United Capital Funding

Collection related services and costs

Mark Mandula — Wed, 16 May 2012 19:14:41 +0000

With most bank lines of credit, the bank or lender requires that all payments are sent to them directly, either at the bank or by utilizing a lock box facility. In either case, the bank controls the collection process. This is usually not a negotiable item with the bank. In most cases, the bank passes through the cost of all of the fees related to the establishment, monitoring and services provided by the lock box. Again, it is quite common for the bank or lock box provider to also assess a per payment or collection fee.

It is nearly impossible to determine or provide an estimate about what these fees could cost. Each bank is different and in the event that the service is outsourced to a third party provider, it is logical to assume that the costs could be marked up by the bank to ensure some profit is earned on their relationship. If your business generated a large number of small invoices, beware that if you are charged a per collection fee, the cost could be significant.

Annual Line Fees

Mark Mandula — Tue, 15 May 2012 19:10:53 +0000

With most bank lines of credit, there are annual line fees that are a standard part of the terms of the loan. These are usually not a negotiable item with the bank. Given that many lines of credit have two or three years maturities, these can add up quickly. It is not uncommon to see annual line fees quoted as a percentage of the total approved credit facility of loan amount. While each bank is different, closing fees seem to average about .25% to 1% of the approved credit facility. In some cases, the annual line fee is a fixed, agreed amount that is not calculated as a percentage of the total credit facility.

In factoring, the contrast between the line of credit and factoring is quite clear. With most firms, there are never any annual line fees or renewal fees of any kind or scope. If you are required to pay these fees with a line of credit, they can significantly increase the true cost of the facility to your business. This is often overlooked by a business. In addition, if the amount of the approved line of credit is not large, the out of pocket costs that you will be required to pay initially, and then for each year might dramatically increase the effective cost of the funding.

Personal Guarantees, continued

Mark Mandula — Mon, 14 May 2012 19:09:14 +0000

With factoring, the contrast between the line of credit required to be personally guaranteed could not be starker. With most factoring agreements, there is NO personal guarantee required. What is required would be a reasonable validity statement signed by the owners of the business. This states that those receivables to be sold/acquire are valid, accurate and constitute a final sale to the purchaser.

Personal Guarantees, continued

Mark Mandula — Sun, 13 May 2012 19:01:15 +0000

The almost global requirement that all owner(s) personally guarantee a line of credit at a bank takes on a more potentially onerous tone when we think back to the results of the Pepperdine research that was previously discussed at length on my blog, for the following reason; recall that one of the most common spots where SME’s surveyed sought and secured capital was from “friends and family.”

This means that perhaps, friends and family become shareholders and are then potential exposed to being asked to personally guarantee a line of credit utilized by the business. Or consider the other side of this coin: by a bank having a blanket PG, does this weaken the business to be able to pay “friends and family” who thought that they were putting in capital for just a “short” time?

Again, as I mentioned in the last blog, it behooves all business owners to very carefully research all options when seeking capital for their businesses. Make sure you fully understand the risks and rewards before getting involved, either an equity participant, lender, guarantor or otherwise.

Personal Guarantees, continued

Mark Mandula — Sat, 12 May 2012 18:59:10 +0000

If your business has multiple owners, it is imperative that you understand and confirm exactly what you are getting yourself into before you sign any loan or line of credit document. Don’t assume that what you have been told, or believe the financial strength of your fellow owners is accurate. The bottom line is that if the bank calls your loan, you individually and collectively need to come up with the money.

Unfortunately, these kinds of discussions rarely occur, and if they do, can be a source of conflict and angst. If family is involved, there is another element of stress and anxiety that often prevents owners from discussing openly and honestly such issues.

The statement of the obvious is that when you personally guarantee any loan or line of credit, everything you have worked hard to achieve is at risk. Even the most creative asset protection strategy leaves you exposed. So carefully consider this as you research funding options for your business.

Personal Guarantees

Mark Mandula — Fri, 11 May 2012 18:56:58 +0000

With most lines of credit, the bank will require that the owner, owners, significant outside shareholders or directors personally guarantee the loan. It is true that in some cases, the bank will not require owners to personally guarantee the loan. However, particularly for SMEs, this is the exception rather than the rule.

It is common for many businesses to have more than one, or even many owners. Many may have different goals, financial needs, and capacity to repay a loan if your business has to, or is forced to at a less than desirable point in the year.

Collateral, continued

Mark Mandula — Thu, 10 May 2012 18:55:26 +0000

The other very important fact to consider is that once assets have been pledged to the bank to secure a line of credit, it is nearly impossible to get them released. Coupled with the fact that most lines of credit agreements require two or three years terms, this can eliminate any future borrowing on pledged collateral without prior approval by the bank. Again, there are very few banks that ever release previously pledged collateral without some other asset being added to replace the asset. This can seriously impact your ability to expand or cultivate other funding sources, such as equipment leasing firms, commercial mortgage providers and other sources of long term capital.

On the other hand, with factoring, the only collateral that is required to use this flexible funding tool is the purchased accounts receivables. This allows you maximum flexibility and does not eliminate the possibility that other assets can be collateralized in the future.

Collateral

Mark Mandula — Wed, 09 May 2012 18:53:39 +0000

With most bank lines of credit, the collateral requirement, or assets pledged to secure the line of credit are significant. From the bank’s perspective, the more collateral, the better. So in most cases, the collateral required is global, or 100% of all currently owned assets of the business. In addition, this commonly includes all future assets acquired, for the term of the line of credit.

While this might sound reasonable, the approved amount of the line of credit can be a small fraction of the value of what is required to be pledged as collateral.

Increase in the Credit Facility, continued

Mark Mandula — Tue, 08 May 2012 18:49:11 +0000

But let’s take a simple example to illustrate how dangerous this approach could be to the health of your business. Say you have been working on the ‘big deal’ for a long time, and one day you land it. But what happens if the amount of money you need to purchase the raw materials, hire people, produce the product or afford the increase in payroll is woefully short of what you have? The obvious answer would be to go back to the bank and request a significant increase in your line of credit.

Unfortunately, I have seen over and over again that while in theory this should be easy to do quickly and cost effectively, it rarely happens. Too many times the decision-making process at the bank, and the required timeframe for you to mobilize are weeks or months apart. In most cases, a significant, or even small, increase in your credit facility requires a complete new application, underwriting and approval process by the bank.

In addition, there are usually substantial fees to reapply with the bank. So your funds, already stretched by this new client get further depleted, causing additional risk and worry.

Granted, if you plan ahead, and cue the bank into what is happening you can avoid this chain reaction from occurring. It has been my experience again that few businesses have or take the time to constantly court their bank.

On the other hand, with factoring, no such protracted decision making process or time constraint usually exist. This is due to the fact that all current or potential clients can be pre-approved by the accounts receivable firm, well before/if the ‘big deal’ is landed. This way, you are in the driver seat and can ensure that when you need the capital, it will be there. Finally, there are usually no fees to ever have an increase in your total factoring relationship.

Increase in the amount of the Credit Facility

Mark Mandula — Mon, 07 May 2012 18:47:24 +0000

With most bank lines of credit, the amount or maximum loan amount available is set or capped. This is done to ensure that the bank is not exposed to more risk than what was agreed upon when the line of credit is approved. In most cases, the borrower doesn’t want this limit any higher than they realistically anticipate using, as closing fees, unused line fees, taxes or filing fees – if applicable – are usually a percentage of this amount. In addition, if you hired a broker to secure the line of credit, often their fee is also driven by the approved amount. So it makes economic, although often not long term strategic sense, to have this number be conservative.