Author Archives: schatzi

Dec
04
2022

How Asset-Based Loans From Commercial Finance Companies Differ From Traditional Bank Loans

When it comes to the different types of business loans available in the marketplace, owners and entrepreneurs can be forgiven if they sometimes get a little confused. Borrowing money for your company isn’t as simple as just walking into a bank and saying you need a small business loan.

What will be the purpose of the loan? How and when will the loan be repaid? And what kind of collateral can be pledged to support the loan? These are just a few of the questions that lenders will ask in order to determine the potential creditworthiness of a business and the best type of loan for its situation.

Different types of business financing are offered by different lenders and structured to meet different financing needs. Understanding the main types of business loans will go a long way toward helping you decide the best place you should start your search for financing.

Banks vs. Asset-Based Lenders

A bank is usually the first place business owners go when they need to borrow money. After all, that’s mainly what banks do – loan money and provide other financial products and services like checking and savings accounts and merchant and treasury management services.

But not all businesses will qualify for a bank loan or line of credit. In particular, banks are hesitant to lend to new start-up companies that don’t have a history of profitability, to companies that are experiencing rapid growth, and to companies that may have experienced a loss in the recent past. Where can businesses like these turn to get the financing they need? There are several options, including borrowing money from family members and friends, selling equity to venture capitalists, obtaining mezzanine financing, or obtaining an asset-based loan.

Borrowing from family and friends is usually fraught with potential problems and complications, and has the potential to significantly damage close friendships and relationships. And the raising of venture capital or mezzanine financing can be time-consuming and expensive. Also, both of these options involve giving up equity in your company and perhaps even a controlling interest. Sometimes this equity can be substantial, which can end up being very costly in the long run.

Asset-based lending (or ABL), however, is often an attractive financing alternative for companies that don’t qualify for a traditional bank loan or line of credit. To understand why, you need to understand the main differences between bank loans and ABL – their different structures and the different ways banks and asset-based lenders look at business lending.

Cash Flow vs. Balance Sheet Lending

Banks lend money based on cash flow, looking primarily at a business’ income statement to determine if it can generate sufficient cash flow in the future to service the debt. In this way, banks lend primarily based on what a business has done financially in the past, using this to gauge what it can realistically be expected to do in the future. It’s what we call “looking in the rearview mirror.”

In contrast, commercial finance asset-based lenders look at a business’ balance sheet and assets – primarily, its accounts receivable and inventory. They lend money based on the liquidity of the inventory and quality of the receivables, carefully evaluating the profile of the company’s debtors and their respective concentration levels. ABL lenders will also look to the future to see what the potential impact is to accounts receivable from projected sales. We call this “looking out the windshield.”

An example helps illustrate the difference: Suppose ABC Company has just landed a $12 million contract that will pay out in equal installments over the next year, resulting in $1 million of revenue per month. It will take 12 months for the full contract amount to show up on the company’s income statement and for a bank to recognize it as cash flow available to service debt. However, an asset-based lender would view this as receivables sitting on the balance sheet and consider lending against them, depending on the creditworthiness of the debtor company.

In this scenario, a bank might lend on the margin generated from the contract. At a 10 percent margin, for example, a bank lending at 3x margin might loan the business $300,000. Because it looks at the trailing cash flow stream, an asset-based lender could potentially loan the business much more money – perhaps up to 80 percent of the receivables, or $800,000.

The other main difference between bank loans and ABL is how banks and commercial finance asset-based lenders view the business’ assets. Banks usually only lend to businesses that can pledge hard assets as collateral – mainly real estate and equipment – hence, banks are sometimes referred to as “dirt lenders.” They prefer these assets because they are easier to control, monitor and identify. Commercial finance asset-based lenders, on the other hand, specialize in lending against assets with high velocity like inventory and accounts receivable. They are able to do so because they have the systems, knowledge, credit appetite and controls in place to monitor these assets.

Apples and Oranges

As you can see, traditional bank lending and asset-based lending are really two different animals that are structured, underwritten and priced in totally different ways. Therefore, comparing banks and asset-based lenders is kind of like comparing apples and oranges.

Unfortunately, many business owners (and even some bankers) don’t understand these key differences between bank loans and ABL. They try to compare them on an apples-to-apples basis, and wonder especially why ABL is so much “more expensive” than bank loans. The cost of ABL is higher than the cost of a bank loan due to the higher degree of risk involved in ABL and the fact that asset-based lenders have invested heavily in the systems and expertise required to monitor accounts receivable and manage collateral.

For businesses that do not qualify for a traditional bank loan, the relevant comparison isn’t between ABL and a bank loan. Rather, it’s between ABL and one of the other financing options – friends and family, venture capital or mezzanine financing. Or, it might be between ABL and foregoing the opportunity.

For example, suppose XYZ Company has an opportunity for a $3 million sale, but it needs to borrow $1 million in order to fulfill the contract. The margin on the contract is 30 percent, resulting in a $900,000 profit. The company doesn’t qualify for a bank line of credit in this amount, but it can obtain an asset-based loan at a total cost of $200,000.

However, the owner tells his sales manager that he thinks the ABL is too expensive. “Expensive compared to what?” the sales manager asks him. “We can’t get a bank loan, so the alternative to ABL is not landing the contract. Are you saying it’s not worth paying $200,000 in order to earn $900,000?” In this instance, saying “no” to ABL would effectively cost the business $700,000 in profit.

Look at ABL in a Different Light

If you have shied away from pursuing an asset-based loan from a commercial finance company in the past because you thought it was too expensive, it’s time to look at ABL in a different light. If you can obtain a traditional bank loan or line of credit, then you should probably go ahead and get it. But if you can’t, make sure you compare ABL to your true alternatives.

When viewed in this light, an asset-based loan often becomes a very smart and cost-effective financing option.

Nov
02
2022

Ways To Pay Less Tax and Still Stay Within the Law

We would all like to pay a little less tax to the tax authorities and with careful planning you can do just that whilst staying, of course, completely within the law and abiding by the tax regulations. These ways of saving tax refer to the tax jurisdiction of the United Kingdom so may not be relevant if you live elsewhere in the world.

One of the easiest ways of saving tax is to make full use of your available allowances.

If you have a spouse (or civil partner) who has no income then transferring savings and investments that are currently paid interest after the deduction of tax will save you the tax on that interest. Even if you only have a small amount of savings the tax saved can mount up quickly. Of course, you would want to trust your other half completely before embarking on this strategy especially if you have considerable investments.

From 6th April 2015 new rules come into force that will mean a spouse can transfer 10% of their personal allowance to the other partner, provided you are not a higher rate tax-payer. This would only be beneficial if one partner had an income that didn’t allow full use of their own personal allowance but the other did.

For high earners with incomes over £100,000 per year their personal allowance is reduced gradually for every £1 over that limit until the point where there is no personal allowance for those earning over £120,000 per year (in the 2014/15 tax year). There are several ways for such high earners to retain their personal tax-free allowance of £10,000 per year. One is to transfer any savings and investments that produce an income to their spouse or civil partner to bring their annual income back below £100,000. Another is to make contributions into their own pension, again of an amount that will reduce their yearly earnings below the threshold.

Age-related Personal Allowances

Currently anyone born before 6th April 1948 is entitled to a higher personal tax-free allowance and those born before 6th April 1938 to a higher allowance still. However, these allowances are gradually being phased out by keeping the amount at the same level until the non-age-related allowance is at the same level.

While this allowance is still available the same strategies to maintain the full allowance apply as for the standard personal allowance.

Annual CGT Exemption
Anyone with a portfolio of investments generating a capital gain should make sure to use the annual capital gains tax exempt amount.
For the 2014/15 tax year in the UK any sales of assets where the gain is less than £11,000 will benefit from this amount being tax free. Selling some assets or shares each year where the gain is below this threshold will allow you to take tax free profit from your portfolio over a period of time. The timing of selling shares is, therefore, crucial if you want to save tax.

These and other strategies to save tax can be complicated so always seek the advice of a chartered accountant or professional tax advisor to make sure you both stay within the law but, at the same time, benefit from all allowances that you are entitled to.

Oct
01
2022

Ways To Pay Less Tax and Still Stay Within the Law

We would all like to pay a little less tax to the tax authorities and with careful planning you can do just that whilst staying, of course, completely within the law and abiding by the tax regulations. These ways of saving tax refer to the tax jurisdiction of the United Kingdom so may not be relevant if you live elsewhere in the world.

One of the easiest ways of saving tax is to make full use of your available allowances.

If you have a spouse (or civil partner) who has no income then transferring savings and investments that are currently paid interest after the deduction of tax will save you the tax on that interest. Even if you only have a small amount of savings the tax saved can mount up quickly. Of course, you would want to trust your other half completely before embarking on this strategy especially if you have considerable investments.

From 6th April 2015 new rules come into force that will mean a spouse can transfer 10% of their personal allowance to the other partner, provided you are not a higher rate tax-payer. This would only be beneficial if one partner had an income that didn’t allow full use of their own personal allowance but the other did.

For high earners with incomes over £100,000 per year their personal allowance is reduced gradually for every £1 over that limit until the point where there is no personal allowance for those earning over £120,000 per year (in the 2014/15 tax year). There are several ways for such high earners to retain their personal tax-free allowance of £10,000 per year. One is to transfer any savings and investments that produce an income to their spouse or civil partner to bring their annual income back below £100,000. Another is to make contributions into their own pension, again of an amount that will reduce their yearly earnings below the threshold.

Age-related Personal Allowances

Currently anyone born before 6th April 1948 is entitled to a higher personal tax-free allowance and those born before 6th April 1938 to a higher allowance still. However, these allowances are gradually being phased out by keeping the amount at the same level until the non-age-related allowance is at the same level.

While this allowance is still available the same strategies to maintain the full allowance apply as for the standard personal allowance.

Annual CGT Exemption
Anyone with a portfolio of investments generating a capital gain should make sure to use the annual capital gains tax exempt amount.
For the 2014/15 tax year in the UK any sales of assets where the gain is less than £11,000 will benefit from this amount being tax free. Selling some assets or shares each year where the gain is below this threshold will allow you to take tax free profit from your portfolio over a period of time. The timing of selling shares is, therefore, crucial if you want to save tax.

These and other strategies to save tax can be complicated so always seek the advice of a chartered accountant or professional tax advisor to make sure you both stay within the law but, at the same time, benefit from all allowances that you are entitled to.

Sep
01
2022

A New Dawn – The Heyday of the Small Bank

When the head of Berkshire Hathaway, Warren Buffett, has stated that “the U.S. Economy is ‘flat on the floor’ after a cardiac arrest, it makes even the most optimistic types such as myself wonder about our perhaps inappropriately upbeat position. The world economy is now at stake.

Despite all of this, I see several rays of sunshine. I still see new stores opening. I still see the clients in our business credit program obtaining new trade lines and lines of credit. Most importantly, I still see many smaller, regional banks offering generous offers of credit.

For many years I have instructed our clients to cultivate relationships with small local banks. When I first begin working with a business owner I am often asked if I have a preference as to what bank they open their business checking account with. I tell them that I have excellent referrals if they are looking for them, but I then ask: Do you currently have a good relationship with a bank? If, indeed, they do, I urge them to maintain that. In fact, as a business owner building business credit, a strong relationship with a bank is one of the most valuable tools that they have.

It is true that right now many large banks are facing heavy financial woes; even large banks that are strong and sound are still tightening up the requirements on the money that is lent, that includes the credit cards that are offered and approved. It is difficult than ever to make a splash with one of these large banks.

Again, I must fall back on the argument that small banks are better for small to midsized businesses building credit. Here is an example to consider:

John Smith owns ABC, LLC which operates a restaurant on Main St. in a small town that is on the way to a large and popular ski resort. John successfully builds the credit of ABC, LLC with the assistance of a business credit firm such as ours. He is able to improve his menu and the interior of the restaurant using the independent lines of credit that have been established for the business. At the beginning of all of this, John opened a business checking account with Small Town Bank. Small Town Bank has ten branches all in the same state. John has a good relationship with the Officers at his local branch. He continually puts money into the bank. Lately, due to the improved credit of his business and increased profits he is carrying a mid-five figure balance.

One day the owner of the building where John’s restaurant is located comes to him and says “John, I have had this building for nearly forty years. I am thinking of selling it and moving up to the mountains. You have been a great tenant. You always pay your rent on time and take great care of the space. I would like to give you first crack at it”.

To make a long story short, John goes to Small Town Bank’s local branch and is able to secure the financing for the building. Of course, some of this has to do with the fact that the building is a tangible asset and is priced near its current market value, but the more important fact here is that Small Town Bank knows John and his business. They are doing what they always have done, they are lending to their depositing pool.

Had the business owner in this story went over to the Big National Bank across town he very well may still be paying rent to a new owner. The reason: The growth of his business and the bank balances probably would not have made a blip on the radar. In addition, he would have had to go through a mountain of time wasting paperwork. In the meantime, another buyer could come in and buy out the investment from right underneath his feet. This would place the tenant in a precarious position. Not only did he lose out on a great business investment, the business, itself, could be in jeopardy if the new owner decides not renew the lease.

I urge all small to mid-sized business owners to consider the benefits of forming an ongoing relationship with a local or regional bank in their area. These banks take notice of you and your business. You do not need to carry six or seven figure balances in order to have your needs catered to. When it comes time for expansion, these lenders are your best friends. Small banks remain a constant a ray of sunshine for us all.