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Financial Myths Vs. Financial Facts
The world of commercial finance is complex. It is recommended that all businesses consult with their trusted advisors (CPA, attorney, or partner) before entering into any financial transaction that will have a long-term impact on their business. The following statements are ideas based on the dictionary definitions below.
Merriam-Webster Online Dictionary Brief Definition:
Etymology: Greek myth
1 a: Usually a traditional story of historical events that reveals part of a people’s worldview or explains a practice, belief, or natural phenomenon.
2 a: a popular belief or tradition that has grown up around something or someone; Specifically: embodying the ideals and institutions of a society or segment of society
2b: An unfounded or false assumption
Etymology: Latin factum, from neuter of factus, past participle of facer
1: A job done
2: The quality of being real
3 a: something that has real existence
3b: A real event
4: a piece of information presented as being objectively real- in fact: in truth
“A fool and his money are easily divided”
Financial Myth: Number 1
Finance companies that promise funding in 24-48 hours are the best option.
Unless you’re desperate for funding, you should take the time to compare options, read proposed deals and consult with your advisors.
It is recommended that you read the proposed agreement before agreeing to the terms, and carefully consider the risks related to the following matters:
1. Percentage of Advance: It can range from 60% to 90% of the face value of the invoice. Will the percentage increase be enough to help you grow profitably?
2. Your obligation to work with the finance company: Are you required to sell 100% of your accounts receivable each month, or are you allowed to sell at your discretion? Are there monthly minimum charges and if so, can you use the services of a commercial finance company to this degree each month?
3. Will you be more profitable if you use the services of finance companies? In other words, can you afford to pay commercial financing fees to grow your business?
4. Which source is better for you: a small commercial finance company, a large commercial finance company, or the bank’s asset-based lending department? With smaller companies, you are more likely to work with decision makers and they generally have more flexibility and discretion. With large companies, you can complete large transactions and this can be of great importance especially if your business is international. If your accounting is perfect and you are good at dealing with strict requirements then banks can be a great option. Banks are regulated institutions with safety and soundness requirements that generally make banks more conservative than private lenders. GFS works with three types of lenders.
5. Choice of Law: If you are in California, and any dispute must be litigated in New York, can you afford to travel to defend your interests? Where to settle disagreements or disputes? Is there binding arbitration?
6. Penalty for early termination: Some annual contracts provide that if you want to leave the commercial finance company, you are liable for “the greater of two percent (2.00%) of the maximum credit line, or the number of months remaining. The contract is multiplied by the monthly minimum fee. Is the termination fee risk affordable?
7. Penalty interest if you customer fails to pay on time: Some lenders if the customer defaults, you can substitute another invoice and not incur penalty charges. If the customer fails to pay the invoice within 90 days as other lenders may require, you are charged 20% of the invoice face amount plus 7.5% per month until payment is made. What does a commercial financing agreement require when your client doesn’t pay on time?
“Finance with Truth”
If someone is economical with the truth, they omit information to create a false picture of a situation without actually lying.
Financial Myth: Number 2
Finance companies that promise low rates are a good option. For example, Co. “A” offers 3% per month; Co. “B” offers 3.25% per month. Co. “A” is the best option.
The terms and conditions of the contract determine your actual costs based on when your customers pay. This requires analysis.
It is recommended that you carefully consider the terms of the contract regarding how interest is charged and your experience of paying your customers to project the actual costs of financing. Here are several examples:
1. You sell an invoice with a face value of $100.00. Assume the contract fees are 3% for 30 days, with an 80% advance to you and your client paying the full amount to the commercial finance company on the 30th day. You take an $80.00 advance on Day 1 and your client pays $100.00 to the commercial finance company on Day 30:
v Suppose Lender “A” charges 1% for every 10 days period. Assume “payment date” is defined in the commercial finance agreement as the date on which the finance company receives payment from your customer plus ten (10) banking days. Ten banking days are two calendar weeks. You will be charged for 44 days. One percent for the first 10 days and 4 percent for the next 34 days equals a fee of 5%. Your cost = $5.00.
v Suppose lender “B” charges 1.5% every 15 days. Assume the “payment date” is defined in the commercial finance contract as the time the finance company receives payment from your customer and three business days for the check to clear. You will be charged for 33 days. You will be charged 4.5%. Your cost = $4.50.
v Suppose Lender “C” defines “Payment Date” as the day it receives a check or wire fund transfer. This commercial finance company stops the interest clock on the day it receives payment from your customer. You will be charged 3%. Your cost = $3.00.
v Suppose Lender “D” defines the “Payment Date” as the day they receive the funds and charges daily interest only on actual funds in advance, daily interest is also known. You are being charged 3% on $80.00 Your cost = $2.40.
2. The definition of “payment date” in each contract and the method of interest calculation are important to estimate the true cost of your financing. All of the above methods of calculation except Lender “A” may be justified due to the risks inherent in the transaction. Gregg Financial Services works to obtain the most competitive rates and terms for our client’s initial funding; And GFS works to reduce business finance costs as you grow.
3. If your customers typically pay in 60-90 days, an agreement requiring a minimum interest charge for 60 days is not unreasonable. This situation may require medical accounts receivable financing.
4. Consider whether the commercial finance company’s contract requires you to sell every invoice (100% of all invoices) on the day they are issued, or can you sell individual invoices up to 59 days prior to your needs? There are tradeoffs: lower price versus flexibility. This is a very question of how much you pay for your business financing needs and your gross margin financing costs.
“Easier Than Done”
If something is easier said than done, it’s a lot harder than it sounds. It is often used when someone advises you to do something difficult and tries to make it easy.
Financial myth number 3
You can determine the best finance company to work with by comparing several different websites.
Websites are advertising. Knowledge of the lender, their reputation and business practices is essential to choosing wisely.
Key points to consider:
When evaluating the most appropriate commercial financing company to use, make sure to:
o The provider is a reputable company
o Match your contract with any verbal or written quotations
o You are aware of any financial penalties if you wish to terminate the contract early
o The financing credit limit is adequate for your initial needs
o You have read the contract carefully before signing, check the financing amount and notice period
o You understand all the terms and conditions, and the costs you will pay
Commercial finance brokers work with many dedicated commercial finance companies and banks in many businesses of all sizes. There are several areas of expertise, such as purchase order financing, accounts receivable financing, inventory financing and SBA financing. Most commercial finance companies limit their services to one or two of these categories. A professional finance broker will evaluate different companies and match you with the one that best fits your business needs. They also keep a close eye on commercial finance companies that may charge non-competitive fees and won’t match you with them. In addition to comparing rates, there are several points to consider when choosing services.
Anticipate issues with customers that will inevitably arise, find out the level of customer service they offer to help resolve issues. Do they offer telephone support and in-person meetings, e-mail help and live chat, or a combination of services? Choose a professional finance company that offers multiple ways to reliably answer concerns or questions. Consider the differences in where you are and the time zone where the commercial finance company is located. How does this affect the cut-off time for funding? How does this affect your ability to reach your key finance representatives?
You can ask for a list of references before doing business with them. Be sure to ask questions like:
o Were they able to process your funding requests quickly?
o Was the approval process simple? how long did it take
o Was the company easily accessible by phone and email?
o How long did it take before you received the funds?
o If you had a problem with your account, what did they do to fix it?
o How have your clients reacted to working with a commercial finance company? Did they handle them properly?
o Would you recommend this company?
If you take something at face value, you accept the appearance instead of looking deeper into the matter.
Financial Myth: Number 4
A non-recourse agreement means that if your company defaults, you don’t have to pay the financing.
Most contracts require you to pay until your client goes bankrupt or goes out of business.
There are two general types of factors: recourse and non-recourse. Resource factoring is the most common. With recourse factoring, the commercial finance company will typically fund every invoice you submit, but will require refunds and their fees for unpaid invoices within a certain period, usually 90 days.
Non-recourse factoring can relieve your company of any responsibility for non-recourse accounts, if, and only if, it is truly unconditionally “non-recourse”.
“Take care of the pennies and the pounds will take care of themselves.”
If you take care of money, the pound will take care of itself, meaning that if someone takes care not to waste a small amount, they will accumulate capital.
If you are drowning, you decide to do something or commit yourself even though you know there is an element of risk involved.
Copyright © 2007 Gregg Financial Services
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