Financial Myths vs. Financial Facts
By Gregg Elberg
Evaluating Funding Options for your B2B Business
The world of commercial finance is complicated. It is suggested that all businesses consult with their trusted advisors (CPA, Attorney, or Partner) before entering into any financing transaction that will have long term effects on their business. The following statements are the opinions based on the dictionary definitions herein below.
Merriam-Webster Online Dictionary Abridged Definitions:
Etymology: Greek mythos
1 a: a usually traditional story of ostensibly historical events that serves to unfold part of the world view of a people or explain a practice, belief, or natural phenomenon.
2 a: a popular belief or tradition that has grown up around something or someone; especially: one embodying the ideals and institutions of a society or segment of society
2 b: an unfounded or false notion
Etymology: Latin factum, from neuter of factus, past participle of facere
1: a thing done
2: the quality of being actual
3 a: something that has actual existence
3 b: an actual occurrence
4: a piece of information presented as having objective reality- in fact: in truth
"A fool and his money are easily parted"
FINANCIAL MYTH: No. 1
Finance companies that promise funding in 24-48 hours are the best choice.
Unless you are desperate for funding, you should take time to compare alternatives, read the proposed contracts, and consult with your advisors.
It is recommended that you read the proposed contract before you agree to terms, and carefully consider the risks regarding following matters:
1. Percentage to be advanced: This may range from 60% to 90% of the face value of an invoice. Will the percentage to be advanced be sufficient to help you grow profitably?
2. Your obligation to work with the finance company: Are you required to sell 100% of your accounts receivable every month, or are you permitted to sell at your discretion? Are there monthly minimum charges and if so, would you be likely to use the services of the commercial finance company to this degree every month?
3. Will you be more profitable if you use the finance companies services? In other words, can you afford to pay the commercial financing fees in order to grow your business?
4. Which source is better for you: a small commercial finance company, a large commercial finance company, or the asset based lending department of a bank? With the small companies, you are more likely to work with the decision makers and their usually is more flexibility and discretion. With the large companies, you can accomplish larger transactions and this may be of great significance especially if your business is international. Banks may be an excellent choice if your accounting is perfect and you are good at dealing with strict requirements. Banks are regulated institutions with safety and soundness requirements which generally make banks more conservative than private lenders. GFS works with all three types of lenders.
5. Choice of law: If you are in California, and any dispute must be litigated in New York can you afford the risk that you might have to travel to protect your interests? Where are disagreements or disputes to be decided? Is there binding arbitration?
6. Penalties for early termination: Some yearly contracts provide that if you want to leave the commercial finance company, you are liable for "the greater of Two percent (2.00%) of the Maximum Credit Line, or the number of months remaining in the agreement multiplied by the Monthly Minimum Fee". Is the termination fee risk affordable?
7. Penalty interest if you client fails to pay on time: Some lenders provide that if a client defaults, you can substitute another invoice and not be charged a penalty. Other lenders may require that if a client fails to pay an invoice within 90 days, you are charged 20% of the invoice face amount plus 7.5% per month until payment is made. What does the commercial financing agreement require when your client does not pay on time?
"Economical with the truth"
If someone is economical with the truth, they leave out information in order to create a false picture of a situation, without actually lying.
FINANCIAL MYTH: No. 2
Finance companies that promise lower rates are the better choice. For instance, Co. "A" offers 3% per month; Co. "B" offers 3.25% per month. Co. "A" is the best choice.
Contract terms and conditions determine your actual costs based on when your clients pay. This requires analysis.
It is recommended that you carefully consider the contract terms regarding how interest is charged and your experience regarding how your customers typically pay to project the true costs of financing. Here are several examples:
1. You sell an invoice with a face value of $100.00. Assume the contract charges are 3% for 30 days, with an 80% advance to you and your customer pays the commercial finance company the full amount due on the 30th day. You take an $80.00 advance on day 1 and your customer pays the commercial finance company $100.00 on the 30th day:
v Suppose Lender "A" charges 1% for every 10 days period. Assume "Payment date" is defined in the commercial finance contract as the date the finance company receives payment from your customer pays plus ten (10) banking days. Ten banking days are two calendar weeks. You will be charged for 44 days. One percent for the first 10 days, plus 4 percent for the next 34 days equals a charge of 5%. Your cost = $5.00.
v Suppose Lender "B" charges 1.5% every 15 day period. Assume "Payment date" is defined in the commercial finance contract as the date the finance company receives payment from your customer plus three business days for check clearance. You will be charged for 33 days. You will be charged 4.5%. Your cost = $4.50.
v Suppose Lender "C" defines "Payment date" as the day they receive the check or wire funds transfer. This commercial finance company stops the interest clock on the day they receive payment from your customer. You will be charged 3%. Your cost = $3.00.
v Suppose Lender "D" defines "Payment date" as the day they receive funds and charges daily interest only on the actual funds advanced, also know as per diem interest. Since you are being charged 3% on $80.00 your cost = $2.40.
2. In every contract the definition of "Payment date" and method of interest calculation are critical to anticipate your actual costs of financing. All of the above methods of calculation, except Lender "A", may be reasonable on account of the risks inherent in the transaction. Gregg Financial Services works to obtain the most competitive rates and terms for our client's initial funding; and GFS works to reduce commercial finance costs as you grow.
3. If you customers typically pay in 60-90 days, a contract that requires a minimum interest charge for 60 days is not unreasonable. This condition may be a required for medical accounts receivable financing.
4. Consider whether the commercial finance company's contract requires you to sell every invoice (100% of all invoices) on the day you issue them, or may you sell individual invoices up to 59 days past due, according to your needs? There are tradeoffs: lower price vs. flexibility. It is very much a question of assessing your commercial financing requirements and your gross margins to pay for financing costs.
"Easier said than done"
If something is easier said than done, it is much more difficult than is sounds. It is often used when someone advises you to do something difficult and tries to make it sound easy.
FINANCIAL MYTH No. 3
You can determine the best finance company to work with by simply by comparing several different websites.
Websites are advertising. Knowledge of the lender, their reputation and business practices are essential to choose wisely.
KEY POINTS TO CONSIDER:
When assessing the most appropriate commercial financing company to use, make sure:
• the provider is a reputable company
• your contract corresponds with any verbal or written quotations
• you are aware of any financial penalties if you wish to end the agreement early
• the financing credit limits are sufficient for your initial needs
• you have read the contract carefully before signing it, checking the amount of financing and notice periods
• you understand all terms and conditions, and the costs you will have to pay
"Take the plunge"
If you take the plunge, you decide to do something or commit yourself even though you know there is an element of risk involved.
Gregg Elberg, President
GREGG FINANCIAL SERVICES
930 Irwin Street, Suite 209
San Rafael, CA 94901
Gregg Financial Services is a full service brokerage for commercial finance companies and banks that fund manufacturers, distributors, assemblers, jobbers, importers, staffing, service, agribusiness, construction and health care companies. We shop for the lowest rates and terms. We arrange various types of financing including purchase order financing; factoring; factoring with an inventory component; and asset based loans on receivables, inventory, equipment and machinery. GFS also provides cash flow financing and SBA loans on real estate and equipment. We work with all industries and can arrange financing transactions throughout the US and Canada, Mexico, Australia and several areas of Europe including the UK, Ireland, France, and Poland. GFS arranges funding from $25,000 to $50 million per month at competitive pricing, and we work to reduce your financing costs as your company grows. For more information about GFS, please visit our website: www.greggfinancialservices.com
Copyright 2006 Gregg Financial Services.
About the Author
Mr. Gregg Elberg is a licensed attorney and licensed real estate broker. He specializes in many forms of commercial finance as a commercial finance broker for B2B business and commercial real estate. For more information about GFS, please visit our website: http://www.greggfinancialservices.com
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