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Written by Gregg Elberg
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Saturday, 18 August 2007 |
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Word Count: 958 Accounts Receivable Financing- Yesterday
Most people intuitively understand the time value of money from first time
they received an allowance from their parents. All other things being equal, you
would rather get your allowance today instead of having to wait for the weekend.
Go to the movies today instead of waiting for the money. Instant gratification.
In business, if you have the money today you are positioned to increase the
future value of your business by increasing sales of services or products over a
period of time. There are several mathematical concepts to compute the time
value of money such as present value, future value, present value of an annuity,
and future value of an annuity. These computations are beyond the scope of this
article.
Uneven cash flow is a challenge to B2B businesses that have to meet regular
obligations such as payroll, rent and supplies. One solution to this problem is
accounts receivable financing which is also known as factoring, factoring
receivables and asset based lending. With accounts receivable financing you can
get cash for your invoices immediately and give terms to your customers to pay
you in thirty, sixty or ninety days.
The financial markets today are exceptionally volatile. There are grave concerns
regarding a meltdown in the mortgage finance market and several major providers
of home mortgages than have declared bankruptcy or exited this market. The
secondary market for certain types of mortgage securities has virtually closed
the door on securities known as subprime home loan securitizations which makes
these types of bonds, not having any liquidity, virtually worthless. Why is this
relevant to accounts receivable financing?
A little known fact is that many commercial finance firms that provide accounts
receivable financing are not using their own money to fund their transactions.
This is sometimes called “refactoring”. Their funds may be available from three
sources: bank lines of credit, investor participations and the equity of the
firm. Bank lines of credit, or asset based credit lines from major non-bank
commercial finance firms are by far the largest source of funds for most firms
that offer “refactoring” accounts receivable financing.
These firms are under more pressure from their lenders to make safe and sound
loans. The pressure comes from Banks, Federal regulators such as the Federal
Deposit Insurance Corporation and the Federal Reserve Banks. This may affect how
long it takes to get financing.
There is a process called due diligence which is a pre-requisite to accounts
receivable financing. Several components are: analyzing the credit of the
borrower; analyzing the credit of their customers, and running a UCC-1 search in
each state where the company operates. The UCC-1 search and filing is required
to give the lenders the legal right to collect the accounts receivable that are
being sold or pledged for the financing. This can take 5 to 10 days depending on
the state bureaucracy and how busy they are with such requests. If the UCC-1
report is not “clean” meaning first lien status is not available to the lender,
there will be no financing. Tax liens, legal judgment liens, and earlier
financing liens can delay financing until they either are paid or subordinated.
When a B2B business is growing rapidly and needs more cash flow for operations
the time value of money becomes critical. There is a common answer the question:
“When do you need the money?” Answer: “Yesterday”.
John Lennon and Paul McCartney understood the time value of money and more
importantly for them, the money value of time. They were the primary songwriters
for the group, The Beatles, from 1960 to 1970. The group experienced major cash
flow difficulties because of poor financial management of recording contracts,
out of control costs of running their record business, Apple, and the pressures
that caused them to renounce public performances (which was a major source of
income). Some of their greatest songs (and a source of substantial future
income) were created while they were on a hiatus to meditate with the Maharishi
Mahesh Yogi in India in 1965. In 1970 The Beatles disbanded because of
personality differences, the stresses of mass popularity and financial problems.
Paul McCartney’s song, Yesterday, is considered to be the most recorded song in
the history of popular music, if not the most popular song of all time. Here are
the lyrics to Yesterday:
Yesterday,
All my troubles seemed so far away,
Now it looks as though they're here to stay,
Oh, I believe in yesterday.
Suddenly,
I'm not half the man I used to be,
There's a shadow hanging over me,
Oh, yesterday came suddenly.
Why she
Had to go I don't know, she wouldn't say.
I said,
Something wrong, now I long for yesterday.
Yesterday,
Love was such an easy game to play,
Now I need a place to hide away,
Oh, I believe in yesterday.
Why she
Had to go I don't know, she wouldn't say.
I said,
Something wrong, now I long for yesterday.
Yesterday,
Love was such an easy game to play,
Now I need a place to hide away,
Oh, I believe in yesterday.
Mm-mm-mm-mm-mm-mm-mm.
The bottom line: If your B2B business needs money yesterday accounts receivable
financing may be the answer to your cash flow challenges.
Copyright 2007 © Gregg Financial Services
www.greggfinancialservices.com
Mr. Elberg is a licensed attorney and licensed real estate broker. Gregg
Financial Services is a full service brokerage for commercial finance companies
and banks that fund B2B businesses. Mr. Elberg arranges funding from $25,000 to
$50 million per month at competitive pricing, and works to reduce your financing
costs as your company grows. For more information about GFS, please call 888 482
9221 or visit our website:
http://www.greggfinancialservices.com
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