Leasing, cash-flow lending, asset-based lending and sale-leasebacks could be options

Sandeep Thakrar, managing director,Skada Capital

As published in Scotsman Guide's Commercial Edition, March 2010.

As a commercial mortgage broker, you know that your business-owner clients are having trouble finding financing to expand their businesses. As banks increasingly turn down existing business-owners' requests for capital, however, other financing sources can help.

Brokers would be well-served to get to know the following four alternative financing sources available to help their clients expand their businesses.

1. Leasing. Business-owners often seek capital to buy equipment. If a client wishes to purchase a tangible asset, leasing can be a 100-percent-financing option. Leasing companies often include soft costs such as installation in the lease, and these costs also can be financed at 100 percent.

A common type of equipment lease is a $1 buyout lease. With this type of lease, clients can buy the equipment for $1 after the lease term ends. Typical equipment-lease terms range from three to five years.

2. Cash-flow lending. Review all the assets on your clients' balance sheets. You'll likely find that the major asset most business-owners have available to them is their account receivables. Many lenders will factor invoices from a creditworthy customer or provide an account-receivables-based line of credit backed by a group of receivables. Advance rates typically are 80 percent to 85 percent of the invoiced amounts.

3. Asset-based lending. Asset-based lenders also will consider real estate, equipment and inventory as collateral. Generally, equipment and inventory lenders will provide lower loan-to-value ratios, typically in the 50-percent range. Most lenders like real estate as collateral for asset-based loans, but you should ensure that the appraisal is current, considering changes in real estate values.

4. Sale-leaseback transactions. Sale-leasebacks can involve real estate or heavy equipment that the business owns free and clear. In a sale-leaseback transaction, the business-owner sells the asset, and the new owner immediately leases the asset back to the business. The business receives an infusion of cash, and the new owner receives guaranteed payments from business-owners for the asset.

When seeking alternative financing solutions for your business-owner clients, remember that some alternative-financing companies specialize in certain services or markets exclusively. One way to increase your and your clients' chances for a successful financing transaction is to partner with companies that have business and entrepreneurial experience, that offer broad solutions, and that provide access to multiple alternative-financing options.

Sandeep Thakrar is the managing director of Skada Capital. Skada Capital is based in Columbia, Md., and provides alternative financing to small-business owners and commercial real estate developers who cannot raise traditional bank financing. Thakrar has a bachelor's degree and a master's degree in business administration from the Wharton School of Business and has experience in small-business finance, commercial real estate and venture capital, in addition to having started two firms. Reach him at sathakrar@skadacapital.com.