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.

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Lawsuit Financing Companies

Attorneys, law firms, lawyers, beneficiaries or clients usually form lawsuit-financing companies. Lawsuit financing companies can also provide appeal finance, firm finance, custom finance or estate finance.

Many lawyers and attorneys create lawsuit financing companies based on their experience and the types of cases they encounter the most. Attorneys and lawyers with expertise in personal injury lawsuits or patent lawsuits help by providing cash advances and support in their fields.

Lawsuit financing companies provide many financing options. With a significant monthly fee, a few lawsuit financing companies may help to settle the case faster. Though a large variety of options are available, the plaintiff has to discuss with the attorney which option is best suited to him.

The lawsuit financing company and the plaintiff can make an agreement of the amount of share the lawsuit financers would obtain after the settlement or the verdict is known. This is called “flat fee”. Apart from the flat fees, the plaintiff has to pay a minimum fee every month, called “recurring fees”, to the lawsuit financing company. This recurring fee can be as low as 2.9% in the case of a few lawsuit financing companies, or could be as high as 15% with other companies.

It is the financing company’s decision as to how much to pay as the cash advance. Lawsuit financing companies pay from $1000 to about a million dollars depending on the case.

Every lawsuit financing company would have a team of lawyers to assess the strength of the case. The key is to avoid funding frivolous complaints. Thus the financing companies will scrutinize the complaint and decide the chances of success of the case.

Lawsuit financing companies do not term their cash advances as loans but as investments. The applicant has to repay after the verdict. Usually the monetary settlement that is obtained after the settlement by the court is larger than the company’s advance. The lawsuit financing company should be paid the principal and the predetermined share of the monetary verdict.

Many lawsuit financing companies can be approached through the Internet. Companies like legalcashnow.com, legalfundingnetwork.com and lawsuitcash.com are available on the Internet. Websites like these are flooded with information and instructions regarding lawsuit financing.

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Stop Working Hard and Grow Money on Trees

For the average person today, getting ahead financially seems like an almost impossible feat. It’s difficult for many to envision ever escaping the rat race when the cost of living is so high and wages are so low. Seeing no way out, most just suck it up and push through, trying to make the “best of it” the only way they know how – by working harder.
WORKING HARD DOESN’T WORK
The problem with this approach is that the rules of money have changed, and working hard simply doesn’t work anymore. Most people have no idea that the rules of money have changed and that they are being penalized for playing by the old rules. Working hard used to work. Saving money used to work. However, after the rules changed in 1971, working hard and saving money progressively makes you poorer.
Because of a lack of financial education, a number of people find themselves metaphorically attempting to push a boulder up the side of a hill. A very few might make it, but for the majority the hill wins. This is what life is like today for those who don’t have a financial education and choose to play by the old rules and work hard.
The new rules require that your money work hard for you, instead of you working hard for money. You can look at this as “growing money on trees.” The rich don’t work hard for money. The rich have their money grow on trees, and so should you!
WORK TO ACCUMULATE ASSETS
The rich work to accumulate assets. In very simple terms, assets are things that place money in your pocket. Some examples are businesses, stocks, real estate, and precious metals. When we speak of growing money on trees, the asset is represented by the tree. Whether it is a business, real estate, stocks, or precious metals, the tree – as an asset – represents something that places money in your pocket.
How the asset performs is represented by its quality of DIRT. DIRT stands for debt, inflation, retirement, and taxes.
IT’S ABOUT HAVING GOOD DIRT
Having a sound financial education provides you the ability to increase the amount of money that goes into your pocket because of a high quality of DIRT. The poor and middle class suffer due to a lack of financial education. This is why they end up deeply in debt, destroyed by inflation, sold the riskiest of investments, and paying the highest in taxes.
Playing by the old rules is a losing proposition and dangerous! Learn to have your money work hard for you. Learn to grow your money on trees through assets – just like the rich.

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Bankruptcy and Your Vehicle

The bill collectors are calling you and everyone you know, your wages are about to be garnished and you can barely pay the necessities. You know you need to file bankruptcy. So what is stopping you, the fear of losing your car, truck, or motorcycle?
In most cases when you file bankruptcy you can keep your vehicle. Of course, it is a little more complicated than just file bankruptcy don’t worry about your car. This article will explore several scenarios I have dealt with in the past dealing with bankruptcies and client’s vehicles. Motorcycles come with a caveat, here it is… Motorcycles are slightly different from other vehicles in that they can been classified as non necessity luxury items so contact your attorney to see what your specific options are regarding motorcycles.
Scenarios in a Chapter 7 Fresh Start Bankruptcy.
Scenario 1. You owe nothing on the car and it is not worth that much. You do not make enough money to cover even your basic needs, you have a car and you do not want to lose it. Chances are if you have a car in this situation you own it outright. Whether you can keep it or not will depend on the value of the car. In Washington, for example, the automobile exemption for an individual is $3450.00. Washington also allows a wildcard exemption of $3000.00. If your car is worth $4500.00 in its current condition, an individual could use the full motor vehicle exemption and then use $1050 of the wildcard. That will fully protect your car and still save $1950.00 of your wildcard. Your car is safe.
Scenario 2. You owe nothing on the car but it is worth more than the exemption value. This is the most complicated scenario in a chapter 7 bankruptcy and may be better dealt with in a chapter 13. Nevertheless, there are options in a chapter 7. Let’s say the car is worth $10,000.00. As discussed above, you can use the current vehicle exemption of $3450.00. You can then add to that the wild card exemption of $3000.00. That protects $6450.00 of value in the vehicle. meaning that you have $3550.00 unprotected. Now we have a couple of options.
You could:
1) Let the trustee take and sell the vehicle and use the proceeds to pay off some of your creditors. If you do this, the trustee will cut you a check for $6450.00 and use the $3450 that is unprotected to pay some of your creditors. You could then use this money to help get a new car or to buy a used car outright.
2) Try to work out a deal with the trustee to repay the unexempt equity. Trustees are usually willing to work out a reasonable payment plan to allow you to keep something like a vehicle. Common terms might be to pay back the equity in six equal installments, or to make a down payment with a monthly payment that ends in a larger payment when you get your tax refund. You need to be careful with this useful arraignment, if you default on your payments your discharge could be denied or revoked.
3) Try to get a new loan on the car after the bankruptcy is finished which would allow you to pay the equity to the trustee. You would then have a car payment to pay the newly incurred loan.
Scenario 3. You owe less on the car than what the car is worth. If you are looking to file a chapter 7 to obtain a fresh start and avoid making a chapter 13 trustee payment, you should be able to protect that car. Say the car is valued at $15000.00 and you still owe $12000.00. In this case you have $3000.00 in equity. Because the automobile exemption is worth more than the equity you have in the vehicle, your car will be protected. You will need to speak with your attorney about what to do during and after the case, but you will need to maintain your loan payment if you wish to keep the vehicle.
Scenario 4. You owe more on the car than it is worth. In this scenario you might owe, for example, $15000.00 on a car that is only worth $7000.00. You have several options under this scenario.
You could:
1) decide to let go of the car. Why pay more than double the value of anything? You could surrender the vehicle and then look to purchase a vehicle with better terms after the discharge;
2) You could continue to pay on the vehicle at the terms provided in the loan agreement;
3) We could seek a redemption loan whereby you get a new loan that is only up to the value of the car in its current condition. In this case you need to qualify for the new loan and there may be additional attorney’s fees but it could potentially save you a lot of money and keep you in a car that you love.
Scenario 5. Bonus Scenario! You have unexempt equity in your vehicle but you also have tax liens which attach to personal property. This one is a little tricky, but if you have no other equity in any other property and the amount of the tax lien is greater than the unexempt equity in your vehicle, the trustee is not likely to bother with you or your vehicle. The down side to this is that if they were to take and sell the car for the unexempt equity, they would then use that money to pay off or to pay down your tax lien. If the trustee leaves you and your vehicle alone, you are still going to have to find a way to deal with those taxes once your bankruptcy is done.
Scenarios in a Chapter 13 repayment plan bankruptcy:
Scenario 1. You owe nothing on your car and it is worth less than the exemptible amounts. Under this scenario, your vehicle would have no impact on your chapter 13 plan payment.
Scenario 2. You owe nothing on your car but it is worth more than the exemptible amounts. Under this scenario, we have to offer the unexempt value to the creditors in the form of your trustee payment. While this goes beyond the scope of this article, we can pay the unexempt value by way of the trustee payment over a period of time lasting as long as 60 months. This is a valuable tool if you have a car that is worth a lot of money and you cannot bear to part with it.
Scenario 3. You owe money on the car and you want to keep it. This scenario gets complicated depending on whether the loan on your car was taken out at the time that you bought the car. It also matters as to how long ago you bought the car. If you bought the car more than 910 days ago, we can cram down what you pay on the car based on its current value. So say that you owe $15000.00 on the car but it is only worth $7000.00, we can propose a plan that only pays that creditor back $7000.00 as a secured claim. We can also lower the interest payment on the car depending on the rate that the loan is for and depending on the jurisdiction. If you bought the car less than 910 days ago, we may still be able to lower the interest rate that you pay on the car, but the full dollar amount of the outstanding loan would have to be paid back as a secured creditor.
Scenario 4. You owe money on the car and you just do not want it any more. In this scenario a chapter 13 can also be a good option depending on what the rest of your financial situation looks like. We can propose a plan that surrenders the collateral. The lien holder will come and get the car. They then have to sell it and credit your account for the amount of the sale. In the chapter 13 they are then able to file an unsecured claim for the remaining balance. The benefit to you though is that you will end up paying less than you owed (possibly zero) and paying no further interest on the loan.
Conclusion: As you can see, there is no simple answer to what happens to a car in a bankruptcy. The good news though is that there are many options that allow you to keep your vehicle and still other options that will allow you to escape from a bad deal. If you find yourself in financial difficulty and the thought of losing your only car is stopping you from filing, call your local bankruptcy attorney to discuss which option might be best for you.

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