Business Finance Options for Challenging Situations Winston Rowe & Associates

LOS ANGELES - June 9, 2013 - PRLog -- Business Finance Options

Winston Rowe & Associates a national non investment due diligence, advisory and consulting firm specializing in structuring complex debt, private equity and institutional financing for commercial real estate.

If you would like to learn more about lending options for your business from Winston Rowe & Associates you can check them out online at http://www.winstonrowe.com

A common perception in today’s economy is that commercial banks do not want to lend. As anyone who works for a commercial bank can attest, this quite frankly is dead wrong. In fact, commercial banks are clamoring to put money into operating companies that have annual positive cash flow of more than $5 million and working capital assets.

Lending standards have stiffened considerably since then, but banks still desperately want to provide loans to creditworthy companies. They are flush with cash, and interest rates are at historic lows. The main issue lenders are having with making loans is that their customers are showing very little demand for them. Corporations have record amounts of cash on their balance sheets, and companies that have credit lines continue to use them at abnormally low levels. While 60 percent was once viewed as a normal overall usage rate for credit lines, the figure has hovered around the 40 percent range for the past several years.

Asset-Based Loans:

An asset-based loan is secured by a company’s collateral, typically through its working capital. Collateral used includes accounts receivable and the raw material and finished goods portion of inventory. Secured capital can be up to 85 percent of accounts receivable and up to 60 percent of inventory. There are two main types of loan structures for asset-based loans:

Asset-based loans are used in a multitude of business situations. They are particularly useful when traditional credit is tight or a company does not have sufficient cash-flow stability to qualify for a traditional loan. An asset-based loan is also an option for companies that have large amounts of working capital, are seeking expansion, or need to restructure.

Companies seeking alternative lending options often do not have the luxury of time to wait for approval of a traditional loan. Turnaround time for securing an asset-based loan can be quite short. Asset-based loans can be used to help smooth out the unpredictability that operating firms face as they navigate through changing business climates. They can help to stabilize liquidity, enabling a company to operate more efficiently. Funds and nontraditional banks lend at a higher percentage of accounts receivable and inventory than traditional banks do. Asset-based loans also allow companies to maintain ownership of their assets.

Factoring:

Factoring involves the sale of an asset, such as accounts receivable or purchase orders, to an outside firm to help a company manage its collections and finances. Factoring creates an environment in which a lender becomes intimately involved with a company because the factor becomes the owner of the asset. Therefore, the factor is vested in the success of the firm, although a factoring arrangement is usually short-term.

Factoring is an option for companies that are growing rapidly, such as a start-up, but need assistance with managing their receivables and invoices. It is also an option for a company that cannot obtain traditional or alternative lending, but has either substantial working capital to collateralize or purchase orders that are enticing to factors.

Purchase Order Financing:

Purchase order financing is a short-term financing method that allows companies to collateralize their invoice orders to obtain financing.

Purchase order financing can be a funding source for companies that have purchase orders representing large amounts of future revenue on their books, but low levels of cash flow or collateral assets. The financing arrangement allows a company to purchase raw materials to continue developing goods that buyers have previously ordered. Financiers are willing to lend on purchase orders because buyers have set a demand precedent for the product. Purchase order financing is an option for companies that are undergoing rapid growth, such as start-ups or companies executing aggressive growth strategies.

The main advantages of purchase order financing are that qualifying is relatively simple and that it can be implemented quickly. The main disadvantage is that it is more costly than traditional lending.

SBA Loans:

U.S. Small Business Administration (SBA) loans are orchestrated to help small businesses meet their capital funding needs when they are having problems securing traditional loans. Designed to spur small-business activity and therefore increase overall economic activity, SBA loans help small businesses secure financing through a variety of lending sources by guaranteeing repayment of up to 75 percent of the amount of the loan.

The SBA connects companies with third-party lenders that are geared to meeting specific lending needs of small businesses. Typically, SBA loans are available for up to $5 million but in some cases may be as high as $10 million.

Because of the repayment guarantee, underwriting due diligence is not as stringent for SBA loan approval as it is for traditional loans. One drawback to an SBA loan is the upfront cost. Borrowers must pay from 2.5 to 3.5 percent of the loan amount upon initiation.

Mezzanine Financing:

Mezzanine financing is a capital raise that involves a mix of both debt and equity. Namely, it is debt capital with equity warrants attached. Mezzanine financing is a subordinated form of capital, junior to the senior loans of banks and venture capitalists. It is a viable alternative for companies looking to expand via acquisitions, initial public offerings (IPOs), or organic growth. The advantage of mezzanine financing is that it can be obtained quickly because little or no collateral is required to secure the loan. It also acts as an equity component on the balance sheet and may ultimately help a firm secure a traditional loan. The main disadvantage is cost. Lenders who issue mezzanine financing typically seek returns in the 20 to 30 percent range.

Hard Money Lenders:

Hard money lenders are often referred to as lenders of last resort. A hard money loan is secured by the value of a company’s property, not by its collateral. These loans are sometimes used for distressed debt and turnaround situations, normally by companies that have a great deal of equity on their balance sheets. The loans are usually short-term. Under no circumstances will traditional lenders issue loans under these terms.

The advantage is that a company finds a lender that is willing to issue a loan. The disadvantage is the cost of the loan and the risk inherent with a loan of this nature.