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.

When viewed in this light, an asset-based loan often becomes a very smart and cost-effective financing option.

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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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Business Letter Closings – Are You Sincere, Faithful or True?

Business letter closings are part of a standard format but are subject to several variations. Sometimes called the “complimentary close”, business letter closings vary by geography, type of letter and sometimes relationship of the writer to the recipient. In learning how to write a business letter, pay attention to all three in choosing your close. Your choice can change the tone of your business letter, creating a more or less formal or friendly message. Depending on your standing with the recipient, as well as the part of the world you are both in, this can make a difference in how your message is received.

Geography

In the U.K., business letters almost always adhere to long standing tradition and close with Yours faithfully, while in North America and Australia, Yours sincerely is the norm. You’ll also see Yours truly on some letters.

Type of Letter

Formal business letter closings generally use the complete phrase, such as Yours truly, and sometimes it will be amplified to Yours very truly. Letters to professionals of high standing, such as judges or senior government officials, may close with Respectfully. In diplomatic circles, business letter closings can be quite elaborate and unusual, e.g. Your obedient servant!

Relationship

When writer and recipient know each other well, more casual closings are acceptable in North America and Australia, and sometimes even in the U.K. Popular choices include Best Regards, Regards, Cordially.

In all variations of business letter closings, the first letter of the first word is capitalized, but the second is not, e.g. Yours sincerely, not Yours Sincerely.

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5 Points About Writing a Business Letter

Letter writing was sure an art and it still remains the same, but with the electronic mails coming of age, the format and language of writing the content is surely changing. For example, referring to the subject matter, i.e. giving reference to context and writing the introduction section, etc. It is being more informal these days, though a well drafted business letter can make a lot of difference in the actual business professional world.

Tips for Writing Business Letters

The convention of letter writing remains like the olden days with the basic rules with reference to the content of a letter. It remains the same as any formal letter, that is to say, the sender’s address, date, recipient, introduction of the letter, body, and closing of the same. In the following, find some useful tips for writing a business letter.

Layout: The layout of the formal business letter is the blocked one, which is also known as the American letter writing format. Unlike before, the British writing format has been long gone and it has been replaced with intending all the contents to the left of the page.

Structure: The skeleton of the business letter has an additional section for mentioning details about the issue referred in the letter. It starts with the addresses and subject line. Be brief while writing the subject section. It should just be a pointer.

Content: Here you should mention the purpose of writing the letter. You may mention the business deal or proposal you are referring to in case it is about something related to that. If it is for a different purpose, then you may write it in the subject line, for example if it is an inquiry. It is required to give technical details, though in the first paragraph only. For example, the date, invoice, reference or deal no., etc.

Tone: Depending on your purpose, you can vary your tone of writing the letter. For example, if it is a business proposal you are drafting, it needs to be persuasive in nature. If it is a thank you letter, you need to be courteous. Use jargon with the appropriate recipient.

Reference: The last section of business letters are very important. You are required to mention the references to the issue you are talking about, along with names and contact details of the people associated with the same.

These were some tips for knowing how to write a business letter. Last but not the least, you may include a section naming ‘Enclosures’ at the end of the letter. This again depends on the nature of your subject.

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Proper Business Letter Creation

If you are in the business world, then creating a business letter is no longer new to you. It is a normal part of the business world because of lots of announcements, acknowledgments, appointments, authorization letter and many others. As you use business letter format, you are communicating with a sense of professionalism. A good business letter doesn’t need to be too long. Remember that you are writing with businessmen and with busy people. You don’t have all their time. Three paragraphs would be good enough.

The first paragraph of a business letter should contain the main point of the letter. You can start with a friendly opening then quickly proceed with the main point. Be specific. Use a few sentences to explain your purposes but remember no to go for further detail until the next paragraph.

The second paragraph should now contain the accurate details of the purpose of the letter. The second paragraph is the backbone of the purpose you have mention in the first paragraph. This is an important part because it will give justification or reasoning on why you wrote a letter to the reader. The second paragraph is also called the body of the letter. This is also the part where you can insert more information about you or more information about the reason you wrote.

Lastly, the last paragraph should tell the importance of the letter. If you are writing for an employment better put your contact information in the last paragraph. On the other hand, if you are writing because you want to inform the reader, the last paragraph should contain your appreciation for the reader’s time. The last paragraph should end with a call to action. It should also contain your hope that the reader will respond to your letter.

Business letter should be short yet clear to take into consideration the time of the reader. If you are sending a letter enclosed with additional documents, don’t forget to put an enclosure line. Also if your letter is not for a single person alone it is best to include carbon copy of the letter for the other receiver or receivers.

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Having a Business Letter Format Makes Writing a Business Letter a Breeze

We will all go through writing a business letter at least once in our lifetime. It does not matter if you are an employee, an owner, a stay-at-home mom (or dad) that has her own business at home; we all have to go through writing it. It cannot be avoided!

To be able to write an efficient and effective business letter, you have to know your purpose for writing one. It can be informational, persuasive, motivational or promotional. You have to know that there are business letter formats that you can follow. With the format, it is now easier to make a letter that looks and sound professional. But the format does not include the words that you are going to write.

Just remember that you should use words that are clear and concise. Never be vague especially if you are trying to ask something from your recipient. Most people will not have the patience or the time to decipher what you are saying. Besides, nobody assumes in the corporate world. So many mistakes have already been made when one assumes or guesses what the other party wants. Just make your point in as less words as possible. Do not put unnecessary details into your letter.

So even if you are writing a complaint letter, remember to always remain professional. Simply state the problem, remain polite and respectful and do avoid threats and most especially curse words. Do not worry because once you get a hold of a business letter format, writing your business letter will become a breeze.

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The Correct Business Letter Format Should Be Used

Knowing how to write a business letter is important especially if you are in a business. How the words are constructed together and the template itself is different from any other letter. Although how it is done would depend on the type of the business relationship between the one company and its recipients. There are many types of business letters. One thing is for sure, whatever type is used; it uses formal language and 8 1/2″ by 11″ unlined paper.

There are a lot of business letter formats that can be used. However, the block format is the simplest and the most widely used amongst all of them. Just keep the following things in mind since they are quite common in all of them: the return address of the letter writer should be indicated, the date of the letter, the complete name, title and address of the recipient should be indicated and the appropriate salutation with a colon should be used. Do not forget that the body of the letter should be short. Businessmen especially the owners do not have the time to read a long letter. In fact, it should not have more than 4 paragraphs.

Actually there is a preformatted business letter format that you can always use to help you out. It will make sure that your letter has the right space in between paragraphs, the right margins and size of the indentation and even the right font and its size. It is important that use the correct business letter format because of the impression that it will give your recipient about you and your business.

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