Author: JM Luna Added: August 2, 2008
In today's economic environment, asset rich cash poor is a familiar term. Many businesses, due to economic conditions, have put themselves in awkward working capital situations. Their income statements might show a small or large net profit but their balance sheets reflects a company that is not liquid. Their working capital is Ok, in the total sense, but the liquidity of the cash flow cycle doesn't turn fast enough to generate a sound healthy company. Many times you will see a balance sheet where a profitable company can be overdrawn at the bank by hundreds of thousands of dollars at any point in time. This is a company that may have a large working capital problem. An example of this is when cash reflects a zero balance, accounts receivable is $1,000,000 and the outstanding accounts payable is $700,000. The working capital is $300,000 which seems Ok unless the accounts receivable collection drags on beyond the payment of the outstanding accounts payable. The bottom line cash flow could be out of wack and cause a large working capital problem. In today's environment where the economy is weakened by various problems, customers are not paying their bills on time, therefore rippling back to the businesses holding the receivables. In turn, the tardiness of the payment and/or no payment at all has caused the businesses holding the accounts receivable to be tardy on paying their bills...This is caused a major working capital problem that the businesses must resolve. Another type of working capital problem is where businesses have invested alot of dollars in construction and truck investments in prior years. The liabilities on these related assets have been paid off and has created an equity position in these unencumbered assets. As the economy has changed as we discussed above and any current investments in this area can cause a major working capital and cash flow concern. Now we have two major problems, substantial dollars tied up in accounts receivables and the rest in hard assests like bulldozers, dump trucks, excavators, boom trucks, etc.... The solutions to these problems can be resolved by either factoring your receivables, securing a line of credit on your accounts receivables/inventories and/or securing a hard asset money loan on your hard assets, heavy equipment, yellow iron, trucks etc.....Each one of these areas have pro and cons and will be discussed on a limited basis below..... Factoring has been around for centuries, you are basically selling your accepted receivables to a factor and they are collecting the monies for you. Each factor is different and advance you a certain money upfront once you have completed certain requirements for the factor. At the end of the collection process, the factor usually will keep somewhere between 2-5% of the original receivable. The business gets their infusion upfront of money to keep their cash flow process going and the cost to do business is either passed on the customer or absorbed by the business. The types of industries that qualify for a factor are changing and it is a good idea to do your homework before you select a factor.... Another way to generate upfront money is to go to your bank and obtain a line of credit against your accounts receivables and inventories. Usually qualifying banks will lend up to 75-80% on the eligible accounts receivables and 50% against the inventory up to a maximum amount....This can be a tedious process for the business with cross quarantees and additional collateral required. Their are many qualifying procedures to go through including personal and business credit checks. Additionally, in many instances, the bank on demand can call in the loan for various reasons.. One should consult his attorney and accountant on this type of loan, In many instances, businesses are sitting on substantial amount of equity on heavy equipment such as bulldozers, trucks, production line equipment, excavators etc that is either paid off and/or could be refinanced. Niche lenders will come up with an internal house formula for how much is the liquidation value. Base upon this liquidation value, either orderly or forced, will come up with a lending base the lender will advance on. For the most part credit isn't really an issue, the underlying assets are the key to how much money is available for working capital purposes. Obviously, the lender will do their due dilengce on any liens or encumberences against the qualifying assets.. These are three basic ways a illiquid business can look for alternatives in obtaining working capital. Additionally, there are other types of bridge loans, construction loans, debt/equity loans etc that are out in the market. Some additional lenders look at purchase orders or large binding contracts to lend money on. One should consult an attorney and/accountant when they enter these areas. It is good prudent advise.......... Happy hunting for your loan....................
--- J.M Luna has over thirty years experience in the financial field. This includes accounting and taxes, leasing, hard asset money and other types of lending. U.S Corporate Capital assists the startup as well as the seasoned business for financing in all different types of industries..
http://www.cclgequipmentleasing.com/Sale_Leaseback.htm
Comments
| 
