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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   August 2006

Creative Financing: 3 Secrets

Help cash-strapped clients with bridge loans, asset-based loans and accounts-receivable financing

Business-owners can be accustomed to banks turning them down. Lenders often shy away from startups, fast-growing firms and other companies that have the greatest needs because these companies don’t have the assets and history to qualify for a traditional loan.

A gold mine of alternative-funding sources does exist that perhaps can cure a cash crunch quickly and effectively. With a little creativity, brokers and lenders can capture a wide market of cash-hungry clients, from startups to firms going into or coming out of Chapter 11. And they can make a profit.

Here are three of the best-kept secrets in the business of creative financing:

Bridge loans

Bridge loans can be the new best friend of a business-owner who needs money fast. They offer short-term, asset-based financing until more permanent financing can be secured. Most can close in two weeks. This is a huge selling point for businesses with time-sensitive transactions, such as an acquisition or tax lien.

The loans typically range from $100,000 to $5 million with terms from 90 days to 24 months. Real estate often is used as collateral, but equipment, royalties, accounts receivable and company stock also can be collateral.

Bridge loans typically are based on a loan-to-value (LTV) ratio of as much as 65 percent of the collateral’s quick-sale value. Borrowers often pay points as origination and underwriting fees. In some cases, the points, interest and fees may be rolled into the loan.

Asset-based leases

Like bridge loans, asset-based leases can lead to quick cash. They are based on the value and type of equipment. They usually have an LTV of around 35 percent to 60 percent.

These loans differ from traditional leasing because they typically are geared to credit-challenged businesses, such as subcontractors with equipment to pledge to extract cash.

Often, a business will finance a long-term asset with a short-term line of credit. An asset-based lease allows the business-owner to enter into a sale-leaseback of the equipment, matching a long-term asset to a long-term lease.

Accounts-receivable financing

Accounts-receivable financing provides immediate access to cash — typically, more than what banks offer.

In addition to quick capital, accounts-receivable financing offers another attractive option for business-owners: They don’t have to give up equity in their companies or take on more long-term debt. Instead of selling a chunk of the company to an equity player, the owner temporarily sells its receivables.

For example, a manufacturer facing its first big order could turn to a purchase-order financier. That funding source could provide the money to cover labor and parts costs, typically about 50 percent of the invoice. After funding is secured, the manufacturer can turn to a lender that finances the receivables. This creates a complete loop of working capital that takes the company through that entire, all-important order.

The accounts-receivable financing firm would typically advance 80 percent of the invoice value upfront. The remainder is paid, minus a financing fee, when the buyer pays for the completed order. The fee structure varies, but it’s generally between 1.5 percent and 4 percent of the invoice value.

In the end, the company ships the products, sells the invoice and ideally, uses the proceeds to keep growing its business.

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New financing opportunities have drawn new players into the lending field — from hedge funds to large, cash-rich companies.

Be sure to work with a lender that has a good reputation and a solid track record. After all, the recommendations you make for your clients are an extension of your good name. You want the professionalism of those referrals to reflect on your own business.


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