Q1- How Lenders Make They’re Lending decisions.

Character: Lenders review your character based on your personal credit report, D & B report and the personal history that you provide. If you have low debt and have paid your bills on time for the last 10 years, your chances for a loan are good. But, what if you’re personal and/or business credit is not good? Anticipate the question, and give the lender your reasons for any credit problem (in writing), along with any proof you may have.

Collateral: Collateral helps lenders feel secure about getting their money back. But, what if you don’t have any collateral? You may consider taking on a partner/shareholder with collateral in real estate, securities, equipment, or business assets.

Ability to make monthly payments: Lenders want to be sure that you can pay your monthly loan payments and existing expenses and have a payment cushion of at least 15% or more of your monthly loan payment. Lenders look at past, present, and future business performance to see if you make your payments. If you’re past history shows you can make your payments today, show why you can make the payment now-for example: new rental income, new contracts, reduction of expenses. Also, be creative. A co-signer’s business may be strong enough to show the lender that the so-signer can make monthly payment. Renting a portion of your business space to a tenant can increase your ability to pay your debt.

Commitment: Show lenders your commitment. Borrowers often come to lenders while leaving themselves room to retreat if the business fails. Why would a lender risk it’s funds on someone who is less committed than the lender. Show your commitment, and offer your collateral up front.

Experience: Lenders want to know that you can run your business successfully. Give us your résumé and stress your qualifications. But, what if you don’t have all the necessary qualifications? Create your management team. Lenders don’t expect you to be able to do everything, but we do expect you to manage the business by hiring the right staff, consultants and advisors. Obviously, advisors with reputable credentials enhance your image with lenders. Employees may take less in salary in return for a percentage of the business. If they own a piece of the company, lenders feel they would remain in the business for the long run.

Capital: Lenders want to know how much money you have invested in your business. Generally, they will lend a multiple of what you have invested. For example, some lenders will lend 3, 4, 5, or more times what you invest. If you don’t have the money you need, look to friends, family and investors.

Q2- What is the difference between equipment leasing and equipment loan?

If you don’t understand the difference between a lease and a loan, you are not alone. Many business owners continue to finance their equipment the “old fashioned” way, through loans, because they don’t fully understand the potential benefits of leasing their equipment. These benefits can be seen in four important areas, initial cost, equipment obsolescence, tax benefit and off balance sheet financing. Due to these benefits, many business owners area realizing that they do not need to own their equipment in order to conduct business. They only need to use it.

The first thing you need to know about equipment leasing is that it is 100% financing. A lease is essentially a “rental” of equipment, there is usually no down payment required to access the equipment your business needs. This directly contracts most commercial bank equipment loans, which require a minimum 10% and as much as 50% down payment. By comparison, most equipment leases will require only the first and last payment in advance of delivery. Even if you only need a small amount of equipment, this can result in tremendous reduction in the “out of pocket expense” necessary to upgrade your equipment. This gives you the opportunity to put thousands of dollars of working capital bask into your business, instead of giving it to your banker.

In addition to the initial cost and obsolescence, leasing your equipment can also provide you business with a substantial tax advantage. While you should always consult with your tax advisor first, most equipment leases can be structured so that you can write off 100% of the annual lease payments. By contrast, current tax laws only allow a business to write off the interest paid on loans. However, because a lease is a rental and the business is only using the equipment, the business can usually write off all of the monthly lease payments just like any other legitimate business expense. Once again, this can result in thousands of additional dollars in working capital being put back into your business.

The last major advantage of leasing your equipment instead of buying is that leasing allows you not to show the equipment on you balance sheet. Once again, this is because equipment is being rented and therefore actually belongs to a different company than the one that is using it. For this reason leases are often referred to as “off balance sheet” financing and this can be a tremendous advantage to many businesses both large and small. Big businesses prefer this option because they don’t want to own millions of dollars in equipment. This equipment will depreciate substantially with the day-to-day usage.

Whoever owns the equipment is responsible for the depreciation on their balance sheet. Also, large corporations may require that the board of directors approve any new loans to the business since. This can make it difficult for the management of business to operate efficiently. But a lease is not a loan and therefore may not require approval by the board of managers to get the equipment they need. In smaller businesses this can also be an advantage because they will not show additional debt on the balance sheet that will affect their ability to borrow money in the future. If you are considering selling your business, this may also make your more attractive to potential buyers since you will be showing less debt on the balance sheet.

Because your Business Consultants works with many leasing companies nation wide they can help you determine if leasing your equipment is right for your business. If you should decide to lease, they can usually get the equipment you need with just a simple, one-page credit application. In many cases they can have the new equipment on site in as little as a few days.

Q-3 What is factoring accounts receivable?

Factoring, is also known as “ cash receivables,” is the conversion of a business accounts receivables into immediate cash by the outright purchase of its receivables, at a discount by a factor.

Factoring is not a loan and is not based on business ability to repay the money advances. The length of time in business is NOT a consideration. The debt to equity ratio is NOT a consideration. Instead, it is based on the ability of your customers to pay what they owe. Once a factor purchases the receivable invoice, they assume responsibility for its collection. The factor is also responsible for accounts receivable management functions, such as credit investigation, accounting and bookkeeping. As compensation for these activities, the factor purchases the receivables at a discount.

This discount fee is usually dependent on the amount purchased, the credit worthiness of the debtors, and the turn around time. Fees can vary substantially but area usually less than most business owners expect. Frequently, a commercial bank cannot provide all the loan funds a growing company needs. A balance sheet is not liquid enough, or it can’t clear off the bank debt every 6 or 12 months. A factor can provide funds to clear off the bank loans periodically or make additional bank credit possible by guaranteeing accounts or replacing accounts receivables with cash.

Once a factoring contract is entered into , you will submit orders to the factor for credit approval before shipping. The factor’s credit department becomes your credit department. When the order is approved, you will receive up to 80% of the proceeds with the remainder retained by the factor as a reserve against loss from complaints and returns. This is withheld to protect against credit losses, since the factor purchases the accounts without recourse. Usually the factor will settle the account each month and pay the proceeds due, less cash discount.

One of the biggest advantages of factoring is that the businesses get immediate cash (from 70% - 80% of the face value of the invoices) within 24 – 48 hours, which means you can accelerate you cash flow by speeding up payment of the receivables. You will have immediate source of funds for operating expenses and the future growth. You will be able to use your own, hard-earned cash without having to wait 30, 60, 90 or 120 days to collect from customers. Additionally, since only receivables are used as collateral for the cash advance, other assets (such as real estate and equipment) can be used for future borrowing.

Cash flow is probably the most important element in the success of a business. Accounts receivables may be the biggest asset on a company’s balance sheet. They also represent the business best source of operating capital that is in permanent disuse. Factoring improves cash flow. A business can use cash currently tied up in receivables to increase sales and take advantage of supplier discount. Factoring accelerates cash flow by eliminating the time lag between the delivery of goods or the performance of service and the payment for it. Most businesses have to pay their expenses before they can collect their receivables, disrupting cash flow.

A Business Finance Consultant can help you determine the factoring your company’s accounts receivable is the right option for you. Once you have come to a decision to factor, your business Finance Consultant will package the transaction in accordance with the factors requirements. The Business Finance Consultant will select from a wide variety of investors to find the right match for your company. Whether your company is in the star-up phase or you have out grown your cash flow, a business Finance Consultant can help your invoices and get the cash you need.