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   ARTICLE   |   From Scotsman Guide Commercial Edition   |   October 2013

Show Your Clients the Money

Provide cash-strapped clients with alternatives to bank loans

Cash is what powers any business. Without cash, businesses can’t be functional and will run risks ranging from lawsuits to tax liens to dissolution.

Because almost all lending sources have tightened their lending criteria since the credit crisis, small businesses have been forced to look for alternative sources of cash to stay afloat and current on their obligations. 

"Because mortgage banks have tightened their lending criteria, many businesses — even with the help of mortgage brokers — have been unable to access credit."

Owners of small and mid-sized businesses typically will look to savvy commercial mortgage brokers for creative, nontraditional ways to raise funds. Obviously, there are two ways for any business to come up with needed cash. The first option is to take out a loan or a line of credit, and the second option is to sell something.

When a business takes out a loan from a bank or another financial institution, the process is similar to renting a car. The rental agreement grants you the right to use the vehicle, but you must return it at the end of the agreed period and pay for the privilege of its use.

In the case of business loans, what is being rented is money. Banks provide a certain volume of funds for a specific period of time at a mutually agreed interest rate. These funds may be granted in a lump sum or through a line of credit where funds are accessed and returned repeatedly. In either case, the funds must be returned, and the business must pay for the usage of funds. The interest rate paid over the loan amount is the price for using the funds.

When clients choose to take credit, it can be an attempt to ensure that they do not run out of cash, in which case they often opt to establish a line of credit. But sometimes the purpose of taking out a loan is to purchase an asset like a building or an expensive piece of equipment. In this case — which is common for commercial mortgage brokers — the appreciation of the purchased property or the income that can be generated from the equipment turns the loan into an investment that can pay decent dividends.

Unfortunately, because mortgage banks have tightened their lending criteria, many businesses — even with the help of mortgage brokers — have been unable to access credit. Lenders have been looking unfavorably at borrowers who are newcomers to the business, have insufficient cash flows, have struggled with a previous bankruptcy or have poor credit scores.

Because businesses still will continue to look for alternative ways to come up with cash, brokers should work with them on the alternative route — that is to sell something. That something can be a product, service, time or expertise.

In this scenario, the ideal situation for your clients is to get paid before delivery or at least at the time of delivery. In today’s economy, however, businesses often are confronted with the need to grant its customers payment terms. That means your clients will be selling on credit and that the money will stay in the buyers’ bank accounts for a period of time. Payment terms typically are a net of 30 days.

Unfortunately, many companies now are demanding payment terms that range from net 60 days to 90 days or longer. Because the sellers can’t access or spend cash that’s in someone else’s bank account, they should find a way to get access to the money that belongs to them or use someone else’s money. Again, taking credit is a possible solution.

Alternately, businesses should look to sell something else such as equity, intellectual property rights, patent rights, franchise rights or an asset such as excess inventory, land, equipment, buildings or accounts receivable. Here is how each of these sales may help.

Equity

Equity is your clients’ ownership of their companies. They can sell part of that ownership in return for cash. Stock sale and venture-capital infusion are forms of equity financing. Although this gives your clients access to cash, it means that they will have to give up their autonomy. Many times, this can be exceptionally useful, as investors may bring levels of expertise or personal contacts that can serve your clients’ business. Depending on your clients’ industry, strategy, personality and track record, it may be extremely difficult to sell equity, however.

Rights

Licensing is another way to raise cash. If your clients have a proprietary product or process, they may be able to license the rights to that product or process to others in exchange for cash. Because most small and mid-sized businesses do not have such a proprietary product or process, however, they may be unlikely to use this route to raise cash.

Assets

Assets include everything your clients own, such as property, equipment, excess inventory, accounts receivable, etc. Because your clients own the assets, they have the right to sell them and raise cash. Property, equipment and excess inventory are examples of nonrenewable assets, which are assets that exist in physical form. Once they are gone, they’re gone.

Accounts receivable are a renewable asset, however. Every time your clients sell their products or services to customers who are paying over time, they create a new receivable. As an asset, accounts receivable can be sold in a process known as factoring. When a business factors its accounts receivable, it sells the right to payment to a third party for a small discount, typically 2 percent or 3 percent of the face value.

Factoring companies that buy accounts receivable look at individual invoices as financial instruments (similar to stocks, bonds, mortgage notes, etc.) that can be bought and sold. A business invoice typically has an issue date, maturity date, description of what it represents (i.e., the product or service sold), face value, issuing party and obliged party. Your clients own these financial instruments and therefore can sell them to factoring companies.

As a renewable asset, your clients can use accounts receivable repeatedly as a source of immediate cash. Keep clients aware, however, of some basic requirements for being able to raise cash through the sale of accounts receivable:

  • Your client’s customers must be either a business or agovernment entity.
  • Your client’s customers must have an acceptable commercialcredit record (a company or a city in bankruptcy is not creditworthy).
  • Your client’s accounts receivable must not be pledged toanother entity as collateral for some other financial relationship.
  • They must not have irresolvable tax liens or judgmentsagainst their businesses.

• • •

Cash is the lifeline of any business. Although commercial mortgage brokers typically provide help with arranging funding through credit, it is important to be well-versed in alternative ways to help your clients come up with needed cash. There are restrictions and ramifications for every option, but with the help of professional mortgage brokers, business owners should be able to determine what options are viable for their specific situations. 


 


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