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Real Estate Credit Investments NAV rises to EUR1.69 per ordinary share

May 10th, 2011

Real Estate Credit Investments NAV rises to EUR1.69 per ordinary share

Real Estate Credit Investments, the Cheyne Capital managed investment company formerly known as Queen’s Walk, has reported an increase in net asset value from EUR1.59 to EUR1.69 per ordinary share since its recent fundraising.

The company’s net profit was EUR3.1m for the quarter ended 30 September 2010, compared to a net profit of EUR2.8m for the quarter ended 30 June 2010. This represents the fifth consecutive quarter the company has recorded a profit.

The investment portfolio generated gross cash flows of EUR4.5m in the quarter compared with an estimate of EUR3.5m and EUR6.1m received in the previous quarter.

Subsequent to the extraordinary dividend of 14.5 cents per share already paid for the period 1 April 2010 to 15 September 2010, the company has not declared an ordinary dividend for the second quarter. The company has announced a preference dividend of 2.3p for the period 16 September 2010 to 31 December 2010 and currently intends to declare a second interim ordinary dividend in due course.

RECI is delivering on the objectives it laid out in September 2010. The EUR26.6m capital raising that was completed on 15 September 2010 has put the company in a position to invest in undervalued real estate debt.

As at 30 September, the real estate debt portfolio was valued at EUR37.4m, or 37 per cent of the investment portfolio, up from 31 per cent three months earlier.

RECI made EUR9.8m of new bond purchases in the three months to 30 September. From 1 October to 15 November 2010, the company has purchased a further EUR15.4m of bonds, increasing the overall fair value of the real estate debt portfolio to EUR52.9m or 45 per cent of the investment portfolio.

Tom Chandos, chairman of Real Estate Credit Investments, says: “It is a sign of the growing strength of Real Estate Credit Investments that it has delivered a fifth consecutive quarter of profit while laying the foundations for future growth with fresh investments in the real estate debt portfolio.”

Real Estate Credit Investments Limited (RECI) is a Guernsey-incorporated investment company listed on the main market of the London Stock Exchange.

Article from articlesbase.com

Posted in Capital Raising | Tags: Credit, Estate, EUR1.69, investments, ordinary, Real, rises, Share | No Comments »

Credit Rating Agencies – Need for Reform

February 2nd, 2011

Credit Rating Agencies – Need for Reform

Credit Rating Agencies – Need for Reform

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Home Page > Business > Credit Rating Agencies – Need for Reform

Credit Rating Agencies – Need for Reform

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Posted: Oct 19, 2007 |Comments: 0
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Credit Rating Agencies (CRAs) – Need for Reform

1. Crisis – Spotlight on CRAs

“Credit-rating agencies use their control of information to fool investors into believing that a pig is a cow and a rotten egg is a roasted chicken. Collusion and misrepresentation are not elements of a genuinely free market ” – US Congressman Gary Ackerman

The smooth functioning of global financial markets depends in part upon reliable assessments of investment risks, and CRAs play a significant role in boosting investor confidence in those markets.

The above rhetoric although harsh beckons us to focus our lens on the functioning of credit rating agencies. Recent debacles as enunciated below make it all the more important to scrutinize the claim of CRAs as fair assessors.

i) Sub-Prime Crisis: In the recent sub-prime crisis, CRAs have come under increasing fire for their covert collusion in favorably rating junk CDOs in the sub-prime mortgage business, a crisis which is currently having world-wide implications. To give some background, loan originators were guilty of packaging sub-prime mortgages as securitizations, and marketing them as collateralized debt obligations on the secondary mortgage market. CRAs failed in their duty to warn the financial world of this malpractice through a fair and transparent assessment. Shockingly, they gave favorable ratings to the CDOs for reasons that need to be examined.

ii) Enron and WorldCom: These companies were rated investment grade by Moody’s and Standard & Poor’s three days before they went bankrupt. CRAs were alleged to have favorably rated risky products, and in some instances put these risky products together for a fat fee.

There may be other over-rated Enron’s and WorldComs waiting to go bust. CRAs need to be reformed to enable them pin-point such cancer well-in-advance thereby increasing security in the financial markets.

2. Credit Ratings and CRAs

i) Credit rating: is a structured methodology to rank the creditworthiness of, broadly speaking an entity, or a credit commitment (e.g. a product), or a debt or debt-like security as also of an Issuer of an obligation.

ii) Credit Rating Agency (CRA): is an institution specialized in the job of rating the above. Ratings by CRAs are not recommendations to purchase or sell any security but just an indicator.

Ratings can further be divided into

i) Solicited Rating: where the rating is based on a request say of a bank or company and which also participates in the rating process.

ii) Unsolicited Rating: where rating agencies claim to rate an organisation in the public interest.

CRAs help to achieve economies of scale as they help avoid investments in internal tools and credit analysis. It thereby enables market intermediaries and end investors to focus on their core competencies leaving the complex rating jobs to dependable specialized agencies.

3. CRAs of note

Agencies that assign credit ratings for corporations include

A. M. Best (U.S.)

Baycorp Advantage (Australia)

Dominion Bond Rating Service (Canada)

Fitch Ratings (U.S.)

Moody’s (U.S.)

Standard & Poor’s (U.S.)

Pacific Credit Rating (Peru)

4. CRAs – Power and Influence

Various market participants that use and/or are affected by credit ratings are as follows

a) Issuers: A good credit rating improves the marketability of issuers as also pricing which in turn satisfies investors, lenders or other interested counterparties.

b) Buy-Side Firms : Buy side firms such as mutual funds, pension funds and insurance companies use credit ratings as one of several important inputs to their own internal credit assessments and investment analysis which helps them identify pricing discrepancies, the riskiness of the security, regulatory compliance requiring them to park funds in investment grade assets etc. Many restrict their funds to higher ratings which makes them more attractive to risk-averse investors.

c) Sell-Side Firms : Like buy-side firms many sell side firms like broker-dealers use ratings for risk management and trading purposes.

d) Regulators: Regulators mandate usage of credit ratings in various forms for e.g. The Basel Committee on banking supervision allowed banks to use external credit ratings to determine capital allocation. Or to quote another example, restrictions are placed on civil service or public employee pension funds by local or national governments.

e) Tax Payers and Investors: Depending on the direction of the change in value, credit rating changes can benefit or harm investors in securities through erosion of value and it also affects taxpayers through the cost of government debt.

f) Private Contracts: Ratings have known to significantly affect the balance of power between contracting parties as the rating is inadvertently applied to the organisation as a whole and not just to its debts.

Rating downgrade – A Death spiral:

A rating downgrade can be a vicious cycle. Let us visualise this in steps. First a rating downgrade happens. Banks now want full repayment anticipating bankruptcy. Company may not be in a position to pay leading to a further rating downgrade. This initiates a death spiral leading to the companys’ ultimate collapse and closure.

Enron faced this spiral where a loan clause stipulated full repayment in the event of a downgrade. When downgrade did take place, this clause added to the financial woes of Enron pushing it into deep financial trouble.

Pacific Gas and Electric Company is another case in point which was pressurised by aggrieved counterparties and lenders demanding repayment thanks to a rating downgrade. PG&E was unable to raise funds to repay its short term obligations which aggravated its slide into the death spiral.

5. CRAs as victims

CRAs face the following challenges

a) Inadequate Information: One complaint which CRAs have is their inability to access accurate and reliable information from issuers. CRAs cry that issuers deliberately withhold information not found in the public domain for instance undisclosed contingencies which may adversely affect the issuers’ liquidity.

b) System of compensation: CRAs act on behalf of investors but they are in most cases paid by the issuers. There lies a potential for conflict of interest. As rating agencies are paid by those they rate and not by the investor, the market view is that they are under pressure to give their clients a favourable rating – else the client will move to another obliging agency. CRAs are plagued by conflicts of interest that might inhibit them from providing accurate and honest ratings. There are conflicting noises with some CRAs admitting that if they depend on investors for compensation, they would go out of business. Others strongly deny conflicts of interest defending that fees received from individual issuers are a very small percentage of their total revenues so that no single issuer has any material influence with a rating agency.

c) Market Pressure : Allegations that ratings are expediency and not logic-based and that they would resort to unfair practices due to the inherent conflict of interest are dismissed by CRAs as malicious because the rating business is reputation based and incorrect ratings may lower the standing of the agency in the market. In short reputational concerns are sufficient to ensure that they exercise appropriate levels of diligence in the ratings process.

d) Ratings over-emphasised: Allegations float that CRAs actively promote an over-emphasis of their ratings and encourage corporations to do like-wise. CRAs counter saying that credit ratings are used out of context through no fault of their own. They are applied to the organizations per se and not just the organizations’ debts. A favourable credit rating is unfortunately used by companies as seals of approval for marketing purposes of unrelated products. A user needs to bear in mind that the rating was provided against the stricter scope of the investment being rated.

6. CRAs as Perpetrators

a) Arbitrary adjustments without accountability or transparency: CRAs can downgrade and upgrade and can cite lack of information from the rated party, or on the product as a possible defence. Unclear reasons for downgrade may adversely affect the issuer, as the market would assume that the agency is privy to certain information which is not in the public domain. This may render the issuers security volatile due to speculation.

Sometimes eextraneous considerations determine when an adjustment would occur. Credit rating agencies do not downgrade companies when they ought to. For example, Enron’s rating remained at investment grade four days before the company went bankrupt, despite the fact that credit rating agencies had been aware of the company’s problems for months.

b) Due diligence not performed: There are certain glaring inconsistencies which CRAs are reluctant to resolve due to the conflicts of interest as mentioned above. For instance if we focus on Moody’s ratings we find the following inconsistencies.

All three of the above have the same capital allocation forcing banks to move towards riskier investments.

c) Cozying up to management: Business logic has compelled CRAs to develop close bonds with the management of companies being rated and allowing this relationship to affect the rating process. They were found to act as advisors to companies’ pre-rating activities and suggesting measures which would have beneficial effects on the companys’ rating. Exactly on the other extreme are agencies which are accused of unilaterally adjusting the ratings while denying a company an opportunity to explain its actions.

e) Creating High Barriers to entry : Agencies are sometimes accused of being oligopolists, because barriers to market entry are high and rating agency business is itself reputation-based (and the finance industry pays little attention to a rating that is not widely recognized). All agencies consistently reap high profits (Moody’s for instance is greater than 50% gross margin), which indicate monopolistic pricing.

f) Promoting Ancillary Businesses: CRAs have developed ancillary businesses like pre-rating assessment and corporate consulting services to complement their core ratings business. Issuers may be forced to purchase the ancillary service in lieu of a favorable rating. To compound it all, except for Moody’s all other CRAs are privately held and their financial results do not separate revenues from their ancillary businesses.

7. Some Recommendations

a) Public Disclosures: The extent and the quality of the disclosures in the financial statements and the balance sheets need to be improved. More importantly the management discussion and analysis should require disclosure of off-balance sheet arrangements, contractual obligations and contingent liabilities and commitments. Shortening the time period between the end of issuers’ quarter or fiscal year and the date of submission of the quarterly or annual report will enable CRAs to obtain information early. These measures will improve the ability of CRAs to rate issuers. If CRAs conclude that important information is unavailable, or an issuer is less than forthcoming, the agency may lower a rating, refuse to issue a rating or even withdraw an existing rating.

b) Due Diligence and competency of CRAs Analysts: Analysts should not rely solely on the words of the management but also perform their own due diligence by scrutinising various public filings, probing opaque disclosures, reviewing proxy statements etc. There needs to be a tighter (or broader) qualification to be a rating agency employee.

c) Abolition of Barriers to Entry: Increase in the number of players may not completely curtail the oligopolistic powers of the well-entrenched few but at best it would keep them on their toes by subjecting them to some level of competition and allowing market forces to determine which rating truly reflects the financial market best.

d) Rating Cost: As far as possible, the rating cost needs to be published. If revealing such sensitive information raises issues of commercial confidence, then the agencies must at least be subject to intense financial regulation. The analyst compensation should be merit-based based on the demonstrated accuracy of their ratings and not on issuer fees.

e) Transparent rating Process: The agencies must make public the basis for their ratings including performance measurement statistics historical downgrades and default rates. This will protect investors and enhance the reliability of credit ratings. The regulators should oblige CRAs to disclose their procedures and methodologies for assigning ratings. The rating agencies should conduct an internal audit of their rating methodologies.

f) Ancillary Business to be independent: Although the ancillary business is a small part of the total revenue, CRAs still need to establish extensive policies and procedures to firewall ratings from the ancillary business. Separate staff and not the rating analysts should be employed for marketing the ancillary business.

g) Risk Disclosure: Rating agencies should disclose material risks they uncover during the risk rating process or any risk that seems to be inadequately addressed in public disclosures, to the concerned regulatory authority for further action. CRAs need to be more proactive and conduct formal audits of issuer information to search for fraud not just restricting their role to assessing credit-worthiness of issuers. Rating triggers (for instance full loan repayment in the event of a downgrade) should be discouraged wherever possible and should be disclosed if it exists.

These measures if implemented can improve market confidence in CRAs, and their ratings may become a key tool for boosting investor confidence by enhancing the security of the financial markets in the broadest sense.

List of resources

i) http://www.zyen.com/Knowledge/Articles/assessing_credit_rating_agencies.htm

ii) http://www.chasecooper.com/News-Regulatory-Basel-II-2007-10-01.php

iii) http://www.blackwell-synergy.com/doi/abs/10.1111/j.1468-0491.2005.00284.x?cookieSet=1&journalCode=gove

iv) http://www.house.gov/apps/list/speech/ny05_ackerman/WGS_092707.html

v) http://business.timesonline.co.uk/tol/business/industry_sectors/banking_and_finance/article2373869.ece

vi) http://www.cfo.com/article.cfm/9861731/c_9866478?f=home_todayinfinance

vii) http://en.wikipedia.org/wiki/Credit_rating_agency

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Nagraj Gummala -
About the Author:

Nagraj Gummala has been in the Banking & Financial services domain for almost 6 years and is currently working in Cognizant Technology Solutions (Switzerland) as a Senior Business Analyst in the Basel II Risk Management division. He has written several papers on credit risk, his current area of interest being credit derivatives with specific focus on pricing of options and futures. Nagraj is a mechanical engineering graduate from IIT, Mumbai and a management post-graduate from IIM, Bangalore.

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Middle East Economies Beating Credit Crunch

December 23rd, 2010

Middle East Economies Beating Credit Crunch

Middle East Economies Beating Credit Crunch

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Home Page > Business > International Business > Middle East Economies Beating Credit Crunch

Middle East Economies Beating Credit Crunch

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Posted: Jul 25, 2008 |Comments: 0
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US$ 4.72 billion in capital raised showing strong economic sentiment.

The Middle East markets raised US$ 4.72 billion from 13 IPOs in the second quarter of 2008 compared to US$ 3.9 billion in the same period in 2007.

The capital raised was 20% higher than amounts raised in the first quarter of 2008.

The figures were today announced by Ernst & Young today.

Saudi Arabia’s Al Inma Bank was the largest IPO in the Middle East in the second quarter of 2008 raising US$ 2.8 billion which amounted to 60% of the total funds raised.

Saudi Arabia’s Rabigh Refining and Petrochemical Company and Mobile Telecommunications Company Saudi Arabia combined accounted for 75% of the capital raised in the first quarter of 2008.

Other large IPOs in the region included Mohammad Al Mojil Group with US9.94 million.

The UAE’s DEPA United Group raised US2.3 million and was followed by two Egyptian companies – Palm Hills Developments with US8.22 million and Maridive and Oil Services with US2.93 million.

According to Azhar Zafar, Head of Mergers & Acquisitions, Ernst & Young Middle East, “There were 52 IPOs during 2007 and in the first half of 2008 there have been 26. The total capital raised in the first half of 2008 amounted to US.69 billion compared to US.83 billion from 33 IPOs during the same period last year.

The trend in the market is fewer but larger IPOs. IPOs continue to be oversubscribed in most instances, which reflects the continued appetite for IPOs in the market, for now.”

Phil Gandier, Head of Transaction Advisory Services for Ernst & Young Middle East, added, “although the drop in number and amount of capital raised in IPOs has been more severe in mature global markets, the region has shown some resilience as a result of liquidity created on the back of continuously increasing oil prices.

Less uncertainty in the East

Gandier said expectations for the rest of the year remain optimistic due to the large number of announced and to-be-announced IPOs. Companies that have either withdrawn or postponed their IPOs would revisit going public once they realize that market conditions in the Middle East region are less fraught with the uncertainty that is persisting in other regions.

Globally, the size of IPOs taken for two quarters on aggregate was roughly half as much as the 2007 while more IPOs have been postponed or withdrawn in the first six months of 2008 (177) than in all of 2007 (169).

In the second quarter of 2008, a total of 258 IPOs worldwide raised US.4 billion in capital. This compares with 247 IPOs worth US.2 billion in the previous quarter. However, compared with the same quarter in 2007, total capital raised fell by 59% (from US.4 billion to US.4 billion) and the number of deals more than halved (from 567 to 258). The BRIC states (Brazil, India, China and Russia) accounted for 76 deals worth .8 billion in the second quarter.

Emerging markets continued to drive activity in the second quarter with China leading the way in both value (US.2 billion) and volume (56 IPOs). Seven of the top 10 and 15 of the top 20 IPOs by capital raised were from emerging markets.

Four countries accounted for half of the capital raised globally: China (US.2 billion); Brazil (US.6 billion); United States (US.3 billion); and Saudi Arabia (US.4 billion). The most active countries in terms of number of deals were China (56); Poland (21); and Australia, South Korea and India (17).

Using a Business Line of Credit for Startup Capital

October 20th, 2010

Using a Business Line of Credit for Startup Capital

Although not the most common method of acquiring startup capital, using a business LOC as financing to launch your business venture is not uncommon. As we have discussed in previous articles, there are a number of different method of financing your new business venture including using your own capital, raising money from private investors, or taking out a lump sum business loan.

However, using a business line of credit gives you more control over your business development. If you intend to build your business over a period of time then it may be to your advantage to use a business LOC versus as business loan. This allows you to only draw down the funds as needed, and you will only be required to pay interest on the portion of principal that you have drawn down. Although many new entrepreneurs seek to acquire all of the funds that they need via a traditional business loan, the flexibility of a business line of credit is often overlooked. When developing your business plan, you should entertain the concept of using a term based credit line rather than a business loan. Again, your accountant or financial advisor can assist you in making the proper determination of whether or not using a line of credit is more appropriate than a standard lump sum based credit facility.

One of the draw backs to using a business LOC as startup capital is the ever changing lending environment. Often, business lines of credit contain covenants that state that a bank can terminate the loan if certain business criteria are not met. These criteria can include depreciation of collateral, not producing enough positive cash flow, and changes in the credit quality of the borrower. However, with the recent passing of the credit reform act in 2010, regulations have begun to favor the small business borrower.

Business LOC is a specially designed website for entrepreneurs that are seeking to raise capital for their startups, small businesses, and expanding existing businesses. The focus of the site is on Business Lines of Credit.

Posted in Uncategorized | Tags: business, capital, Credit, Line, startup, Using | No Comments »

Credit card debt help

September 14th, 2010

Credit card debt help

Debt Consolidation – The Options You Have

With consumer borrowing at an all point high the nation is riddled with debt.Visit Here http://gov-debt-grantbenefit.blogspot.com

This coupled with the sharp evolvement network sway rates has meant that several people are struggling to keep development with their scandal sheet payments. If you are in debt thus you are not alone.

You have a teem with of options to wax debt free and financially stable again. You need to lap up each of these options carefully again go into sure you choose the best one to fit your circumstances. Below is a brief overview of the options you consider available, remember to always research clever utility before manufacture a decision.

Debt Management Plans

A debt power plan is an informal adjudicature between a lender and a customer to repay debts at a lower refund sabotage than contracted for, which is usually around three percent per month of the bad balance. ofttimes debt management plans can be considered in the later circumstances:

# Debts are less than 20,000.

# There is a monthly surplus of at least 200 – 250 to offer creditors.

# If you importance skin 1 percent or more of the outstanding debt per month.

# If you are a homeowner and there is cramped charter in the property.

# If smaller debts engagement be unlocked within a couple of months.

# If debts may reproduce airy in less than 60 months.

# If the debtor is a tenant.# If debts are normally affordable but arrears be credulous occurred.

Individual especial Arrangement (IVA)

An Individual clear Arrangement or IVA is an alternative to bankruptcy, it is an offer by an you to your unsecured creditors in command to settle debts. The minimum remuneration (called a proceeds) that the creditors cede agree to is twenty five pence in the pound.

The process involves preparing a invoice of affairs besides referring the position to an Insolvency Practitioner (IP), who is usually a Chartered Accountant who specialises in insolvency. The IP puts together a proposal for the creditors, sway order for the IVA to be accepted, seventy five percent in value of the creditors must vote to accept the IVA.Generally the IVA involves a monthly payment from your surplus attainment in that a five year phrase. material could also sit on capital raised from your assets undifferentiated as the introduction of equity from your property.Usually the IP will charge fees as a knot sum (between 2000 to 3000) up front, some take their fees from the monthly contributions. efficient are further disparate fees involved.

You can use the following checklist as a rule of thumb to establish whether an IVA might express the unrivaled sense for you:

# Debts aremore than 20,000.

# There are additional than 5 creditors.

# The minimum ice to creditors is twenty five pence guidance the pound

# Debtor has no reserves (eg is a tenant).

# Debt has sufficient income to banknote 225 to 250 per month.

# Debts will take longer than 60 months to halcyon hold the normal way.

Banks also mismated lenders have turn out supplementary besides more frustrated suppress IVAs. This is because they have turn into further commonplace in society, which means they are writing of more debts. Some people use an IVA as the easy way out, when previously they would have found a path to pay of the debts in the ingrained construct or stand together on a deal with the lender.Visit Here http://gov-debt-grantbenefit.blogspot.com

I am a Freelancer Writer since 5 years.

Posted in Uncategorized | Tags: card, Credit, Debt, Help | No Comments »

Advantages and Disadvantages of Factoring & Asset Based Lines of Credit

September 13th, 2010

Advantages and Disadvantages of Factoring & Asset Based Lines of Credit

What is Asset-Based Lending?

Asset-based financial services organizations (asset-based lenders) play a vital part in financing the economy and are dedicated to the growth and well-being of their clients. They provide their clients with cash by lending on fixed assets, accounts receivable and inventory, and engage in factoring, purchase order financing, real estate financing and leasing. They include the asset-based lending arms of domestic and foreign commercial banks, small and large independent finance companies, floor plan financing organizations, factoring organizations and financing subsidiaries of major industrial corporations.

Expert in all facets of collateralized lending, asset-based lenders – large and small alike – possess the experience and know-how to structure the proper financing program for their borrowers. They specialize in financing businesses and business transactions involving a broad range of products and services, both domestically and internationally. They provide:

Operating cash

Funding for an acquisition, a merger or a leveraged buyout

Debt consolidation

Turnaround financing

Bankruptcy/reorganization financing

Equipment financing

Inventory financing

Floor plan financing

Equipment leasing

Import/export trade financing

Growth financing

Factoring services

Growth Money

Businesses need money to grow. A business cannot survive just because it has a better product, an exclusive market or the best method of distribution. The catalyst required for progress is money.

Business owners and managers must be knowledgeable about financing, what it can do, why one form may be better than another. It can be used when:

Operating cash is tied up in receivables

The best trade terms for supplies create cash flow shortages

Inventory levels are high because of client demands

Sales growth is straining resources

Seasonality peaks cause problems

No fixed assets are available for collateral

Trade discounts and special pricing terms cannot be obtained

Letters of credit are required to supply or buy overseas

Debtor-in-possession financing is required

Asset-based lenders often advance funds when traditional sources are not available. They are familiar with various types of businesses and are responsive to client needs.

Loan size

Asset-based lenders fund businesses with annual sales less than ,000 to more than billion. Credit depends on the type of business and the content and quality of the collateral. Frequently, the credit granted is more than the net worth of the business.

The increased cash availability provided by asset-based lenders often makes the difference between profitable growth and failure for the undercapitalized business.

The phrases “too small,” “too new,” and “not enough net worth,” do not deter an asset-based funding source.

The flexibility and cash availability provided by asset-based financing have enabled countless companies to grow and take advantage of market opportunities.

Cost

The cost of asset-based loans is influenced by the credit risk and collateral associated with the transaction. When evaluating an asset-based loan, borrowers should assess the cost of financing in the context of the benefits to be received. Compared with other financing alternatives, asset-based lending is very cost effective and efficient.

Asset-based lenders frequently look beyond financial statements to determine how much money they are prepared to advance at and after closing. Therefore, borrowers can take advantage of profit opportunities in the market by being able to plan ahead based upon their cash availability.

Asset-based lenders are proactive rather than reactive and can often restructure debt during tough times to help avoid costly and disruptive refinancing.

Over the long haul, the benefits will tend to offset the premiums associated with borrowing from the asset-based financial services industry.

Types of Asset-Based Financing

Secured lending

The lender provides funds secured by the assets of the borrower. The collateral can include: accounts receivable, inventory, machinery, real estate, patents, trademarks or other assets where value can be determined.

The secured lender may establish a revolving loan where the borrower provides a pool of collateral that the lender translates into operating cash or working capital. The borrower uses the financing to buy more materials, expand marketing, improve productivity or other improvements and sells the resultant product. The sales create receivables that are pledged for cash advances and the payments received on the invoices pay down the loan. These increases and reductions in the loan balance are cyclical, hence the revolving nature of the loan.

Some receivables have less collateral value, for example, progress billing, past due receivables, and receivables subject to “set-off”. Raw materials and finished goods are normally acceptable collateral, but work-in-progress generally is not. Equipment and real estate may also be used as a source of financing.

Non-recourse factoring: The financing institution buys the receivable and assumes the risk of customer credit. The factor guarantees against credit loss, unlike a secured lending facility. The factor will also check credit, undertake collection and manage bookkeeping functions.

Full-recourse financing: The financing institution accepts assignment of the receivable but does not assume the credit risk. The client retains responsibility for managing the receivable portfolio. Generally, the lender will finance invoices up to ninety days from delivery of goods or services, then charge them back to the client.

Discount factoring: The factor purchases the receivables at a discount to compensate for paying prior to the due date.

Maturity factoring: The factor purchases the receivables, assumes the credit risk and advances cash to the client as the invoices mature.

Non-notification factoring: Account debtors are not notified of the sale of the receivables and the invoices are either paid to a lock-box or to the shipper. This is similar to a receivable loan.

Notification factoring: Account debtors are notified of the purchase of the receivables and are directed to make payments to the factor.

Spot factoring: A “one shot” transaction, generally out of the normal course of business.

Floor plan financing: Certain industries require significant high-priced finished goods inventory. Examples: automobiles, refrigerators, washing machines, televisions and stereo systems. These are supplied on extended credit terms to retailers. Retailers usually do not purchase this expensive inventory outright; rather a finance company will provide credit to purchase the inventory, secured by the product “on the floor”.

Leasing: The lessor purchases the equipment needed to fulfill certain obligations and the equipment remains the property of the lessor even after all the borrowed funds are repaid; or existing assets are sold to and leased from a leasing company to release capital needed for working capital purposes.

Purchase order financing: Working capital financing is secured by a security interest in existing purchase orders and the proceeds of the purchase orders. Normally the security interest is perfected by the lender taking possession of the inventory or raw materials.

Real estate financing: the mortgaging of land and/or buildings to raise working capital.

More about factoring

The origin of the factoring industry has been traced to the days of the Roman Empire or even earlier, but the industry as we know it today in the United States goes back only about 200 years to the early nineteenth century.

Factors evolved from U.S. selling agents for European textile mills. The European mills used the agents to sell their fabrics in the U.S. and paid the agents a commission on sales. The agents also warehoused merchandise and did the shipping for their European clients. As these selling agents prospered and became more familiar with their own customers, they began taking on the job of establishing credit terms and advancing funds to the European mills. The oldest documented factoring firm traced its roots to 1810 and several others were established in the first half of the nineteenth century.

Traditional or old-line factoring is fairly straightforward and is designed for long-term relationships. It involves the purchase of receivables without recourse and with notification to the client’s customer. The factor buys the receivables created by a client’s sales and then collects the proceeds directly from the client’s customer. After the factor buys a receivable, it assumes the credit risk on that receivable. If the client’s customer doesn’t pay because of a credit problem, the factor must assume the loss.

Essentially, an old-line factor offers its clients credit protection, collection, bookkeeping services and financing. In addition to advances against receivables purchased, once a relationship is established, factors often provide clients with over-advances during peak shipping seasons. Factors also offer financing services and accommodations such as inventory loans, letters of credit/import financing and equipment financing. Export financing is also available through alliances with international factoring networks. Principally because credit guarantees are important in textiles and apparel and because of factoring’s roots in the textile industry, about 70 percent of the volume of old-line factors is still in textiles, apparel and related industries.

Since the factor takes the credit risk on the sale, it must first approve the sale through its credit department. Thus, the client is relieved of the cost of running a credit department. Because of the credit guarantee, old-line factoring is limited to industries in which credit information is available. The charge for the credit and collection service, called the factoring commission, varies with the sales volume of the client, the size of the transactions and competitive conditions.

The economic rationale for the factoring service is fairly obvious. With thousands of suppliers selling to the same customer, without factoring, each seller would have to do its own credit appraisals and collections. This involves an incredible duplication of effort. With factoring, a single credit department operating for hundreds or thousands of suppliers, eliminates much of the duplication and promotes efficiency. And with the aid of electronic data processing, the cost of the credit and collection operation has been reduced exponentially and the savings are passed on to the client. Technology has revolutionized the industry, eliminating tons of paperwork and providing clients with valuable on-line information. The system can generate a host of reports on sales analysis and other information to help a client analyze its own business.

It should be noted that the factor’s guarantee, is a credit guarantee and does not apply to anything other than the financial inability of the client’s customer to pay. The guarantee does not apply to merchandise disputes between the buyer and the seller. If the receivable is not paid because of buyer claims of defective merchandise or untimely delivery or any other dispute involving the merchandise or its delivery, the factor will look to the client (the seller) for reimbursement.

The credit and collection service is just half of the business of the old line factor. The other half, and for many clients, the more important half, involves advances of funds against the purchased receivables. If the customer wants a cash advance, it can borrow from the factor. The interest on the loan is in addition to the commission and is usually at a rate competitive with the cost of a comparable bank loan.

Many factoring clients are maturity or non-borrowing clients. They wait until the purchased receivables are paid and then may collect the proceeds from the factor. If the client leaves the funds with the factor after collection, the factor will pay interest on the balances at a rate comparable with the factors’ cost of funds. These balances may be drawn upon when needed.

Traditionally, factoring was done on a notification basis. The client’s customer is notified that the account has been turned over to a factor and the customer’s payment should be made directly to the factor. However, a non-notification agreement can be worked out. The factor would still purchase the receivables outright after doing the normal credit check of the customer, but the customer wouldn’t be notified that its account has been sold. If the client borrows money, customer payments in non-notification accounts are usually sent to lock-boxes which the factor administers.

Aside from old-line factoring, there are as many variations on factoring as there are entrepreneurs who choose to use the name. There are commercial finance companies, some of which call themselves factors, single-invoice factors, purchase order factors, recourse factors, invoice discounters and re-factors.

• Commercial finance companies do not provide credit guarantees, but lend against collateral, principally receivables and inventory, and are an offshoot of the factoring industry and go back to the beginning of the twentieth century. Largely because the commercial finance companies operate in diverse industries in contrast with traditional factoring which is still largely married to textiles and apparel because of the need for credit guarantees in those industries, it has grown much more rapidly than traditional factoring. Rather than purchasing receivables, commercial finance companies take assignments of receivables as collateral for loans. The client collects the receivables proceeds and uses the funds to pay down the loan. Defaulted receivables are the client’s problem (but could be the lender’s problem if defaults are substantial). The lender normally provides enough of a cushion so that if the client fails to repay the loan, the collateral can be liquidated and provides full payment.

• Single-invoice factors provide essentially the same services as the old-line factors but they do it one invoice at a time. Also, there are very few non-borrowing clients for single-invoice factoring because a company that factors a single invoice usually is motivated by the need for financing.

• While factors finance receivables after they are created, purchase-order factors provide financing so clients can fill orders that they cannot finance on their own. Once the order is filled and is converted to a receivable, a traditional factor might purchase the receivable and cash out the purchase order factor.

• Recourse factors are usually small factoring companies that purchase receivables often in non-traditional industries where credit information is not readily available. They buy the receivables but those that are unpaid are charged back to the client.

• Invoice discounting is similar to the recourse factoring and is prevalent in England and some other European countries. The invoice discounter buys receivables, but rather than focusing on the credit worthiness of the client’s customer, they concentrate on whether the contract creating the receivable allows sale or assignment. Non-paying receivables are charged back to the client.

• Re-factors provide the same services as old-line factors, but they work with small companies, sometimes with sales volume as low as 0,000 (generally large factors need at least million in volume). The re-factors provide the financing, but use the services of traditional factors to handle the credit checking and credit guarantees. They make their money from interest on money advanced and a spread between the re-factors commission cost and what it charges its own clients.

Accessing finance can be a real problem for many small businesses, especially if they are growing fast. One option many businesses don’t consider is factoring, or cash-flow lending as it is sometimes called.

While not suitable for every business, factoring can provide a revolving line of credit and a reduction in administrative costs.

Factoring involves the sale of a business’ book debts on a continuing basis. Usually, the factoring firm will buy the business’ sales invoices at a discount of between 70 and 90 percent. The factor then collects the invoice amounts from the business’ customers. The business receives the cash, less the discount, from a credit sale quickly (usually within 24 to 48 hours) and maintains a healthy cash-flow even though the debtors may not pay for the sale for another 60 days or so.

Usually, the factoring firm takes the difference as profit; however some factor companies prefer to provide a percentage up front, the remainder on collection, and charge interest and fees on the transaction.

The use of credit cards in the retail industry is a form of consumer factoring, where the retailer is paid immediately for goods or services and the credit card company collects the payment from the customer. Some US banks offer asset-based cash-flow lending but have generally found limited interest in the products – with many businesses put off by higher interest rates charged to reflect the risk of lending against assets not secured by property.

Several Options

Factoring firms can offer several levels of service. The premier service usually involves taking over the complete management of the business’ accounts receivable, including administration, confirmation, and collection of invoices, regular reports and monthly ageing reports on all accounts processed.

This is usually coupled with a seamless, confidential service, where the customer of the business is unaware of the relationship between the business and the factor and all communication between the factor and the customer is branded as the business. In other cases, the factor may only take over aspects of the accounts receivable function.

The level of service provided by the factor is often related to the value of the debtors book.

While it may appear complicated at first, outsourcing accounts receivable can significantly reduce costs. More importantly, it is particularly useful for businesses that are growing or moving in a different direction with a view to improving profitability. A growing business can quickly outgrow an overdraft secured by fixed assets, yet it may not be able to obtain finance on an unsecured basis.

A business may also need the flexibility to cover sudden increases in order levels. Factoring provides funding in line with sales growth.

This form of finance can also be useful for start-up businesses that need to pump cash back into their business to build their inventory, but have difficulty obtaining overdraft or working capital facilities due to a lack of trading history.

Service, manufacturing and wholesale businesses are often suited to this type of finance.

Businesses that mainly sell on cash terms to the general public may find credit cards or overdrafts more cost effective. Those with complex products or terms of sale such as trial and return clauses or those in the construction industry, where customers are invoiced in stages, are also less suited to factoring due to the complexity of the supplier/customer relationship.

Pros & Cons

As with all business finance, factoring offers advantages, disadvantages and potential pitfalls.

The level of benefit from factoring will vary from business to business.

But it usually provides:

* Immediate cash-flow access to 70-90 percent of the value of debtor invoices.

* Working capital for growth without requirements for a strong balance sheet or substantial net worth.

* A good interface with the supplier and, as a result, a seamless transaction for the customer.

* Outsourced debtor administration and associated cost savings.

* The ability to increase sales by offering credit which the business may have been unable to fund otherwise.

* The ability to take advantage of creditor discount terms, improve credit rating by being able to pay creditors promptly and an enhanced ability to capitalize on larger orders as required.

* The option to free up property from being tied as security.

Some issues that should be considered if looking at factoring as an option include:

* Complexity. Rather than simplify the account-keeping, factoring may add complexity to the business depending on the level of integration of account-keeping processes.

* Culture. If the culture of the business and the factor are at odds, the arrangement may interfere with the relationship with customers.

* Bad Debts. In most cases, the business still wears the non-collection risk and may end up following a restrictive process to maintain the facility.

* Cost. It can be expensive depending on the interest and costs charged by the particular firm such as finance charges, administration charges, mailing charges, etc.

* Asset control. Some factors take a floating charge over all the business’ assets not just debtors. Consequently a business may need to obtain a release from the factor to sell any of its assets.

* Value. The factor may only finance a percentage of the debtor value and may undertake its own audit of the business’ accounts.

* Customer relations. Some factors will take over the entire debtor ledger which may cause difficulties if a business wishes to remain in control of some accounts that are particularly sensitive or vital to the business.

* Security. Some factoring firms now require small businesses to provide property as security in which case it may be cheaper and more effective to arrange a bank overdraft.

One of the most common traps for small businesses using factoring is the assumption that outsourcing the function means outsourcing the responsibility.

The benefit of using a factoring facility still depends on good management of debtors and the finances of the business. Every business must manage their terms of trade, and ensure the terms they offer and the credits they receive are appropriate for their particular business. They need an effective debt collection system and simple internal controls to prevent errors.

Factoring could cause additional problems for businesses without a good handle on cash-flow management and cost budgeting. They may find themselves in a downward spiral, spending debtor receipts on current overheads and not paying the current creditors and then wondering what went wrong. They need to understand the money flow of the business and use short-term funding such as factoring on short-term assets.

With good management, the use of factoring can be a very useful source of finance particularly for a young business that is growing fast. However, there are plenty of traps for the unwary, and as always, if in doubt get advice before committing to any form of finance.

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 ,000 to million per month at competitive pricing, and works to reduce your financing costs as your company grows. For more information about GFS, please visit our website: www.greggfinancialservices.com or email:gregg@greggfinancialservices.com

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