Accounts Receivable Financing for Businesses

Purchase order financing is a facility availed of by many businesses and is especially helpful if you are a reseller or an agent or an intermediary with limited liquidity that is requisite to finance your transactions to move materials and keep the business running. Purchase order financing is a viable solution for any business. To … Continue reading “Accounts Receivable Financing for Businesses”

Purchase order financing is a facility availed of by many businesses and is especially helpful if you are a reseller or an agent or an intermediary with limited liquidity that is requisite to finance your transactions to move materials and keep the business running. Purchase order financing is a viable solution for any business. To understand its need we need to first understand the business process.

Let us consider the case of, say a software reseller who has received a purchase order from a customer. A purchase order is a document detailing the type and number or units of the required product or service. All the details should be clearly mentioned here and there should be no room for ambiguity. Any ambiguity could lead to misunderstandings and lawsuits.

Now the reseller contacts his principle. Principle refers to the parent company, that is, the actual makers of the software who instead of hiring, training, managing and paying for a sales team have opted instead to outsource the selling part of the job to somebody already in the business, that it, they have partnered with a reseller, also known as partner. To understand why the reseller needs purchase order financing, let’s understand how a reseller operates.

A reseller, as the name implies, ‘resells’ the software, that is first buys it from the principle, then adds his own profit margin and sells it to the customer, hence essentially acting as some sort of distribution agent. Before the transaction between the reseller and the end user occurs, the transaction between the principle and the reseller occurs. The reseller will first have to buy the asset from the principle with his own money. Money that might not always be available and this is where purchase order financing plays a crucial part.

Purchase order financing is money offered on credit basis to resellers and similar businesses to keep the transactions going on based on the purchased order document. Understandably, some interest has to be paid to the creditor and resellers usually factor this into their profit margin with an added factor of safety in case the customer defaults on the payment. This loan can be paid off once the reseller gets paid by the end user. Purchase order financing is a crucial part of trade and commerce in today’s word and it plays a significant role in keeping the wheels of the economy running. Bernard Linney and his staff of factoring experts are ready to talk with you today about growing your business.

Seller Financing – How Much Can the Buyer Afford?

Many sellers accept owner financing without any idea of how much the buyer can actually afford to pay. The last thing a seller wants is to stress over receiving monthly payments or worse, getting the property back through foreclosure. Use these three simple methods to determine how much the buyer can afford before accepting seller financing.

The amount a buyer can afford to spend on a house depends on their income, overall debt, cash they can put down, credit rating, and the mortgage terms.

There are three different calculations that are traditionally used by mortgage companies to determine how much house a buyer can afford. These are known as the Income Rule, the Debt Rule, and the Cash Rule. While owner financing does not require the strict use of these rules, it makes sense to utilize the standard as a guideline. (Better safe than really sorry, right?)

Income Rule

If you ask a real estate agent or lender for an estimate of how much house a buyer can afford, they willl typically use a version of the Income rule. The Income Rule says that the monthly housing expense – which is the sum of the mortgage payment, property taxes, and homeowner insurance premium – cannot exceed a percentage of income. This is often referred to as the front-end ratio and ranges from 27 percent to 30 percent for most lenders.

If the maximum percentage is 28 percent, for example, and the monthly income is $4,000, the monthly housing expense can’t exceed $1,120 (4,000 x.28 = 1,120). If taxes and insurance on the home are $200 per month, the maximum monthly mortgage payment is $920. At 7 percent interest for a 30-year loan, that payment will support a loan of $138,282. Assuming a 5 percent down payment, the maximum price of the home this buyer can afford would then be $145,561.

Debt Rule

The Debt Rule says that the total debt expense – which is the sum of the total mortgage payment plus monthly payments on existing debt like cars, credit cards, etc. – cannot exceed a percentage of income. This is often referred to as the back-end ratio and ranges from 36 percent to 43 percent.

If this maximum is 36 percent, for example, and the monthly income is $4,000, the monthly payment can’t exceed $1,440 ($4,000 x.36 = 1,440). If taxes and insurance are $200 a month, and existing debt service is $240, the maximum mortgage payment the buyer can afford is $1,000. At 7 percent interest and a 30-year loan, this payment will support a loan of $150,308. Assuming a 5 percent down payment, the maximum price of the home would then be $158,218. (You’ll notice that is significantly higher than what we calculated using the Income rule.)

Cash Rule

The Cash Rule says that the buyer must have cash sufficient to meet the down payment requirement plus other settlement costs. If the buyer has $12,000 and the sum of the down payment requirement and other settlement costs are 10 percent of the sale price, then the maximum sale price using the cash rule is $120,000 (12,000 divided by.10 = 120,000). Since this is the lowest of the three maximums in this example, it would be the affordability estimate that is safest to use for this scenario.

Putting It All Together

How much house a buyer can afford is easy to overestimate if you ignore one of the three rules. Don’t make the same mistake as many of the mortgage lenders that ignored these standards in past years.

Granting loans to buyers that could not afford the payment played a large role in the current sub prime toxic mortgage mess that is currently in the headlines. There is no federal bailout program for sellers accepting owner financing. Play it safe and be sure the buyer can afford the house payment before accepting payments over time

What is Debt Financing?

Almost all businesses, big or small, need to borrow money at some point. Whether it is for large assets such as land and buildings, or simply for supplies to keep a business running, debt financing plays a major role in modern business. Put simply, debt financing is the borrowing of money to keep a business running, to expand a business, or to acquire assets. Long term debt financing is usually associated with larger assets such as machinery, equipment or real estate, and it is paid back over many years. Short term debt financing, on the other hand, is most often used for business operations such as supplies or payroll, and it is often paid back within a year.

The alternative to debt financing is equity financing, which involves the acquisition of money from investors and/or savings. However, we will focus on debt financing in this article.

While most companies in Britain receive their financing from internal finance, 39 percent rely on external sources of finance, usually debt financing in the form of a bank loan. The business will agree the term of the loan and the interest rate, whether variable or fixed, with the lender. As with any loan, companies will have to show the bank how it is going to repay the money and secure the loan against an asset. The asset will usually be a premises or a piece of equipment that covers the value of the loan. In addition, a bank may require that some kind of personal asset is offered as security.

Financial institutions tend to favour companies that have good management, a reliable projected cash flow and good growth potential. The business may have to demonstrate that it can meet the monthly payments from projected revenues in its business plan. Of course, the company will have to comply with the payment schedule specified by the lending institution, and it may run into trouble if it deviates from this. Longer term loans are usually provided in this manner.

Debt financing products

Companies looking for debt finance to cover day to day running costs often opt for an overdraft instead of a long term loan, although these are falling in popularity because of high interest rates, steep fines and the obligation to repay on demand.

There are many options currently available for companies looking to avail of debt financing. Factoring and invoice discounting allow small businesses to take loans out against sales, while leasing allows for the borrowing of money to buy machinery or equipment. However, term loans remain the most popular with businesses and with banks. From the point of the view of the financial institutions, it allows them to impose regular repayment schedules over fixed periods, which is less risky than overdrafts. Many companies are known to have fallen foul of the banks because they were unable to repay overdrafts when asked. This provides an overview of the debt financing products available.

Every lending institution has its own products, rules and rates so it is worth while for any business to shop around for an arrangement that suits its needs. Some companies even offer credit cards designed for small businesses to pay for day to day incidentals. However, these can become an expensive luxury if the balance is not cleared every month.

Debt over equity

Debt financing remains more popular than equity financing for a number of reasons. Interest paid on loans can often be deducted against taxes, and debt finance is available in small, accessible amounts, whereas equity finance tends to be in large amounts. Also, with debt financing the lender has no say in how the business is run and has no rights to any ownership or profits of the business. Another advantage is that business profits can be kept within the company while the loan is used for day to day running or the acquisition of assets.

Debt financing is not a suitable option for all businesses. However, for small businesses where equity financing is not an option, it can be a valuable service in the day to day running of operations and the purchase of equipment. While loans often tend to be short term and at high interest rates, debt financing remains a popular choice for many companies.

If you are interested in learning more about debt financing, take a moment to provide us with some information, and a SimplyFinance representative will contact you to discuss what your next step should be. There are hundreds of debt financing offers available out there, so let us shop around to find the best debt financing option for you.

Financing Rehab And Foreclosure Homes

Financing plays an important role in the whole flipping process. It can significantly impact the profit margin and the amount of time it takes you to flip the home. Here are several popular options in financing and funding a flip;

Using personal finances and a traditional mortgage
Using only personal finances
Obtaining a rehab/construction loan

Personal Financing with a Traditional Mortgage

Although a popular option, personally I don’t see this as a preferable one for first time home Ivestors. The way this works is simple. You find the house; you go to a mortgage broker, bank or lender and ask them to finance the house for you. The remaining costs of repairing and rebuilding the house are all out of pocket.

Let’s say the property you found is listed for $100,000. As long as the house is in livable condition, lenders will offer traditional financing for the property based on their guidelines. Now for financing this house you may need an additional down payment of 5% or 20% and etc. This all depends on how comfortable the lending institution is with your credit, income and mortgage history. You’d have to talk to your mortgage broker, loan officer or personal banker for more details on the down payment.

Once the bank approves the loan, double check to make sure there is no prepayment penalty for selling the home once you’ve completed the rehabilitation process.

Back to our example, we’ll say the bank required a 10% down payment from you to buy the home. Additionally, you’ve talked to your contractor and he’s told you that the costs of repair are going to be about another $30,000. So far, you’ve had to come up with about $40,000 out of pocket in expenses. Of course these aren’t the only things you’ll need to be spending money on. You will still have carrying costs and monthly mortgage payments for the house, insurance, utility and property tax payments as well. And of course, let’s not forget all of the unexpected items that seem to happen all the time.

Many people assume that this is the only real way to finance and work on a house flipping project. The problem becomes worst when hopeful investors tap into their personal and emergency savings accounts to fund their project.

On the plus side, by putting money into the project from personal finances, you save time and money. You don’t have to go back and forth with a bank to get a draw for a specific project and you only pay interest on the money you borrowed for the property. Construction and rehab loans typically have much higher interest rates which again, tap into your profit margin.

Personally, I only recommend moving forward with this type of financing after several properties have been flipped and a comfortable cushion has been made.

Using Only Personal Finances

The way this works is simple. You pay for everything from your own funds and put all of your own money on the line. This is good because you avoid closing costs, mortgage payments and most importantly you will be one of the top considerations for a seller when they have multiple offers. Someone that offers to close with cash has a much higher chance of getting the deal than a second offer willing to pay more, but has to wait for his financing to come through.

On the downside, you’re putting all of your money on the line and tying it up in the property. You have to wait to sell or refinance the property to get your money back out of it and continue with other projects. We’ll talk about refinancing a flip in a different article.

Some big time investors choose to go this way but many of them refrain. These investors would much prefer to make a little less in profits, but have the ability to spread their money into multiple projects at the same time.

Construction and Rehabilitation Loans

An investors favorite, rehab and construction loans are a popular method of financing investment projects. An initial down payment is usually required by the banking institution for purchasing the home. The amount is determined by the bank based on the sales price, future appraised value (when the project is completed), comparable houses in the neighborhood, and the sworn construction statement that has been given to you by your contractor.

The lender finances the property, and allots you a certain amount of funds in the form of a rehabilitation loan. To draw money from this loan, the bank might request the contractor to fill out a draw request schedule on the sworn construction statement and split the payments into a minimum of three parts. Remember, different banks have different guidelines so this is a general scenario. This ensures you and the bank of having a completed phase in the project done before any money is transferred to the contractor. On the down side, the contractor will have to cover all fees until each phase of the project has been completed.

Your monthly payments will be based on the total money borrowed at the current time. For example, you’ve borrowed $100,000 for the land and have drawn $10,000 from the rehab loan to pay the contractors. So your payment would be based on a total loan amount of $110,000. Depending on your lender, these monthly payments can be deducted from the total money you’re borrowing from the bank so you don’t have to immediately pay it out of pocket.

These loans allow you to put a much smaller amount of money from your personal finances into the property and avoid tying it all up into the same project. On the downside you will be making payments month to month on the loan, closing costs and won’t have as much flexibility in making changes (which is sometimes a good thing). Also, you might notice delays in receiving funds from draw requests.

As a branch manager for a mortgage company, to obtain these kinds of loans I personally recommend finding a good local bank or federal credit union. They are much more familiar and aware of the local circumstances that surround a neighborhood. Once you establish a relationship with these smaller local banks, obtaining financing, draws and etc becomes much quicker. Not to mention it can lead to a sudden growth of business from all the relationships you’ll establish. Loan officers and mortgage companies do have access to some rehab lenders, but the fact that they are not local makes the financing procedure sometimes tedious and extremely difficult to obtain

Capital Equipment Finance Times

In today’s time companies have been facing unique challenges making an attempt to keep floating and operate in the worst commercial conditions of the majority of our lifetimes. Feeble shopper demand, decreasing inventory levels, aging equipment and tight credit markets had many companies hobbled and waiting for evidence of industrial recovery.

A study on the small enterprise outlook for 2010 from CIT and Forbes Revelations let slip that 71 % of home business owners concluded that they’re working harder and longer to run their enterprises. Proof of brightness for the approaching months is inspiring, however. The CIT / Forbes Revelations study also claimed that 60 % of home business owners expect their cash to grow or grow noticeably in 2010, while a Duke University / CFO Mag Worldwide Business Outlook Survey for quarter 1 of 2010 reports that chief finance officials expect fifteen % expansion in revenues and nine p.c expansion in capital expenditures this year.

Not understanding what the future will hold, smart enterprises need to station themselves to exploit opportunities. Obviously, there’s a strong need to fund capital expenditures to obtain the apparatus wanted to operate and grow their firms to meet not only today’s challenges, but the stored up demand that’s predicted to appear once the economy grows again. Apparatus leasing and financing plays a major role in helping all sorts and sizes of commercial enterprises in the US obtain the kit they require and its benefits provide the power to manage business stresses, whether during times of doubt or wealth.