance sheets will low leverage than anything else.  If you don’t fit that basic description, don’t apply.  Each category of lender has a basic profile that they won’t stray too far from, no matter what they tell you.

2.  Consider utilizing the services of a financing consultant/specialist (not just a broker … big difference).  This is someone who has their ear to the ground and is staying on top of the twists and turns in the market.

3.  Instead of blindly applying to lenders according to the way we’ve been brainwashed,  start qualifying them yourself.   Remember that you’re the customer and you’re time is worth something too.  So instead of patiently going along with some of their long and drawn out application and interview processes, start by asking them questions related to what you’re trying to do and focus your time one the ones that give you the straightest, most direct, and most committed answers.

Its still going to be a bit of a crap shoot, but still better than just showing up and expecting anyone to be able to help you, despite what they tell you in their latest commercial.

Click Here To Speak Directly To Business Finance Specialist Brent Finlay

Business Financing Home

With Debt Financing, Be Careful What You Wish For

Debt Financing Comes With An Obligation to Pay

Entrepreneurs tend to be a passionate lot, which is why many of them end up becoming successful, but this can also work against them with respect to debt financing.

The other side of the coin that comes with this passion is the blind belief that they are just one more mile away from achieving their goals, so do whatever it takes to get there.

Too much of what I see online regarding business financing is about how to manipulate the system or application process to get financing of some sort, whether it be credit cards, lines of credit, term loans, etc.  Lenders feed this somewhat through the way access to debt is so causally portrayed in their marketing.

And in many cases, at least in the initial going, people can be quite successful securing significant amounts of debt based on a decent credit score and close attention to the application process.

I guess if you’re able to strategically get your hands on this type of debt financing and constructively apply it and profit from it, then good on you.

But when you take on large sums of mostly unsecured debt financing in the form of credit cards and lines of credit and personal loans, you are also putting a gun to your head to make things happen quickly.  If results don’t materialize, your finances can hit the skids hard in a number of ways.

First, the debt is going to carry an interest rate, and in many cases, a high one.  Almost immediate cash flow will be required to service the costs of debt.

Second, high ongoing utilization of  debt will significantly reduce your credit score, making it next to impossible to borrow anything further.

Third, while some of the debt may be in the form of business credit, its likely to still have you personally liable for the balance owing.  Incorporation does not protect you from this debt in many cases.

Fourth, if you are more than 30 days late on a credit card payment, you will get a severe reduction in your credit score and more than one of these can have a damaging impact that can last years.

Fifth, this type of debt financing is usually all demand written meaning that the lender can ask for their money back at any time for any reason.  So even if you feel you’re on top of things, everything can do sideways in a hurry without any warning.

Sixth, if you fail to pay back the debt, your credit is shot.  If you have to go as far as a consumer proposal or bankruptcy to get out of the mess, then we’re talking up to 10 years to rebuild your credit, which is impacting more and more aspects of our daily lives.

Did you know that many companies now want to check your credit before making a hiring decision.  Why?  Because many of them think that a good credit profile is an indication of character.  Same can be true of other things you may apply for over the course of your life.

The value of good credit is growing and needs to be protected.

My point is that sometimes debt financing may be too easy to come by, or someone clever figures out how to “game” the system enough that they get access to more business financing capital than they can actually handle.

And because everyone is always in such a rush, they don’t always stop and think about the potential downside of what they’re doing.

Because business financing for small businesses, especially start ups, is hard to come by, many entrepreneurs turn to personally secured credit cards and lines of credit to fund their business ventures.  Many of the same individuals also wish they had never taken this path.

For the pure type A entrepreneur,  going bankrupt is a temporary set back and they will continue to roll the dice until they get the success they desire, regardless of how much of other peoples money they lose along the way.

However, for most business owners that fall into a debt financing hell they can’t get out of, the resulting fallout can be not only financially devastating for a long period  of time, but emotionally devastating as well.

So, be careful what you wish for.  Only take money you are confident you can pay back and make sure that whatever capital you secure has repayment terms in keeping with the road you’re going down.  Yes, there is always a risk, but if you’re aware of the risk and take it into account before acquiring debt financing, then you’re practicing very responsible and sound financial management.

If things don’t work out, always make sure you can fight another day.

In the end, you’ll sleep a lot better, at least most of you will.

Click Here To Speak Directly To Business Finance Specialist Brent Finlay

Business Finance Home