Asset Based Loans Versus Bank Loans. Which Is Better For My Business?

Asset Based Loans Versus Bank Loans. Which Is Better For My Business?

Huntington Beach, CA  Our clients come to us with an asset based loan or financing need that almost always is required in order to grow their business. If you are like most business owners, cash flow is tight and if you receive a big order outside the normal course of business, it could be challenging coming up with the cash to cover the cost of goods and deliver the product. Your cash need could also be to finance additional equipment and require an asset based equipment loan in order to meet the increased capacity required to fulfill a contract.

Traditional banking places the emphasis on the cash flow and financial strength of the company, the borrower. They are primarily concerned with how financially solid the company they are lending to is. This is good practice, and it makes sense that the companies that the banks deal with are in good financial health. The obstacle to clear however, is that most companies are leveraged to a high degree and can not meet all of the required ratios banks look for when making a credit decision.

If your company is growing quickly and every dollar is going back out the door to cover ongoing working capital needs, it is likely that you will not meet all the requirements of bank lending. For example, banks look at the leverage ratio of the company. This ratio is figured by dividing the total debt of the company by the equity of the company. Equity being the total assets minus the total liabilities. If you have more than 3 or 4 times the liabilities as you do equity, banks will shy away from offering you more credit for fear that your profits and company cash flow will not be able to pay off the new debt. Again, a prudent way to look at things, but the problem is that most borrowers do not qualify.

The advantage to bank lending is the cost. If your company can qualify, then banks will be able to offer the lowest borrowing rates.

The other option are asset based loans. Asset based loans have a broad spectrum of categories. An asset based loan can be used for commercial real estate purchases, inventory loans, equipment loans and purchase order financing to name a few. In an asset based loan, the lender is looking at the asset being used as collateral in the transaction. For example, if your company received a large purchase order and needs additional cash to pay the upfront costs or deposit required by the supplier, and asset based loan is a good option. The asset in this instance is the purchase order itself. Purchase order financing is often accompanied by a factoring loan. Factoring loans are asset based loans secured by the invoice sent to the customer versus the purchase order sent to the supplier. For more information on factoring loans click here.

In our experience, business owners are qualified for asset based loans more often than bank loans. We explore each option as appropriate and the obvious choice is always revealed in the end. Our clients like the unbiased consultation and industry insight we bring to the table. Because we are not lending our own money and acting in a consultant capacity, we are able to align ourselves on your side of the table and deliver the best options for you and your funding needs. Additionally, in the majority of cases, our services are free to our clients. Our lender network compensates us for bringing them asset based loan opportunities.

If your business would benefit from an asset based loan or equipment loan, give us a call. My direct line is 714-719-8966.

To your success!

Huntington Coast Capital To Present At Venture Capital Event At UCI

Huntington Coast Capital To Present At Venture Capital Event At UCI

Huntington Beach, CA: Huntington Coast Capital is proud to be a part of the Orange County Venture Capital Fast Pitch Conference on Thursday, November 30th at The Cove at UC Irvine Applied Innovation in Irvine, CA. Entrepreneurs from around the local and regional area will pitch their business ideas in the search of capital investment. The companies will consist of startup, pre-revenue companies to established companies looking for investment to take their business to the next level.

Huntington Coast Capital will be discussing asset based loans to the largely California-based audience. Venture capital is not necessary for every funding request and perfectly appropriate for others. In a certain circumstances, asset based financing in the form of debt is all a company needs to accelerate their growth.  For example, if your company needs capital to fund the cost of purchase orders, an asset based loan secured by the purchase order and future invoice to the customer, may be all that is required. You do not need to take on an equity partner in the this case and give a portion of your company away. Conversely, if your product or service is having a difficult time breaking in to a market segment due to lack of capital and connections, equity is entirely appropriate and maybe even necessary.

Whether your business needs venture capital or an asset based loan, largely depends on the intended use of the funds being requested. We counsel business owners on the available capital options and provide valuable insight in to the appropriate course of action.

If you would like to discuss how to navigate the capital markets and select the right funding avenue for your business goals, give us a call. My direct line is 714-719-8966 or you may reach us toll free at 844-239-2632.

To your success!

Patrick Zazueta | Founder
Huntington Coast Capital, Inc.

What Is An Asset Based Loan?

What Is An Asset Based Loan?

Huntington Beach, CA: The term asset based loan is widely used to describe a loan secured against an asset of value as security for the money borrowed. Huntington Coast Capital has been securing asset based loans for our clients in California and across the nation since 2010. Asset based loans consist of loans secured by commercial real estate, inventory, accounts receivable, purchase orders or equipment. Below is a brief summary on how we have assisted our clients in securing asset based loans in California and across the United States in these different categories.

  1. Commercial and investment real estate. Companies that lack sufficient business collateral are often required to pledge outside collateral as an abundance of caution in this type of asset based loan. Often referred to as bridge loans, these loans usually have terms of 6 months to 3 years and are offered through private money capital providers. These asset based loans are offered in California and throughout the country.
  2. Inventory loans. For companies in the manufacturing, distribution, wholesale and retail spaces, inventory represents cash tied up in goods for sale. Inventory can be used as security in an asset based loan. Depending on the type of inventory however, a loan may not be available. For example, if a company is selling fresh fish, meat or poultry, finding an asset based loan will likely not be possible due to the quick turn of this type of product and the potential for spoilage. Other forms of inventory such as t-shirts, tires, dried goods and other products with long shelf lives have a much better chance of being accepted as collateral for an asset based loan.
  3. Accounts receivable and purchase orders. These two assets represent an amount owed and an order for shipment. Both of these asset types qualify for an asset based loan. In fact, these two asset classes are the most popular asset based loan being requested from our clients in California. Companies in search of improved working capital utilize their accounts receivable as collateral for an asset based loan and their purchase orders as collateral when looking to obtain funding to cover their cost of goods to suppliers.
  4. Equipment loans. Asset based loans used to purchase or refinance equipment are for a specific purpose. Retail sector companies such as restaurants are big users of equipment loans as well as companies in the manufacturing sector. Often times in business acquisitions, equipment loans provide a portion of the funds required for the purchase if the equipment is currently owed free and clear and has a usable life of over 10 years.

Asset based loans are vital to the economy and provide funds to companies when more traditional finance programs can not meet the need. If you are a California company in search of an asset based loan or are located anywhere in the continental United States and looking for financing to take advantage of growth opportunities, consider an asset based loan.

Need assistance navigating the capital markets? That is our specialty and we are eager to help. For advise and counsel on asset based loans or any other form of business financing, give us a call 714-719-8966.

To your success!

Patrick Zazueta
Huntington Coast Capital, Inc.

How Will A Rise In Interest Rates Effect Business Owners?

How Will A Rise In Interest Rates Effect Business Owners?

Things That Traditionally Increase When the Fed Increases Interest Rates

 

The recent rise in the Fed funds rate will likely cause a ripple effect on the borrowing costs for consumers and businesses that want to access credit based on the U.S. dollar. That has an impact across numerous credit categories, including the following:

  • The Prime Rate: A hike in the Feds rate immediately fueled a jump in the prime rate, which represents the credit rate that banks extend to their most credit-worthy customers. This rate is the one on which other forms of consumer credit are based, as a higher prime rate means that banks will increase fixed, and variable-rate borrowing costs when assessing risk on less credit-worthy companies and consumers.
  • Credit Card Rates: Working off the prime rate, banks will determine how credit-worthy other individuals are based on their risk profile. Rates will be affected for credit cards and other loans as both require extensive risk-profiling of consumers seeking credit to make purchases. Short-term borrowing will have higher rates than those considered long-term.
  • Savings: Money market and credit-deposit (CD) rates increase due to the tick up of the prime rate. In theory, that should boost savings among consumers and businesses as they can generate a higher return on their savings. However, it is possible that anyone with a debt burden would seek to pay off their financial obligations to offset higher variable rates tied to credit cards, home loans, or other debt instruments.
  • U.S. National Debt: A hike in interest rates boosts the borrowing costs for the U.S. government and fuel an increase in the national debt. A report from 2015 by the Congressional Budget Office and Dean Baker, a director at the Center for Economic and Policy Research in Washington, estimates that the U.S. government may end up paying $2.9 trillion more over the next decade due to increases in the interest rate, than it would have if the rates had stayed near zero.

Things That Are Largely Unaffected When the Fed Increases Benchmark Interest Rates

  • Auto Loan Rates: Auto companies have benefited immensely from the Fed’s zero-interest-rate policy, but rising benchmark rates will have an incremental impact. Surprisingly, auto loans have not shifted much since the Federal Reserve’s announcement because they are long-term loans.
  • Mortgage Rates: A sign of a rate hike can send home borrowers rushing to close on a deal for a fixed loan rate on a new home. However, mortgage rates traditionally fluctuate more in tandem with the yield of domestic 10-year Treasury notes, which are largely affected by inflation rates.

Things That Traditionally Decrease When the Fed Increases Interest Rates

  • Business Profits: When interest rates rise, that’s typically good news for the profitability of the banking sector, as noted by investment giant Goldman Sachs. But for the rest of the global business sector, a rate hike carves into profitability. That’s because the cost of capital required to expand goes higher. That could be terrible news for a market that is currently in an earnings recession.
  • Home Sales: Higher interest rates and higher inflation typically cool demand in the housing sector. On a 30-year loan at 4.0%, home buyers can currently anticipate at least 60% in interest payments over the duration of their investment. Any uptick is surely a deterrent to acquiring the long-term investment former President George Bush once described as central to “The American Dream.”
  • Consumer Spending: A rise in borrowing costs traditionally weighs on consumer spending. Both higher credit card rates and higher savings rates due to better bank rates provide fuel a downturn in consumer impulse purchasing. (For more, read How Interest Rates Affect Spending.)

Equipment financing, inventory financing, and working capital loans are easy to find right? Not if you’re in one of these two scenarios…

Equipment financing, inventory financing, and working capital loans are easy to find right? Not if you’re in one of these two scenarios…

Huntington Beach, CA: Business owners looking to obtain a business loan for equipment financing, inventory financing or working capital have many options to choose from. Capital is plentiful for companies on the rise and in need of financing to meet their growth potential. In fact, most of our clients come to us with equipment financing, purchase order financing, inventory financing, and working capital loan needs. Huntington Coast Capital has a extremely high success ratio in placing these loan requests.

However, there are a couple of situations where this may not be so easy. On a rare occasion we will get a funding request for a company in the medicinal marijuana industry. While the selling of marijuana is legal in some states, there is still a stigma attached to it, even if it is legitimately prescribed by a doctor. As you can imagine, obtaining funding for the growers and distributors in this industry, even if completely legitimate, is very difficult to secure. Some lenders simply do not lend in this industry and lump it together with other unsavory industries like gambling and adult content distribution. Is this fair? I have no idea. This article isn’t about providing an opinion on what the lender’s moral compass should be when analyzing loan requests in this industry. I can say, however, that finding a lender to fund your expansion in this business is very difficult. In fact, even with our extensive contacts in the industry, we only know of one. That’s right one. However, we were happy to have this contact when we received a call from a company in Colorado inquiring about an equipment loan along with funding for tenant improvements for his budding (no pun intended) business. The fact is that his cash flow and profit margins are extremely strong and his business could grow substantially with the right capital partner. Looks like we found them a solution after months of searching on their own in vain. A satisfying moment for us indeed. Now his Cannabis business is set to catapult to the next level!

The second difficult spot to be in is when you are looking for accounts receivable financing for consumer accounts receivable. The market is flooded with options for financing accounts receivable when you are selling business to business, but business to consumer is a ghost town. Most all lenders have the perspective that financing against these debt pools is risky and the credit process for business credit and personal credit is much more subjective and difficult to manage. I have to say, that I agree. To manage risk in this area requires having a specialty and sole dedication to the industry. Like other types of lending, you need to manage losses through diversifying the risk over several separate exposures and minimize credit to any one debt holder. However, this said, it is possible, just not popular among the lending community. As before, we have only one lender in this industry! We don’t come across these requests too often, but when we do, it is satisfying to say, “we may have a solution.”

Do you have a difficult loan request? Has everyone told you “no” because you fit one of the scenarios above? If so, we would like to speak with you!

Be on the lookout for our next blog article that features auto mechanics and why that experience also requires a knowledge of the options! I think we can all agree that we are paying too much for our cars to be serviced in most cases and it pays to know who else can do it for less!

Contact us 714-719-8966

Business Loans and Satisfied Clients

Business Loans and Satisfied Clients

Huntington Coast Capital has specialized in securing business loans, equipment loans, inventory loans, SBA loans and purchase order financing in California for business owners since 2011. We are good at what we do, but do not take our word for it, listen to our clients! We secured a $6,500,000 line of credit for Penguin Foods that reduced their cost of funds and allowed them to grow their business well in to the future. Click the image for the video testimonial:

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