Asset Based Loans. The Difference Between A Factoring Loan and a Line of Credit

Asset Based Loans. The Difference Between A Factoring Loan and a Line of Credit

Huntington Beach, CA Asset based loans cover loans secured by any assets on a company balance sheet. For example, a loan secured against accounts receivable, inventory, equipment and real estate are all generally considered asset based. There are asset based term loans and asset based revolving loans. Term loans would cover real estate and equipment while revolving loans would be secured against inventory and/or accounts receivable. For more information on asset based loans secured by equipment, please visit our sister company Equipment Finance Quotes at www.equipmentfinancequotes.com.

For discussion purposes today, we will be focusing on asset based loans secured by accounts receivable. These loans are commonly referred to as factoring loans or accounts receivable factoring. Let’s get started.

What is accounts receivable factoring?

When a company factors their accounts receivable they are taking an advance on the invoice that was created when they sold on open terms to their customer. The transaction is almost always between two commercial entities versus sales made directly to the consumer.

These factoring loans are taken to improve company cash flow by speeding up the collection cycle. Without accounts receivable factoring, many companies would go out of business waiting on customers to pay them. Companies have daily cash needs and if you have slow paying customers, it can seriously impact your cash flow and your ability to meet your overhead burdens.

Factoring loans are an advance on an invoice to a customer. While this form of financing is popular across many industries you may be surprised to hear that a factoring loan is not loan at all. From a legal perspective it is a Buy and Sell Agreement. This is because the factoring is purchasing the invoice from the customer for a period typically up to 90 days.

The loan is paid back when the customer pays. The customer payments are directed to a separate lock box controlled by the factoring company. The customer payment is applied first the advance made against the invoice which, is typically around 80 percent, and the remaining 20 percent is remitted to the client minus the fee for the factoring service. The fee will be based on the amount of days it took to collect the payment on that particular invoice.

Aside from the improvement in cash flow realized by using a factoring company, there is another benefit. Because factoring companies manage the collections on accounts receivable, they are able to maintain accurate and reliable records of payments from customers. Factoring companies essentially outsource this function of the back office management. This is a big savings for the company and savings get larger the larger the company factoring their invoices gets. Credit and collections is a big part of back office responsibilities for any business selling on terms to their customers. Factoring companies completely outsource these functions saving the company salaries, benefits and down time from sick days you would expect with hiring an employee direct.

What is a Line of Credit?

A line of credit against accounts receivable is a revolving loan against the balance of accounts receivable. Typically the advances are made bi-weekly or monthly depending on the cash needs of the business. Unlike a factoring loan a revolving line of credit only provides for financing against the accounts receivable without the back office management associated with factoring loans.

Which is better for my business? The decision on whether to select a factoring loan or a revolving line of credit depends on many variable. The argument in favor of factoring companies is that they provide both capital and back office management to the company. A line of credit is typically lower in interest expense, but harder to qualify for.

Qualifying for a line of credit is a more thorough process. The balance sheet of the company is checked for things like positive working capital, income and retained earnings. A company that is deficient in any of these areas is rarely approved for a line of credit. When applying for a similar line through a factoring company, the process mainly focuses on the financial strength of the customer.

Conclusion

Both a line of credit and a factoring loan can benefit your business by improving available cash flow to meet overhead requirements. The option you choose will rely on what is most important to your business.

Could your business benefit from either a line of credit or factoring loan? If so, we would like to hear from you.

To Your Success!

Patrick Zazueta
Founder | Huntington Coast Capital
714-719-8966

Asset Based Loans  The Difference Between Interest Rate and Opportunity Cost

Asset Based Loans The Difference Between Interest Rate and Opportunity Cost

Huntington Beach CA 

What is the interest rate? How much does it cost? What fees are involved? These are some popular questions our clients ask when considering borrowing money to grow their business. These questions are typical when looking to see how much something is going to cost over the long run. However, these questions are more applicable to purchases related to a home mortgage, a car loan, applying for a credit card or other more commodity based financial products.

When considering Opportunity Cost the analysis is much different. For example, if I told you the cost of capital for fulfilling multiple $100,000 orders is 20%, you may say “that’s too expensive!” However, when you take a closer look at it, the true funding costs may be only 6% to 7% per order less early payment discounts. The borrower makes substantially more money than the cost of financing if the margins can support the cost.

Here is an example of a typical analysis we take our clients through. It’s a simple way to determine if financing is right for your business.

  • A purchase order is received from a customer and the cost of goods is $100,000 (your cost or wholesale cost)
  • Your gross margin on this sale is 60% (your sales price to the customer is $160,000)
  • Your financing cost is 6.5% of your wholesale cost for 120 day funding or $6,500 ($100,000 multiplied by 6.5%)
  • The gross profit calculated after financing cost is $53,500 on this order ($60,000 profit minus $6,500 in finance cost)

The question becomes, “would you spend $6,500 to earn $53,500?” Most all of us would agree that is a worthwhile opportunity. There are some variables that can effect these numbers both positively and negatively. For example, if your company has high fixed costs, this will chew in to the profits. On the contrary, if you are able to negotiate a discount for early payment to suppliers (i.e. a 2% discount for payment in 10 days, expressed as 2%/10 net 30) it will have a positive effect on profits.

Keep in mind that this is one sale and each additional sale will have a better net earnings ratio. This is because fixed costs typically stay the same and more profit gets kicked to the bottom line as more sales are realized. An example of where this analysis doesn’t make sense is if a company has out of control fixed expenses or super slim margins as seen in the electromics industry. In our experience, this analysis pencils out for most of our clients.

We always encourage our clients to look at how much they stand to make versus solely focusing on cost. The lender also needs to earn a return and if expectations are managed, business owners can grow their companies and earn more as a result.

About Huntington Coast Capital. 

Huntington Coast Capital secures funding for companies in a broad base of industries. Our clients come to us to find a more flexible lending partner to meet their growth needs. Many are declined by the bank and are in need of a more creative and entrepreneurial funding solution.

We consult on a wide range of funding options for business owners throughout the United States in the following areas:

  • Supply chain financing 
  • Equipment loans and lease programs (learn more about our equipment loan platform offered through our subsidiary)
  • Lines of credit for working capital needs
  • Term loans for marketing, hiring staff and general expansion needs
  • Factoring services for accounts receivable financing that also provides for back office credit and collection functions
  • Purchase order financing
  • Asset based loans
  • Business acquisition financing
  • Inventory financing
  • Private commercial real estate bridge loans
  • SBA loans for business and real estate needs

Whether you are a startup or established, in need of $100,000 or $10,000,000 we have the capital partners to meet your needs. Contact us to see how we can assist in taking your business to the next level. To your success!

HCC Can Now Offer Commercial Real Estate Loans In California

HCC Can Now Offer Commercial Real Estate Loans In California

Huntington Beach, CA Huntington Coast Capital is now licensed to secure asset based, institutional commercial real estate loans in California. Prior to receiving the license, we were only able to place private money asset based loans for bridge or special purposes. Now that the broker license is in place, we can secure permanent funding for all asset types in commercial real estate.

We look forward to better serving our clients with our expanded asset based loan product offering. All types of commercial real estate will be considered. If you are looking for a commercial real estate loan, give us a call 714-719-8966.

Why You Do Not Need Good Credit For An Asset Based Loan

Why You Do Not Need Good Credit For An Asset Based Loan

Huntington Beach, CA

In the lending world, so much relies on personal credit as part of the analysis. Strong personal credit is something not everyone has, fewer than you think in fact. As business owners, when payments are delayed, you are forced to delay your payments to suppliers. However, because your business income is your primary source of income (in most cases), this means personal obligations can also be delayed. Timely payments on items such as your personal mortgage payments, electricity bill, car payments, and so forth all attribute toward your credit score. Delays in revenue and income from your business can quickly effect your personal life and negatively impact your credit score. A poor credit score makes it nearly impossible to be approved for additional credit.

Asset based loans come to the rescue in these cases! Asset based loans can be used for either real estate or business loan purposes. Let us explore below.

Asset Based Loans For Business.

The company balance sheet reflects all the assets of a business (remember assets, minus liabilities equals equity?). Assets that can be used as collateral for an asset based loan are accounts receivable, equipment, inventory, and real estate (more on asset based real estate loans below).

Accounts receivable are payment obligations from customers for goods purchased or services performed. An accounts receivable invoice reflects the amount due and when payment is expected (usually with 30, 60 or 90 days). These invoices are considered assets and can be used as collateral for a loan.

There are two types of asset based loans available against invoices and those are factoring loans and an asset based line of credit. A factoring loan is a buy sell agreement where the factor provides and advance against the face amount of the invoices to improve the cash flow of the business. Factoring loans are more than just an advance. In a factoring arrangement the factor manages the back office and credit and collection functions for the client. Outsourcing the back office functions is often more cost effective than hiring internal staff. For more information on factoring loans click here.

An asset based accounts receivable line of credit provides an advance against accounts on a total availability In this type of arrangement the lender looks at the accounts receivable aging and advances against the total balance outstanding. There is no back office management involved in an asset based line of credit and as such, the rates are a bit lower.

Asset based loans against inventory and equipment are just as you would expect. The lender advances against the value of the collateral. Proceeds are used to increase working capital and assist in growing the business. Equipment loans have been a major source of growth for us in the asset based loan category. For more information on this type of loan please visit our sister company Equipment Finance Quotes.

Asset Based Loans For Commercial Real Estate. 

Commercial real estate transactions also use asset based loans on a broad basis. If you have a traditional property type and have plenty of time to close using a bank is your best bet. High scrutiny in underwriting translates in to lower rates although the process can be tedious.

Asset based loans in commercial real estate are used as bridge loans to acquire property. Scenarios where time is of the essence or where a property requires creative underwriting, fit well with asset based commercial loan requests. Virtually all property types are considered and the process is much faster and much less document intensive than traditional bank loans. For more information on asset based loans for commercial real estate click here.

You noticed that I did not mention personal credit in any of the explanations above. This is because it does not come in to the analysis to any important degree. The only exception to this is if the borrower has a negative mark on his credit where a lender providing a similar loan took a loss on that loan. Poor credit due to inquiries, slow payment of personal obligations, charge off notices, default on credit cards and the like rarely come in to play. The main focus is the quality of the asset being used as collateral.

I hope you enjoyed reading this. If your business could use an asset based loan or if you need an asset based loan to acquire commercial real estate, give us a call at 714-719-8966.

To your success!

Patrick Zazueta | Managing Director
Huntington Coast Capital, Inc.

Choosing The Right Asset Based Loan For Your Needs

Choosing The Right Asset Based Loan For Your Needs

Huntington Beach, CA  We often receive inquiries from clients looking for an asset based loan for working capital for their business. A common mistake that traps many business owners from obtaining the capital they need to grow is taking on the wrong form of debt.

The number 1 killer of business is taking on an asset based term loan when they should be utilizing and asset based line of credit. We have seen countless times how companies strap themselves with term debt when their capital needs are really short term. Let me explain. If you were in need a $50,000 asset based loan to cover the cost of a purchase order you would not want to borrow the money on a fixed monthly payment plan. Why? FINANCE 101 never use long term debt to cover short term expenses.

Purchase order financing is a revolving need. You receive one purchase order, fulfill it, receive another and so forth. Taking out an asset based loan on a term basis straps the cash flow of the company making it difficult to pay the debt back in a lump sum.

There are predatory lenders out there that will sell you a term loan under the auspices that it is working capital when in fact it is actually term debt. Further, making matters even more difficult, is they will take their payments automatically from your checking account on a daily or weekly basis. This makes cash flow strapped even further and forces the business owner to take out another loan and the cycle repeats. The sales people at these companies are only interested in their commission on the loan and most have never run a business for themselves.

On the contrary, a revolving asset based business loan provides you with the revolving credit you need to allow you to borrow the money when you need it and pay it down through the normal course of the business cycle. How? Let us use the previous example of a $50,000 asset based purchase order loan. The asset is the purchase order. A promise to pay from a credit worthy customer for goods or services your company is providing. If your cost to fulfill the purchase order is $50,000 and your sale price for the sake of round numbers is $100,000, you can pay the loan back entirely upon receipt of payment from the customer. Once the $100,000 is paid by the customer, $50,000 of that payment goes to pay down the loan amount and the borrowing process repeats.

Why can we not do the same thing with a term loan? There are a couple of reasons for this. First, term loans often come with pre-payment penalties over the first two years. You can not pay them off without paying an extra fee in the first two years of the agreement. This is not ideal for short term asset based loan needs. Secondly, term loan lenders will file what is known as a UCC-1 blanket lien on the company making it impossible for another lender to provide financing until the debt is paid off. This second requirement is a major road block.

There is an exception to the rule however, but it does not favor the business owner. Some term loan asset based lenders will allow additional debt. This means that you can have more than one term loan. The problem with this is as the term debt is stacked up, your monthly payment obligations increase. Lenders measure your ability to pay by the amount of income the company has after all other debts are paid. There comes a point where the company can not take on any more debt and borrows its way out of business.

What is the solution? There are two many scenarios and variables within each to discuss here. The moral of the story is to apply the right type of financing to the right needs. This is not always easy to determine. Especially, when you have a persistent sales person telling you that his term loan is what you need for your business. Let Huntington Coast Capital manage your asset based loan decisions for you. Our unbiased consultation will give you the honest truth about which type of financing is right for you. We have a unique advantage over the lenders out there and that is simply that we are not lending our own money. Our objective is not to sell our product, but to consult with you to determine which is best for your business.

Do not trust a salesperson trying to hit a quota! We align ourselves on your side of the table and have your best interest in mind. In need of an asset based loan? Do not make the decision without contacting us first.

To your success!

Patrick Zazueta – 714-719-8966
Managing Director, Huntington Coast Capital, Inc.

Asset Based Loan Funding Announcements

Asset Based Loan Funding Announcements

Huntington Beach, CA Huntington Coast Capital is proud to announce that we secured $525,070 in new asset based term loans for our clients through the first two weeks of February! The loan details are as follows:

  • A $350,000 asset based loan for a distributor of cell phone and tablet accessories. The company once had sales of over $20,000,000 a year and had a $1,000,000 line of credit with Bank of America. However, margins in the electronic accessories industry are becoming increasingly thin with all the big players entering the market. In 2017 the company made the conscious decision to exit the high volume, low margin business and pursue the smaller volume, but higher margin business. As a result, their profits were not greatly effected, but their gross sales went down and thus their need for a $1,000,000 line of credit. Surprisingly, Bank of America asked them to find a new lender as they do not provide lines of credit of that size to their clients. They are interested in the larger borrowers. The pressure to find an asset based loan was mounting as the requirement was to pay off the entire $350,000 as quickly as possible. Huntington Coast Capital was able to find them an asset based loan to get them out of their predicament! With an asset based term loan now in place, the company can re-focus on operations with Bank of America off their backs
  • A $175,000 asset based loan for a restaurant owner. An established restaurant owner was looking for a loan to open a new concept in a second location. Due to the company ownership structure that included investor unwilling to guarantee the loan, a little creativity was required to secure the financing they were looking for to expand. HCC was successful is obtaining an asset based loan for the company after numerous lenders on both the private and institutional side. There was no interest from a number of SBA lenders and the loan was ultimately completed by a non-SBA lender offering a 10-year asset based term loan. The term of the loan kept the payments down and allowed the company enough cash flow to carry the new project.
  • A $70,000 asset based loan to a physicians consultant company. A consultancy group came to us looking to refinance some high priced MCA loans or merchant cash advance lenders. These loans are expensive to say the least and they often require direct daily debits from the bank account of the client. With high interest sucking the cash flow out of the company, they needed answers quickly. HCC secured an asset based loan to refinance these high priced lenders and also provided for a portion of cash out to be used as working capital for some new contracts coming down the pipeline.

If your company could benefit from an asset based loan or if you are in need of an asset based loan for a commercial real estate purchase or refinance, we would like to speak with you.

Introducing Equipment Finance Quotes.com!

Introducing Equipment Finance Quotes.com!

Huntington Beach, CA Huntington Coast Capital has launched a sister company specializing in asset based equipment loans and lease programs for asset based equipment loan requests of all sizes.

Equipment Finance Quotes (www.equipmentfinancequotes.com) brings business owners and/or their consultants together with the right lender for their asset based equipment loan request. It works by matching the questions asked on the online application with the requirements from lenders on the platform. Once all of the questions are received, a preliminary estimate on the chances of approval is issued. From there, a list of required items is requested from the business owner to complete the underwriting review. If approved, a term sheet is issued by the lender and the business owner and lender are placed in direct contact.

The inspiration for Equipment Finance Quotes.com was similar to what inspired Huntington Coast Capital. We want to simplify the process of finding a loan for business owners. Additionally, we want to not only find the right loan for the business owners request, we want to provide them with some options to choose from and get some lender competition going for their request. Through our online platform we are taking the time, frustration and energy out of the process and providing the business owner with a user-friendly customer experience.

We launched Equipment Finance Quotes.com to handle the amount of equipment loans being received. Our inquiries in this area required a separate platform to better streamline these requests.

If your business could use additional equipment for growth or a line of credit against existing equipment, we would like to hear from you. Please visit us at www.equipmentfinancequotes.com.

To your success!
The Huntington Coast Capital Team.

A Major Obstacle To Obtaining An Asset Based Loan

A Major Obstacle To Obtaining An Asset Based Loan

Huntington Beach, CA  Asset based loans are loans secured by equipment, real estate, inventory or accounts receivable. Essentially, most assets on a company balance sheet can be used as collateral for an asset based loan.

Let us discuss asset based loans secured against equipment and asset based loans secured against commercial real estate. Asset based loans secured against inventory and accounts receivable work entirely different from fixed asset loans.

For starters, lenders in the asset based lending space need to have conservative loan to value ratios. Asset based loans on real estate have loan to values in the 50 to 65 percent range. This is because the lender needs to be able to sell the property and recoup his principle (and hopefully interest) should the borrower default and go in to foreclosure.

Similarly, the loan amount for an asset based loan on equipment is measured by the forced liquidation value. This is not true in most cases, but if we are talking about strictly and asset based loan, it is. The idea behind lending on a percent of the equipment liquidation value is that the lender can sell the equipment at auction should the borrower default.

So, if you own assets free and clear, you should be able to get a loan for 50 to 65% of the assets value, correct? Not necessarily. One item borrowers over look when seeking an asset based loan for the their business is cash flow. They think that if they have the asset, that is all the lender needs. This is incorrect. In addition to having the assets available for collateral, you also have to demonstrate the ability to make the monthly payments. This sounds obvious, but many borrowers initially believe that the asset itself is enough.

Asset based lenders need to be convinced that their loan can be repaid. This was never more apparent than during the real estate meltdown of 2007-2008. Asset based loans against real estate were being made on what was referred to as stated income loans. Or in other words, you tell me how much money you make, I will believe you and then depend on the property value to be high enough to cover my loan should you go in default. This was a very short sided and poor lending practice.

If you can qualify for a million dollar loan to buy a house, it does not mean you can qualify for a five million dollar loan just because the loan to value is there for the asset based loan. Simply put, you still need to make your monthly payments. Sounds simplistic, but borrowers frequently think that having the asset is enough. Well, it is not unfortunately.

Could your company benefit from an asset based loan? Do you have the cash flow to afford to take on the loan payments? Let us talk and see what works.

To your success!

Patrick Zazueta
Huntington Coast Capital, Inc.
714.719.8966

More Thoughts On Asset Based Loans And How To Qualify For One

More Thoughts On Asset Based Loans And How To Qualify For One

Huntington Beach, CA Asset based loans are a popular alternative to traditional bank loans. Business owners use their assets which typically consist of inventory, equipment and accounts receivable to name a few as collateral for an asset based business loan. However, having the collateral alone doesn’t qualify you for an asset based loan.

What else is needed to qualify for an asset based loan? Cash flow. Many times, business owners spend a good portion of their capital on inventory needed in their business. The inventory is sold to customers creating revenue which turns in to net income after all expenses are paid and the cycle repeats. The problem happens when the inventory is slow moving causing the cash of the company to be locked up in the goods held as inventory. As we know, inventory sitting on the shelf in the warehouse is not creating revenue. It needs to be sold or turned in order to generate cash flow which is the life blood of any business.

Companies that can not demonstrate the ability to pay the monthly payments on an asset based loan will not qualify. One half of the equation is having the collateral, the other half is having the ability to make the monthly payments and afford to take on the additional debt.

Sounds elementary, however, business owners often only look at one side of the equation. Asset based loans can work for both business and real estate purposes, but you have to have adequate income to justify the lender giving you the loan.

If the company does not have the income to cover the asset based loan payments, they will need to seek an equity investment which has a completely different analysis in asset based lending.

To your success!

Patrick Zazueta | Founder
Huntington Coast Capital, Inc.
714-719-8966

A Word Of Caution When Seeking An Asset Based Loan

A Word Of Caution When Seeking An Asset Based Loan

Huntington Beach, CA Occasionally I feel the need to share some insight in to the capital markets and what it is like working with both clients and other consultants. Obtaining an asset based loan for your business is at times a frustrating process. There are certain consultants in the industry that have their clients sign a fee agreement with them promising a certain percent of the funded amount at closing. This amount can be anywhere from one to five percent of the loan amount.

The problem is, some of these consultants in the asset based lending space, do not have the lender contacts to fulfill the financing their client is requesting. As a result, they come to someone like us to assist in securing the funding.

All of our asset based loan partners, direct lenders, pay us upon the successful close of a loan. We never have the client sign a fee agreement for an asset based loan.

Once the other consultant has their client sign a fee agreement, it can be a burden on the client if they can not deliver the financing as promised. The client looks at them and wonders why they are paying them a fee when their consultant has to go to another broker to meet their asset based loan requirements. A good question.

In these cases, the consultant group that had their client sign a fee agreement, needs to adjust their fee and accept a smaller referral fee in exchange for getting the loan done and doing right by the client. In most cases however, the consultant will guard their client from others and attempt to find what they are looking for through common Google searches and LinkedIn contacts. This wastes time and often causes the client to get exhausted and find an option on their own.

The moral of the story is to choose your broker representative wisely. As a policy, you, as a business owner, should never sign a fee agreement until you know the broker can deliver. We take this out of the equation by having the lender pay us directly upon successful closing of the loan. We never take on an assignment that we do not already have a lender for ahead of time. It frustrates the client and damages our reputation.

Could your business use an asset based loan? If so, we would like to speak with you! You can reach me directly at 714-719-8966.

To your success!

Patrick Zazueta
Huntington Coast Capital, Inc.
714.719.8966