Contributed Articles


Author Contributions-Articles About Financial Services



SECA Funding Company


Views Expressed Disclaimer

SECA Funding Company assumes no responsibility or liability for any errors or omissions in the content of this site or any Contributed Articles.

The information contained in this site is provided on an “as is” basis with no guarantees of completeness, accuracy, usefulness or timeliness.
Any author’s Contributed Articles may not necessarily represent the views or opinions of  SECA Funding Company of its owners, stakeholders, staff and clients.

 Therefore it is the author that assumes all and any liability to any party for any loss, damage, or disruption caused by errors or omissions in their work, whether such errors or omissions result from accident, negligence, miss information or any other cause thereof.


Who Is Eligible For Accounts Receivable Factoring?

Invoice factoring is also known as accounts receivable factoring. The financial strategy of selling invoices to immediately boost cash flow to an existing business. By effectively eliminating debt and freeing up assets to meet all financial obligations.

Finding a factoring company is not all that difficult, but many people do not know what a factoring company actually does or provides. If you are in business for yourself, chances are good, you should really understand the concept behind a factoring company providing a cash advance via an invoice factoring service.

What exactly does accounts receivable factoring mean to you and your business? Well, it translates into money today for promised money tomorrow. Nonetheless, factoring is not a loan as in a home loan or a car loan. Instead, factoring means you get money today for the money you should be getting tomorrow. Factoring, in essence, is a cash advance more similar to a payday cash advance than a loan.

Many businesses need cash today for the equity of invoices they may hold now. With invoice factoring, the business owner sells his or her commercial invoices today for the money needed now rather than later. This has many benefits, such as:

– providing a small or medium business with a more workable, immediate cast flow; – allowing a small or medium business to meet expenditures such as payroll and taxes; – offering a small or medium business the opportunity to purchase additional contracts and materials needed to make more business; – and finally, small or medium business will find accounts receivable factoring means less debt.

As is obvious, factoring definitely has some advantages, but not everyone will qualify for invoice factoring. Certain types of businesses are more able to get those factoring needs met, such as:

– temporary placement providers; – cable and/or satellite television contractors; – business in Chapter 11bankruptcy; – contractors such as defense; – nursing registries; – and finally, many bodyguard services.

While many factoring companies will offer different factoring services, this accounts receivable factoring is most commonly available to the types of companies listed above. If you think you may qualify for an invoice factoring the best way to decide whether or not you qualify is to find a reputable factoring company in your area or try searching via the Internet.

Factoring companies purchase the invoices, but what does the factoring company get for its time and effort? Factoring companies purchase your invoices at a reduced rate. There is another benefit to offering accounts receivable factoring by the factoring company – the business does not have to worry about collecting the debt should the debtor default or renege on the promise of cash later. Of course, no one wants to think debtors will not live up to their end of the deal, but when the inevitable does happen, an invoice factoring provider is a good partner to have on your side.

There are many types of businesses that qualify for an accounts receivable factoring service, and factoring providers thoroughly enjoy purchasing invoices. There is money to be made. This is a copasetic relationship where both benefit from each other. Additionally, many small businesses need money now not later, and sometimes, debtors do not pay what is promised. With a good factoring company, the small business will find they have a partner is collecting that debt without additional costs to the small business.

Troy I. Degarnham

What is factoring anyway?

Here is a great guide for understanding invoice factoring and factoring.

What is factoring anyway? Factoring is the selling of accounts receivables, or invoices, to a third party (factor) for cash. A valuable option for companies with changing cash needs, factoring gives companies immediate cash to manage operations more efficiently, and to help grow their business. Factoring takes place in almost every industry. Factoring is a service that covers the financing and collection of account receivables in domestic and international trade. It is an ongoing arrangement between the client and Factor, where invoices raised on open account sales of goods and services are regularly assigned to “the Factor” for financing, collection and sales ledger administration.

Factoring companies provide financing by making advances on a business’ accounts receivables, using invoices as collateral. An invoice is defined as a product and/or service that has been delivered/completed and accepted by a creditworthy customer. Factoring is NOT a loan, so there is no debt to repay. A factoring company purchases your invoices at a discount. Factoring (also known as Invoice Financing) is the practice of selling your accounts receivable (invoices) at a discount to another company. You get the money from the company that you sold your accounts receivable to and they become responsible for collecting on the invoices.

Unlike a traditional loan, factoring does not add debt to your balance sheet and there are no loans to repay. Factoring is available as either a Confidential or Notification service. If you would prefer that your customers not know that you are using Factoring, then choose the confidential service (subject to credit approval). Advance of money, not a loan, so it does not come with debt. It does not require giving up a part of your company. Advance rates range from 80% to 97% of the gross invoice amount.

Accounts receivable factoring fees are calculated by how long it takes your customer to pay a factored invoice. Keystone charges a fixed percentage every 10 days an invoice is outstanding. Accounts Receivable Funding is quickly becoming a popular choice for its flexibility and rapid injection of needed capital. Accounts receivables may be the biggest asset on a company’s balance sheet. They also represent the business best source of operating capital that is in permanent disuse. Accounts receivable factoring is an ideal solution for companies in the staffing, services, and manufacturing and transportation industries.

Business loans are simply not available to companies unless they have stellar credit and impeccable financials. Business start-ups that have sufficient accounts receivable volumes and sales turnover levels will also find factoring a valuable financing tool. Businesses that are just starting out have more than simply office space and utility bills to concern themselves with. Before they ever produce a deliverable that will bring income, they must hire and possibly pay employees, purchase the resources required to produce the deliverables and search for other clients that will allow them to repeat this cycle. Cash flow is one of the main reasons businesses fail. At one time or another, every business, even successful ones, has experienced poor cash flow.

Are ready you ready to expanded your Business and tap into your hidden treasure, your invoices!

Augustus Montgomery

Invoice Factoring Can Save Your Business

Invoice factoring is also known as accounts receivable factoring. The financial strategy of selling invoices to immediately boost cash flow to an existing business. By effectively eliminating debt and freeing up assets to meet all financial obligations.

Invoice factoring is the basic practice of selling invoices to financial factoring companies for the purpose of receiving money right away. Smaller companies often fall into the financial trap of not having available resources and therefore sell their invoices to financial agencies in order to gain working capital. This practice does not require the business to swallow more debt and in fact operates in an opposite manner. Small businesses that don’t utilize the financial tool of accounts receivable factoring acquire more debt by waiting for the accounts receivables to be paid.

Invoice factoring is typically used as a measure to avoid falling further into debt. Without this effective financial management tool many businesses have to adopt more loans or alternatively, put up more collateral for existing loans. Invoice factoring is available at a minimal fee, which makes it an attractive substitute to assuming more debt. In fact, accounts receivable factoring fees are usually set up by way of discount and these rates differ from individual company to company. The great advantage to this type of liquidation is that there are no interest fees to pay and the result is most often better profit margins.

There are many financial companies that offer invoice factoring services. The individual agencies will set up a company with the right set of accounts receivable factoring parameters. After the professionals from the invoice factoring agency assess the individual situation, they will set up the receivables to be factored and proceed accordingly.

Financial agencies that offer accounts receivable factoring are located worldwide and support every industry under the sun. Even truck drivers can sell their invoices to an invoice factoring financial service to free up capital fast. One of the most attractive aspects to an accounts receivable factoring agency is that they customize the service to each business’s individual requirements.

There are as many different types of invoice factoring agencies, as they are rates for factoring invoices. Some purchase the invoices no matter what the receivable total is and some accounts receivable factoring agencies will only liquidate invoices that accumulate more than $100, 000. Generally the higher the invoice factoring total is, the lower the rates will be to take advantage of this financial escape. In cases where the total is in excess of a hundred thousand, a solid accounts receivable factoring agency will offer rates that can be as low as two per cent!

There are many different types of invoice factoring agencies. For example, some agencies will only serve those businesses in the medical profession while others only serve purchase order factoring. There are some accounts receivable factoring agencies that are specifically designed to cater to small business and offer many great advantages that a larger agency wouldn’t necessarily offer. Despite the type of invoice factoring agency that is required for every individual business need, accounts receivable factoring typically happens within a 24 hour time period.

Troy I. Degarnham

Medical Accounts Receivable Financing-Stat!

According to the U.S National Library of Medicine and the National Institutes of Health Medline dictionary the word “stat is an adverb for the latin word: STATIM. Statim is an adverb that means immediately or without delay. When a persons arrives at the hospital emergency room with a gunshot wound, the staff might say, “We need to get this patient to surgery stat!” meaning immediately, now. In a medical situation “stat” connotes extreme urgency. Does your medical business need to accelerate cash flow with accounts receivable financing “stat”?One of the greatest challenges for medical professionals is managing their accounts receivable. Medical accounts receivable typically are the largest asset on their balance sheet. It typically takes 60 to 120 days or more to collect medical accounts receivable because of the long reimbursement process from third party payors, such as Medicare, Medicaid, and commercial insurance companies. The collection process is long and complex. Disputes regarding payment amounts are common. Medical accounts receivable financing accelerates cash flow to pay for expenses such as payroll, malpractice insurance, rent, inventory and advertising.

What are the types of medical professionals that may qualify for medical accounts receivable financing? The following is a partial list: hospitals, medical centers, rehabilitation centers, medical laboratories, surgical centers, sports medicine centers, MRI imaging centers, physical therapy centers, substance abuse clinics, physical therapy centers, manufacturers and/or distributors of medical devices, and physician’s practices whether general or specialized from A to Z such as anesthesiologists, gastroenterologist, obstetricians, and Zygote – Morula Specialists. How lengthy is the process to obtain medical accounts receivable? It generally takes four to eight weeks to obtain funding because of the unique issues presented. The commercial finance company must perform extensive audits and analysis of the prospective client’s financial situation. They need to determine that the business is and will be a “going concern”. They need to examine billing practices which often are outsourced. This may require a separate audit of a third party. And they need to examine the foreseeability of collection of the outstanding accounts receivable by auditing the accounts receivable aging reports from a historical collection perspective. In other words, how much of the amounts owed will be collection losses? How much will actually be collected?What are other unique issues regarding medical accounts receivable financing? There are potential bankruptcy issues, lien priority issues and the “big bad wolf” issue: after a commercial finance company has purchased medical accounts receivable, the federal government can assert lien priority on the assets of a bankrupt medical company. One example of this is the case of American Investment Financial (“AFI”) versus the US also known as the internal revenue service.

AFI loaned over $800,000 to a pediatric and urgent care clinic. The clinic defaulted on their financial obligations to AFI and also defaulted on their tax obligations to the federal government. It was undisputed that AFI had followed the rules correctly in terms of filing their liens and perfecting their security interests. Nevertheless, the court held that pursuant to Federal law, after a 45 day statutory safe harbor period had passed, the government’s lien took priority. AFI lost hundreds of thousands of dollars because of federal tax law and IRS regulations. It is no wonder that commercial finance companies look very carefully before they purchase medical accounts receivable. Commercial finance companies will generally advance an amount equal to 70% to 80% of a borrowing base, which may be called “the aggregate amount of eligible accounts”, “net realized value” or “net expected collections”. You can expect the following items to be excluded from your borrowing base: accounts which are subject to dispute, counterclaim or setoff; accounts of any account debtor who has filed or has filed against it a petition in bankruptcy; accounts owed directly by patients or customers.

The bottom line: medical accounts receivable financing, or medical factoring, is more difficult to obtain than other types of factoring because of the legal risks and business risks faced by the lenders. The process to obtain medical accounts financing usually takes much longer than accounts receivable financing for other industries, such as a manufacturer. This good news is, once the credit facility is established, funding can take place in a day or less from your request for financing. You can have medical accounts receivable financing “stat”!

Gregg Elberg

Outsourcing Accounts Receivable (AR) have lots of benefit for Small Business

Outsourcing Accounts Receivable (AR) have lots of benefit for Small Business. Here we have discussed some of them.

One of the most critical accounting activities for a business is accounts receivable (AR). Ironically for a small business AR becomes very important to remain competitive. Accounts receivable outsourcing for small business is a trend that has come to stay. By leveraging dedicated and skilled manpower backed with high-end cross cutting technology, small business units can drastically turnaround locked cash to instant liquidity at a minimum process cost and utilize the resource to accelerate growth and higher returns.

Accounts Receivable Outsourcing – Its advantage

By accounts receivable outsourcing, companies gain access to top notch collection agency professionals and advanced collection agency resources even if they don’t have full time AR management needs. It doesn’t take a long roster of past due clients to make a big dent in a company’s bottom line. According to statistics, once an account becomes 90 days overdue, your business is likely to receive only 73 cents for every dollar owed. After 6 months, the amount drops to 50 cents on every dollar and down to 25 cents after one year. Bringing a collection agency on to handle accounts receivable addresses delinquent accounts within the first 90 days, before they get out of hand.

How Accounts Receivables Matter

It is always not feasible for small business operators to implement Enterprise Resource Planning (ERP) and Line of Business (LOB) applications for data management because of high investment cost. Ultimately, management and collection costs of accounts receivables far outweigh the collection putting the small businesses in financial jeopardy. Efficient Accounts Receivable management is thus a key task for a small business enterprise.

AR Outsourcing – Small Business Advantage Partnering with an accounts receivable outsourcing firm has many benefits. These benefits include, but are not limited to, increased cash flow; reduced operating costs; better small business accounts receivable control; efficient management of small business balance sheet accounts, increased sales to slow paying accounts; fewer delinquencies resulting in lower collection costs; and improved customer service. According to IDC review, outsourcing business processes from US is expected grow with a compound annual growth rate of 7.1 percent through 2009, when the market is expected to reach $355 billion. Of the total spending on account of outsourcing, small and medium businesses would have a share of 29% by 2009. The progress of small business accounts receivable outsourcing can be fairly mapped on the company’s Daily Sales Outstanding (DSO) figures and reduction in bad debt. Number of outstanding invoices drops sharply, the impact being felt more in case of very old outstanding invoices as somebody in the offshore destination handling the accounts receivable portfolio is consistently following the invoices on a day-to-day basis. Due to increased fluidity and availability of time for concentrating on more core activities, small business witness significant growth and their overall turnover improve noticeably. On the whole, this better functioning and cash flow consistently improves their bottom lines. Offshore companies deploy cutting-edge technology to carry out their accounts receivable functions without any investment impact on the outsourcing company. This technology integration adds speed and efficiency and improves customer service for the outsourcing small business. Prompt and efficient follow-up reduces delinquency, thereby offshore companies work with many customers on accounts receivable processes and they are an excellent resource on best practices across companies that can be accessed by small business companies to improve their business efficiency and generate higher returns.

Mani Malarvannan

Invoice Factoring: An Effective Alternative For Small Businesses

Many of today’s small business entrepreneurs face cash flow issues. They are unable to obtain bank loans, since many are undercapitalized, have a negative net worth and a history of losses. Factoring accounts receivable is helping tens of thousands of entrepreneurs build value in their companies.

‘Cash is the king’ is an undebatable truth. The vital importance of cash to the growth and day-to-day management of modern small businesses is very much evident. Even though profit, turnover and market shares are indicators of success, there is no replacement for cash. If there is no cash in the bank to meet monthly bills, wage runs and loan payments then any business can succumb to the crunch. Cash flow is generally acknowledged as the only pressing concern of the small and medium sized business enterprises. Small businesses typically enter into factoring arrangements to solve cash flow problems. The lack of access to capital has prevented many small businesses from growing and capitalizing on the many opportunities that are available to them. Small companies do have to forgo large deals or opportunities because they do not have the necessary capital to obtain the resources to service the account. Inadequate capital resources along with the necessity to offer commercial credit to

clients, often makes business owners victims of their own ventures. Factoring is a relatively unknown financial solution that has become available for smaller companies in such crisis situations. Factoring, by definition, is the purchase of accounts receivable without recourse. Factoring is one of the oldest forms of commercial finance. The term factor comes from the Latin verb ‘facio’, which means “he who does things.” The history of factoring is the history of agents doing things for others. The colonists started widespread usage of factoring in the 1600s in Northern America. Factoring accounts receivable is a form of short-term borrowing. Typically, the small business owner transfers all or a portion of your accounts receivable to a bank or other lender known as a factor. This factor immediately gives him a percentage of the accounts receivable. The percentage the lender is willing to advance is known as the discount rate that is typically 60 to 80 percent. This money allows the business owner to fund current business operations and generate new accounts receivable. The factor, usually takes responsibility for collecting all the accounts receivable. Accounts receivable factoring is the sale of part or all of a debt that someone owes to the company. When companies provide financing through accounts receivable factoring, they essentially pay for the invoices as soon as the business owner generates them at a small discount of the invoice amount. They also provide accounts receivable management services by collecting the debt directly, monitoring credit of your clients and providing aging reports. Factoring allows a company to obtain financing without selling part of the company. It should be viewed as a bridge to growing a company, an interim step to obtaining a traditional credit facility or an equity capital. Factoring is prefect for companies that are fast growing or those that seek to seize market opportunities. By using factoring, the entrepreneur can meet increasing sales demands. Today, it is estimated that factoring is a ‘$100-billion-a-year’ industry in the United States. Accounts receivable factoring makes up about a third of all financing secured by American companies using accounts receivable and inventory as collateral. Wholesalers, distributors, transportation, staffing companies, manufacturing and business services are some of the more common industries.

Christine Macguire

The History of the Age Old Practice of Factoring

Factoring has been around for more than 4000 years, since the beginning of trade and commerce. Accounts receivable factoring is also one of the most misunderstood financial tools available to small businesses today. In the U.S. factoring is becoming a popular method of financing, helping to improve the cash flow for businesses, especially in today’s economy.

Accounts receivable factoring is one of the most misunderstood financial tools available to small businesses today. In the United States, factoring dates back to colonial times. Historically factoring has been around for more than 4000 years, or basically since the beginning of trade and commerce.

In the U.S. factoring is becoming a popular method of financing, helping to improve the cash flow for businesses. Simply put, factoring is when a company decides to discount its accounts receivables, at which time the factor bears the credit risk for the accounts. The factor gets the payment from the client’s customer. Invoice factoring is among one of the most efficient forms of financing today — particularly now that we are facing such tough economic times.

Factoring can be traced back to a Mesopotamian king Hammurabi. What’s more, historical documentation about the use of factoring proves that it took place in our American colonies before the American Revolution. This was at a time when raw materials like furs, cotton, timber and tobacco were shipped to Europe. Merchant bankers in London and other parts of Europe advanced funds to the colonists for these raw materials. this way the colonists were able to continue to harvest their new land, free from the burden of waiting to be paid later by their European customers. This practice of receivables factoring was very helpful to the colonists, as they could go ahead and begin their harvesting without waiting for the money the Europeans owed them.

In the past, factoring agreements were on an all or nothing basis where one either factored all of a company’s invoices or not. But in recent years, single invoice factoring, also known as spot factoring, has become popular. With single invoice factoring, you are allowed to factor as few or as many invoices as you desire.

What if you own your own small business, and even as things are going really well, you wish you could get some additional working capital to move your business to the next level. Whether it’s a one-time need, or an ongoing necessity, working capital or the lack of it, is the most obvious reason between the success and failure of a small business today.

Factoring just might be the ticket for you and your company? Ask yourself if your small business could use factoring to speed up cash flow. If you need to increase working capital so the business can grow, then chances are you could use factoring.

While often confused with accounts receivable factoring, which is another way of saying invoice factoring, accounts receivable financing technically refers to a loan agreement between two parties. Factoring is a financial purchase or transaction and involves three parties. The biggest difference is that with a loan it’s your credit that matters, with a factoring agreement it’s your customers credit worthiness that matters.

You may hear things like accounts receivable factoring with and without recourse. What does this really mean?

The term “spot factoring” is the same thing as single invoice factoring and it is becoming more common in its usage. Single invoice factoring, or spot factoring, refers to the increasingly popular practice of picking your spots, or choosing which invoices you want to factor. This allows you to retain the most money while spending the minimum fees with the factoring company.

Kristin DeAnn Gabriel

Asset Based Lending – Learning the Key Advantages

If a company is in a cash crunch and finds itself stuck because of it, asset based lending can be of immediate benefit. It is a reasonable way of meeting their resource needs quickly.

This fast growing method of funding assists businesses in using their assets to solve the problem of a cash flow shortage. Companies that are expanding and therefore in urgent need of available currency have made asset based lending what it is today.

The Many Fold Benefits of Asset Based Lending

Asset based lending gives numerous advantages to businesses of all sizes. Compared to the traditional loan system, asset based lending gives faster access to decently sized amounts of ready cash. Most asset-based lenders and factoring agencies will also offer their clients valuable services, such as invoicing, accounts-receivable processing and collection services. As is common knowledge, if you can properly manage your accounts receivable portfolio, it will help expedite your cash flow and support corporate cash needs, which will help increase your working capital. The result of this is fewer outstanding account balances, which helps avoid bad-debt write-offs and enhances over all profitability.

Similarly, invoice factoring gives you working capital which will improve your business credit. Thus you can turn your accounts receivable line into a strong, predictably even source of working capital. Asset based lenders have branched into many different areas to help their business clients, offering not just credit facilities but also help with invoice purchasing, accounts receivable management, collection services, letters of credit, accounts receivable management and international trade services.

A prospective borrower dos not necessarily have to have a profitable enterprise or a minimum net worth in many situations. A commercial venture with tangible assets and a good qualified management teem can use those assets to create extra capital so they can execute business plans for future expansion. Types of collateral permitted are inventories, including marketable raw materials, machinery and equipment, accounts receivable, owner-occupied real estate and personal assets, as well as certain intangibles.

One of the many boons of asset-based lending is that small companies can not only get more cash, but that it can be received, and therefore put into action, much more quickly than would come from a traditional bank. Other key benefits include the fact that asset based lending is a non bank lending system. It does not limit company growth but instead encourages the purchase of capital equipment. It is more flexible, provides higher advances against collateral, and does not require any additional security, such as warrants against subsidiary stock or the owner’s personal assets.

It is currently widely available the world over, providing flexibility without geographical boundaries. In point of fact, asset based lending helps push activities along, such as capital equipment purchases, reorganizations and debt restructures, mergers and acquisitions, turnarounds, debtor-in-possession loans, seasonal cash shortfalls, amongst others.

Of course, everyone should understand the legal aspects of asset based lending. Asset based lenders carry a certain amount of liability in these agreements, the breach of which, in the past, has lead to quite a few borrower plaintiffs earning legal awards that go well into the millions of dollars. Over the years, the client borrowers have used their right to sue the asset based lenders for the transactional losses they have incurred. This gives a deep sense of a serious safety net to a prospective borrower in asset based lending.

Harald von Richthofen

Seller Financing: 8 Types of Seller Financing

Seller financing gives the buyer and seller unlimited ways to structure a transaction. The follow are the 8 basic categories of seller financing.

Seller financing is extremely powerful because the buyer and the seller have control over all the terms of the transaction.  That means that there are virtually unlimited applications for seller financing.  However, all of the options for seller financing fall into just a 2 major categories: financing after the closing and financing before the closing.

The following 4 types of financing occur after the closing:

1.       Free and Clear Financing – When a seller owns a property “free and clear” there are no liens or encumbrances on the property.  In this situation the seller and the buyer are free to make any terms they want to in order to make a deal successful.

2.       Equity Only Financing – This type of financing means that the seller only finances their equity in a property.  The buyer is responsible for getting new financing to pay-off all of the seller’s encumbrances and liens.  The seller is then free to finance the equity in the property.

3.       Wrap Financing – This is also known as “subject to” or “blanket” financing.  In this situation the buyer takes the property “subject to” the existing mortgage.  The buyer is responsible for making mortgage payments to the seller and the seller is responsible for making mortgage payments to the original lender.

4.       Combo Seller Financing – This type of financing is a combination of the financing options #2 & #3.  The buyer can “wrap” the underlying mortgage and finance the seller’s equity.

The next 4 types of seller financing occur before the closing:

5.       Purchase Option – Any time the buyer gives money to the seller (option payment) for the right to purchase the property at a given price (option price) and within a given timeframe (option period) the buyer has a “purchase option”.  This is a form of seller financing because the seller still is responsible for the property and any payments until the buyer purchases the property (exercises their option to purchase) or the option expires.

6.       Extended Closing – An extended closing is similar to a purchase option except that the extended closing is done with a Real Estate Purchase Contract (REPC).  In the extended close the closing deadline is extended or put into the future significantly further than a typical real estate purchase. 

7.       Open-ended Closing –The open-ended close is also done with the REPC except the closing deadline is tied to a future event (such as the completion of an addition or remodel).  The closing only occurs after the future event has occurred or has been completed.

8.       Seller Partnerships– In this situation the seller may sell the property or may retain ownership.  In either case, the seller contributes the property (and possibly some capital) as their contribution.  The buyer would contribute the work and knowledge (and possibly some capital) to create or enhance the property value.  The property would then be refinanced by the buyer or sold to a third party.  The seller would get his equity and capital contribution plus an agreed partnership split of the additional profits on the transaction.

The great thing about these 8 types of seller financing is that every option can be used to benefit both the buyer and the seller.  Using these seller financing options a seller can actually get a buyer to come in and improve their property, do all the fix-up and repair work at the buyer’s expense, and the buyer is excited about doing the work!   I’ll explain how this can be in my next article…

Khayyam Jones

Merchant Cash Advance VS Business Cash Advance

An overview of the similarities and differences between a Merchant Cash Advance and a Business Cash Advance.

A Business Cash Advance and A Merchant Cash Advance are not necessarily the same thing like so many business owners may believe.  There are some key differences between the two and different underwriting guide lines on each.

A Business Cash Advance is a short term loan that is based on a businesses checking account deposit history and average balance.  Pre-approval on these loans can take as little as 1 hour to 24 hours and funding can occur as soon as 3 to 5 business days.  Money is generally wired directly into the lenders checking account once all the necessarily documents are filed and confirmed.

Repayment is a bit different than a traditional loan in which the lender will make a small withdraw out of the businesses checking account daily until the loan is paid back.  The amount of the withdraw is a preset amount and will not change during the repayment period.  Loan terms are generally 3 to 18 months depending on the lender and there lending guidelines.

A Merchant Cash Advance is abit different though. These short term loans are based on a businesses monthly credit card volume.  Cash Advance amounts will generally range from 50% to 200% of a merchants monthly credit card sales.  These also have a very fast turn around, pre-approval in less than 24 hours and funding will occur in 3 to 5 days just like a business cash advance.

Repayment on these occurs daily as well, but the loan is paid back daily through your credit card sales for that day.  Just like a business cash advance the amount is always the same until the loan is re-payed.  Loan terms are also usually 3 to 18 months depending on the merchant advance company you use.

These lenders like to lend to cash flow clients, such as restaurants, grocery stores, taverns, some service companies, contractors pretty much anyone who receives payments regularly and makes deposits frequently into there business accounts.

Matt Marksbury

Why Businesses Choose a Merchant Cash Advance

Merchant cash advance providers lend money to small and mid-sized businesses that accept credit sales. A portion of the loan is repaid every time a customer makes a credit purchase from the business. A set percentage is taken from the transaction and put toward the balance of the advance until it is paid.

Merchant cash advance providers lend money to small and mid-sized businesses that accept credit sales. A portion of the loan is repaid every time a customer makes a credit purchase from the business. A set percentage is taken from the transaction and put toward the balance of the advance until it is paid. Why do many businesses choose credit card advance funding over traditional loans?

New Businesses Need Money

New businesses need money for a variety of reasons. From paying for inventory to investing in computers, new businesses need to spend money to realize profits. Sometimes new businesses fail because they don’t have enough capital to invest. Often traditional lenders only deal with companies in business for a year or longer. They want detailed documentation to prove your business is stable.

If new companies are unable to qualify for loans for business, they might wind up failing right away. Credit card advance cash is easy to get. Nearly 90 percent of businesses qualify for cash advances. Most cash advance lenders only require your business to be in existence for at least two months. You can get the cash you need without waiting a year or longer to show your business is established.

Traditional Loans Require Extensive Documentation

Traditional loans for business owners often require extensive documentation. A business plan or proposal might be requested. The loan packages are several pages long. They ask a myriad of questions about your credit, business and why you need the money. Some even put restrictions on how you spend the loan proceeds.

A cash advance is short and simple. The two-page application only requires basic information about your business. The only additional documentation required is evidence your business conducts at least $4,000 in credit sales every month. Instead of being bogged down by paperwork, your application is completed immediately so you can get cash right away. There are no restrictions on how you spend the cash so you can use it for any purpose to benefit your business.

Cash Advance Loans Are Quick

Business owners wait weeks or even months when they work with a traditional lender. By the time the loan proceeds arrive, the business could already be struggling to keep its doors open. The endless paperwork takes time and effort. If your business doesn’t qualify for the loan, you have to start the process all over again with another potential lender.

Cash advance loans are quick and easy. You just fax a short application with four months of credit card statements. Your business only needs to have a minimum of $4,000 in credit sales each month to qualify for the loan. In about 24 hours, you receive a contract to review detailing the terms of the loan. Once the contract is signed, loan proceeds are usually issued within 48 hours. It only takes a few days to apply for a cash advance and get money for your business right away.

No Need for Perfect Credit

Many smaller businesses have insufficient credit to qualify for a traditional loan. Other businesses go through hard times and have poor credit. If you don’t have security or collateral, this can become an even bigger issue. While these businesses need the money most, it can be hard to get from typical lenders. Without essential capital, your business could suffer or even go out of business.

There is no need for your business to have perfect credit to qualify for a merchant cash advance. If you’ve been in business for two months or more and have no pending bankruptcies, you can qualify for a cash advance. Simply show $4,000 or more in credit sales each month to ensure your ability to repay the loan.

Cash Advance Loans are Easy to Repay

Traditional lenders require a minimum monthly payment. If your business has a tough month, penalties and fees are charged for late payments. This can affect your credit rating and the ability to borrow more money if needed. Accidentally missing a payment can cause a negative chain of events for your business.

Cash advance loans are easy to repay. A percentage of the money owed is taken out of each credit card sale made by your business. If you have a slow month, you pay less based on the number of credit card sales made. During a prosperous month, you are paying down a larger portion of your loan. You can also get additional funds in as little as 30 days after your initial cash advance. There is no need to worry about sending payments, paying fees or dealing with penalties. Everything is automatically done for your convenience.

Your business deserves to get the cash it needs when you need it the most. Traditional lenders make it difficult to get the money your business requires to keep moving forward. Much like the business world, a cash advance moves fast.


Business Cash Advance – Excellent Choice if Facing Difficulty Securing a Conventional Loan

Merchant cash advance or business cash advance is perfect for business owners that have difficulty securing traditional business loans or funding. Businesses that are starting up or do not have regular cash flow cannot guarantee regular payments. Unlike loans, merchant cash advance is not repaid with monthly installments on fixed dates and is easier to get approved.

This helps business owners as the cash advance needs to be repaid only with credit card receipts.

Though loans and merchant cash advances work differently, neither should be taken out without due consideration to certain factors.

Credit card sales vs. Credit score

Business owners with low credit scores face a lot of problems in acquiring traditional loans. Merchant cash advance providers accept the fact that some business owners may not have a good credit score. Therefore, the providers also consider the projected credit card sales of the business.

The amount of cash advanced to business owners depends on both their credit score and credit card sales. Business owners should have at least one of the two – high credit scores or high credit card sales – for a business cash advance to be approved. Approval is almost guaranteed if the business owner has a good credit score as well as high credit card sales.

Terms of the advance

Merchant cash advance providers expect their money to be repaid within the preset payment term. While loans are repaid with interest, cash advance is paid back with a fee that is calculated as a percentage of the credit card sales of the business. Just as the interest rate for long-term loans is higher than short-term loans, the fee charged for merchant cash advance also increases with the term of the advance.

It is advisable to repay the advanced cash as soon as possible, as the overall cost of the advance increases with time. For example, the merchant cash advance that is repaid in six months is cheaper than that paid back in one year.

Selecting the merchant cash advance provider

The same laws that regulate other financing organizations such as banks do not regulate the merchant cash advance industry. Many merchant cash advance providers charge exorbitant fees and exploit the needy or desperate business owners. The industry is trying to regulate itself to ensure its growth and discourage dishonest merchant cash advance providers from hurting the image of the industry.

Before taking out an advance from a merchant cash advance provider, evaluate the terms very carefully and weigh multiple providers to find the best deal. Do not get ripped off by unscrupulous providers. Check references to make sure you are dealing with an honest provider.

Merchant cash advance is an option for business owners unwilling or unable to take out traditional loans. However, there are many disreputable providers in the market, and business owners need to be prudent.

Do your homework as you would before taking out any other loan. Having a clear plan to repay the advance quickly is a good way to reduce the overall cost of the merchant cash advance. Before you get an MCA, compare price quotes for finance for business at a Business Network. For further information, please read our business loans advice.

Daljeet Sidhu

An overview on Different Legal Financing Options

Legal financing is offered by different companies offering different options. Whether you are searching for pre settlement funding or post settlement funding, you should be aware of those options.

There are dozens of companies that provide legal financing in the United States and abroad. Legal financing can be used by both the plaintiff and the attorney. If you are considering borrowing against your lawsuit, it will be imperative you understand the different types of options. There are no two companies alike as many prefer different types of cases, different rates, and different financing options at different amounts. In this article we will discuss the different types of cases, different rates, amounts and financing options.

Legal financing is offered on a pre-settlement and post settlement basis. This means a client can borrow money before or after a case is settled. The different types of cases that are offered by these companies are personal injury and commercial litigation cases. A personal injury may be an auto accident, wrongful death, slip and fall and medical malpractice. A commercial litigation claim may be securities fraud, copyright infringement, patent infringement and financial malpractice.

While most companies in the United States prefer personal injury related cases, most outside of the states prefer commercial cases.

The rates are also different between the different types of cases. A company may lend money on a compounded monthly rate, quarterly compounded, flat rate, times factor and a percentage of the proceeds plus the principle of the loan. Most companies that provide legal financing against personal injury cases will offer compounded monthly rates, flat rates or quarterly rates; Companies offering clients legal financing against commercial cases may offer compounded or quarterly rates, time’s factors or percentages on a case. The companies that provide money against personal injury cases tend to charge less than those companies offering financing against commercial cases. All companies tend to charge better rates on cases that are already settled. This is because there is less risk to the investor.

The amounts are also different for each company. There are companies that will lend just a few thousand on a case and others that will provide lawsuit loans for million dollar request. The amount of money will be dependent upon the type of case, estimated value of the case and the comfort on the underwriter.

The different financing options may include a lump sum, buyout or line of credit. If a person is borrowing a lump sum they may max out the initial advance. This means the plaintiff is borrowing the maximum amount that a company will provide on one case. There are other companies that will buyout an existing legal financing contract. A company will always want to hold the first position or lien on the case so the only way to borrow additional monies from another company is for the company to buy out the existing contract from another company. If you decide to borrow a small fraction of what your case is worth you may open a line of credit. A line of credit is used as a way to only borrow what you need with an option of coming back at a later date for an additional advance.

Hina Khan

Cash For Structured Settlement?

This article contains valuable information to obtain Cash for your Structured Settlement

When accidents occur, whether an auto accident, slip and fall, medical malpractice, wrongful death, or any other non workplace related injury happens, structured settlements are often set up with insurance companies to pay for these tortuous acts. People who are in involved in personal injury or insurance related cases elect to receive a series of payments over a substantial period of time rather than receive an immediate lump sum payment. These payments typically total more than the amount a person would have obtained for an immediate payment. The injured party(Plaintiff) goes through a process whereby they elect to take this protracted payment, and sign off on a “Settlement and Release Agreement” allowing the Insurer(Defendant) to purchase an annuity policy on the insured’s behalf that would provide for monthly, quarterly, or yearly payments to the injured party, who now becomes what is called the Annuitant.

With the advent of new 2002 Federal Laws, and further State Protections, the injured party now has the right to get cash for their structured settlement by selling this annuity stream to an independent third party if he or she so desires. These periodic payments that flow from an insurance company annuity contract(called a structured settlement), may be transferred at anytime in the future for a lump sum today, but great care should be taken to ensure that the injured party obtains a proper court order. The reason for the court order is one of protection for the injured party, and that protection is twofold; first to protect the annuitant(injured party) from an unscrupulous transaction, and secondly, and just as important in our opinion, to preserve the tax free nature of the transaction. Without obtaining a court order, the proceeds received would be completely taxable, a frighteningly foreboding scenario.

The structured settlement holder should be aware that these annuity sales have specific legal guidelines that differ from state to state. These specific elements must be adhered to strictly in order to complete the transaction. Typically, the injured party receiving the payment stream must execute(sign) a new transfer and assignment agreement disclosing all contractual terms and the price to be paid.

At this point the injured party may be wondering how difficult it is for them to get cash for their structured settlement, since the procedure seems complex. In fact, the sale of a structured settlement annuity is a simple, straightforward process that any institutional funder has done thousands of times, and will handle all the paperwork properly. The only thing the injured party need do is make certain they provide the funder with the proper paperwork required in a timely fashion. This process is really a simple cookie cutter transaction. Once in court, the potential sale is announced to all interested parties and then is submitted to the court for their approval.

Bear in mind that this procedure is a process, and typically will take  at least 90 days to consummate. In order to expedite the process, the injured party needs to make certain that they respond immediately to requests for information and paperwork from the funding party. The institutional funder should have a vast knowledge of the structured settlement business, and have consummated numerous transactions, and offer you referrals. This is for your protection and an acknowledgement that all proper legal guidelines will be adhered to. If your structured settlement company doesn’t meet these requirements, use someone else.

Can you get cash for structured settlement? Yes. Provided your follow these easy guidelines.

J Thomas

Financing Options for Import Companies

Financing Options for Import Companies explores how to finance your growing import company. A combination of purchase order financing, accounts receivable financing and inventory financing may be the solution to growing your import business.

Whether you are starting an import business or have an established importing business, it can be a very profitable venture if you have the right financing to grow your business. Imports are defined as: a good that crosses into a country, across its border, for commercial purposes; a product, which might be a service that is provided to domestic residents by a foreign producer; or a combination of the two.

Starting or running an import business has never been more profitable because of computers, the internet, and the availability of low cost imports from countries such as China and Mexico. These imports may be resold for up to ten times their cost depending on the competition in your field of operations.

It is essential that you have good, honest suppliers plus creditworthy customers with purchase orders for your imports. If you have the right financing, your business can grow exponentially. But how do you finance growth if your own resources or bank lines of credit are not sufficient to take advantage of big opportunities? A combination of purchase order financing, accounts receivable financing with inventory financing may be the solution.


Purchase Order Financing Purchase Order financing is the assignment of purchase orders to a third party, a commercial finance company, who then assumes the obligation of billing and collecting. Purchase order financing can be used to finance all current and subsequent orders to improve your company’s cash flow. The process works as follows:

1) Your company obtains a purchase order for products to be sold another company;

2) A letter of credit may be issued, based on a finance companies’ credit, to guarantee payment to suppliers or factories producing the goods;

3) The order is shipped, delivered and accepted by your customer;

4) The customer receives an invoice for the goods;

5) The Purchase Order Company pays the supplier/factory;

6) a commercial finance company or Accounts Receivable Finance Company pays the Purchase Order Financing Company after the products are delivered to your customer;

7) The customer pays the commercial finance company for goods received;

8) The accounts are settled and the profit is paid to you.

Accounts Receivable Financing Accounts Receivable Financing is the selling or pledging of your company’s account receivable, at a discount, to a Factor, a Commercial Finance Company or to an Accounts Receivable Financing Company who may assume a risk of loss. You receive a portion, usually 80% to 90% of the face value of your receivables in advance of payment from your customers in return for a fee, or interest, to be paid to the commercial finance company. When the commercial finance company is paid by the customer, the appropriate fees are deducted and the remainder is rebated to you. “Accounts receivable financing” is also called accounts receivable factoring, factoring financial services, invoice factoring and cash flow factoring. The terms are used to convey the same meaning.

Inventory Financing Inventory financing is a loan secured by the inventory of your business. Inventory finance enables import companies to hold more stock without cash flow strain and to generate more sales. Inventory finance is often part of a Purchase Order and Accounts Receivable Financing commercial finance package.

These three types of financing can enable an import business to increase purchasing capabilities dramatically; you can accept larger orders and grow your business exponentially. You can use your inventory to leverage your purchasing power. You can use your customer’s credit to obtain these three types of financing; and you can use the commercial finance company’s credit to obtain a letter of credit. The concept of financing your import company with “other people’s money” is part of a safe and sound business plan. Add strong product quality controls, inventory controls, and good accounting to maximize the success of your import company.

Gregg Elberg

Short-Term Working Capital Funding and Commercial Loans

There are two short-term working capital financing options which are often overlooked by business owners. These involve business cash advances and short-term commercial mortgages.

This article will describe alternatives such as short-term business cash advances and commercial mortgages. With an economic recession impacting business activity adversely, all working capital financing options should be considered. Business borrowers should not overlook short-term choices for commercial loans.

Due to misunderstandings about long-term commercial financing, short-term commercial loans are often not considered properly. Although long-term commercial real estate financing options are often appropriate, there are practical short-term business financing choices that will be more workable and profitable for commercial borrowers.

The most critical short-term commercial financing techniques typically include short-term merchant cash advance and credit card processing programs and commercial real estate loan programs. Both working capital funding approaches are frequently a source of confusion for business owners.

An underutilized commercial financing strategy for businesses is possibly the best commercial loan strategy to secure cash for their business: a business cash advance using credit card processing. Credit card financing is an effective business financing tool that is usually overlooked by any business accepting credit cards as a customer payment method.

The most likely candidates to benefit from this working capital loan strategy are retail stores, service businesses, restaurants and bars. To obtain business cash advances based upon sales volume, this funding strategy uses an under-utilized business asset (credit card receivables). This working capital cash strategy is also known as credit card factoring. Some business owners have used receivables financing or factoring which allows them to sell future receivables on a discounted basis.

Not all service and retail businesses can document business receivables to obtain a commercial loan. Businesses such as bars and restaurants do not typically have receivables to use for business financing. What these businesses do have in many cases is documented sales activity. It is this documented level of credit card sales activity that becomes a financial asset to the business and its working capital management strategies. Business cash advances from $5,000 to $300,000 can usually be obtained based on a merchant’s sales volume and future sales.

The commercial financing repayment requirement for working capital advances is normally under 12 months. For merchants that need the business cash advance program for a longer time, the arrangement can be renewed on a recurring basis.

There will usually be only a few business financing sources that are regularly successful at executing the credit card financing and processing. There are key difficulties to avoid with a working capital advance, and selecting an effective funding source is essential to an appropriate business cash advance program.

A long-term commercial mortgage is appropriate for many businesses that own commercial property. Commercial property should be financed with an appropriate combination of short-term and long-term funding. It is wise to consider long-term business financing of up to 30 years when a longer-term commercial real estate loan is feasible.

However there will be many commercial mortgage loan situations in which longer-term commercial financing is not appropriate for the business owner. In such circumstances it is important for a business owner to realize that there are viable short-term working capital strategies.

Short-term commercial loans should be explored especially for business owners who want to sell or sell the property within a few years. Most short-term commercial real estate financing will have more reasonable prepayment penalties and lockout fees than typically required with long-term commercial mortgages.

While we will not attempt to describe the technical aspects of commercial loan prepayment fees and lockout fees in this article, we will note that the absence of such fees in most short-term commercial mortgage loan programs is a very positive aspect of these short-term working capital management options. If a business owner needs to sell their commercial property during the time period which would have triggered prepayment fees and lockout fees in longer-term commercial real estate loans, the lack of penalties could mean a savings of 10% to 30% or more.

Although prepayment and lockout fees will typically be avoided with short-term commercial mortgage loans, there are some trade-offs to be made if a business owner selects shorter-term working capital loans. When short-term commercial mortgages are available, they will usually not be readily available for special purpose commercial properties, the interest rate will frequently be in the range of 11% to 13% and the loan-to-value will typically be under 70%.

Multi-family, warehouse, mixed-use, office and retail commercial properties are the best candidates for short-term business finance options. For a typical short-term commercial loan, business owners should be comfortable with a time period of less than three years.

Few commercial lenders are capable of successfully executing short-term business financing. There are also numerous problems to avoid with short-term commercial mortgage programs, so selecting a lender is critical to business owners wanting a short-term business loan involving commercial property.

It is sufficiently important to repeat that a vital key to successful short-term commercial loans and business cash advances is selection of an appropriate lender. Despite the potential benefits of shorter-term business financing, the choice of a lending source cannot be overlooked.

Stephen Bush

Venture Capital Financing: Structure and Pricing

“A venture financing can be structured using one or more of several types of securities ranging from straight debt to common stock.”


A venture financing can be structured using one or more of several types of securities ranging from straight debt-to-debt with equity features (e.g., convertible debt or debt with warrants) to common stock. Each type of security offers certain advantages and disadvantages to both the entrepreneur and the investor. The characteristcs of your situation and current market forces will impact the type and mix of security package that is right for you.

Types of Securities

  • Senior debt: Which is usually for long-term financing for high-risk companies or special situations such as bridge financing. Bridge financing is designed as temporary financing in cases where the company has obtained a commitment for financing at a future date, which funds will be used to retire the debt. It is used in construction, acquisitions, anticipation of a public sale of securities, etc.
  • Subordinated debt: Which is subordinated to financing from other financial institutions, and is usually convertible to common stock or accompanied by warrants to purchase common stock. Senior lenders consider subordinated debt as equity. This increases the amount of funds that can be borrowed, thus allowing greater leverage.
  • Preferred stock: Which is usually convertible to common stock. The venture’s cash flow is helped because no fixed loan or interest payments need to be made unless the preferred stock is redeemable or dividends are mandatory. Preferred stock improves the company’s debt to equity ratio. The disadvantage is that dividends are not tax deductible.
  • Common stock: Which is usually the most expensive in terms of the percent of ownership given to the venture capitalist. However, sale of common stock may be the only feasible alternative if cash flow and collateral limits the amount of debt the company can carry. While each of these securities has unique characteristics, they can be grouped into two categories: debt or equity. In structuring a venture financing, the primary question is whether the financing should be in the form of debt or equity.

Disadvantages of Debt to a Company

From a company’s viewpoint, there are two potential disadvantages to debt.

  1. An excessive amount of debt can strain a company’s credit standing, thereby reducing its flexibility in meeting future long-term financing requirements on a favorable basis. It can also negatively affect a company’s ability to obtain short-term credit. Of course, the form of debt the venture financing takes makes a difference. For example, subordinated debt will have less impact on borrowing capacity than senior debt.
  2. The venture capitalist has the option of calling his loan if the company is in default of the loan agreement. This remedy, which is not available to him under other financing agreements, puts him in a better position to influence the company’s affairs when it is in default.

Advantages of Debt to a Venture Capitalist

From the venture capitalist’s viewpoint, there are three principal advantages to debt.

  1. There is a greater likelihood that the venture capitalist will get his principal back and, at least, a small return. Many of the companies in the average venture capitalist’s portfolio are referred to as “the living dead.” Needless to say, their performance has turned out to be disappointing. In some cases, these companies are able to repay principal with interest but have limited appeal to potential acquirers or the public. As a result, a venture capitalist with an investment in such a company’s common stock may be unable to recover his investment within a reasonable period, if at all.
  2. As previously discussed, under certain circumstances the venture capitalist is in a better position to influence the company’s affairs.
  3. The venture capitalist has a senior claim. However, it should be emphasized that the meaningfulness of a senior claim depends on the marketability of a company’s assets and the amount of equity it has to cushion its creditors’ position. For example, in the case of a start-Lip situation with little or no equity, a senior claim means little or nothing.

Percentage Ownership Needed

While the difference may not be great, depending on the particular circumstances of the company, a debt position involves less risk than an equity position for the venture capitalist. Accordingly, a company should not have to relinquish as much ownership when a financing is in the form of debt. However, this advantage must be weighed against the disadvantages of debt.

No matter how the venture financing is structured, it must be priced so that it is attractive to the venture capitalist. There is no clear-cut answer as to how much ownership a company will have to relinquish to make a financing attractive. Broadly speaking, the greater the potential return perceived by the venture capitalist, the less ownership he will demand. In other words, if a company has a patented product which a venture capitalist thinks is revolutionary and highly marketable, he will undoubtedly settle for less ownership than he would in the case of 4 company with a relatively less attractive product. Thus, his ultimate position will be a business judgment based on his potential return.

Before you enter negotiations with the venture capitalist, you should determine what your company is worth and how much of your company you want to sell. The following procedure can be used to get a rough idea of how much ownership you will have to give up to make the financing attractive.

  1. Estimate the risk associated with the venture financing. If the investment is very risky, the venture capitalist may be looking for a return as high as 15 times his investment over five years. Conversely, if a relatively low degree of risk is involved, the venture capitalist may be satisfied with doubling or tripling his investment over five years.
  2. Make a reasonable estimate of the price/earnings ratio applicable to comparable publicly held companies. The market value of the company can then be projected by multiplying forecasted annual earnings by the estimated price/earnings ratio for comparable companies.
  3. Divide the estimate of the total dollar return the venture capitalist wants by the projected market value of the company. This yields the percentage ownership the venture capitalist will need, as oil the future date, to realize his desired return. It is important to note that any equity financing required during the interim period must be considered in making these calculations.

Case Study

Suppose XYZ Company, Inc., a start-up, needs $500,000. The company’s product appears to have excellent potential. However, because the product is new and unproven, an investment in the company would be extremely risky. Accordingly, it is reasonable to estimate that a venture capitalist would want a potential return of at least ten times his total investment in five years. Management estimates that the company should be able to “go public” at 20 times earnings in five years. Projected after-tax earnings for the fifth year is $1,250,000. Additional long-term financing of $500,000 will be needed at the beginning of the third year.

Scenario I

In the calculations below it is assumed that the venture capitalist who provides the initial financing ($500,000) also provides the subsequent financing ($500,000), and that he wants a return equal to ten times both. However, it should be noted that if the company made satisfactory progress during the first two years, it would be reasonable to assume that the venture capitalist would be satisfied with a lower return on the subsequent financing since it would involve less risk.

Estimate of Total Dollar Return Required Total Investment $ 1,000,000 Estimate of Return Required X 10 $10,000,000 V. Projected Market Value in Fifth Year VI.   VII. Projected Earnings $1,250,000 VIII. Estimate of P/E Ratio x 20 $25,000,000 Percentage Ownership Needed in Fifth Year Estimate of Total Dollar Return quired $10,000,000 Projected Market Value of Company in Fifth Year 25,000,000 40%

Scenario II

In this set of calculations it is assumed that a second investor provides the subsequent financing ($500,000). The calculations show that the venture capitalist who provides the initial financing ($500,000) would need 20% ownership as of the fifth Year to realize the return he wants. However, since the ownership to be given up for the subsequent financing will reduce his ownership position, he will want more than 20% ownership initially. For example, if it is assumed that 15% ownership will have to be given up for the subsequent financing, the venture capitalist who provides the initial financing would need 23% ownership initially to end up with 20% ownership in the fifth year.

Assume the same facts as Case I, except a second investor provides the subsequent financing for 15% ownership.

Estimate of Total Dollar Return Required Total Investment $ 500,000 Estimate of Return Required X 10 $5,000,000 Projected Market Value in Fifth Year Projected Earnings $1,250,000 Estimate of P/E Ratio x 20 $25,000,000 Percentage Ownership Needed in Fifth Year Estimate of Total Dollar Return required $5,000,000 Projected Market Value of Company in Fifth Year 25,000,000 20%

Thus, it appears that the investment ($500,000) may be attractive to an interested venture capitalist if the principals of XYZ Company, Inc. are willing to give up approximately 23% ownership.


It must be emphasized that the above procedure is highly subjective. And, you should remember that what really matters is how the venture capitalist views the relative attractiveness of a company. Typically, venture capitalists are satisfied with a minority interest. Although a venture capitalist may demand a majority interest, generally they are not interested in operating control. Some of them like to tie the amount of ownership they ultimately get to the performance of the company. For example, a venture capitalist who wants a majority interest initially may give the principals the opportunity to earn part of it back. Such an arrangement can be used to compromise on pricing when there is a significant disagreement between the principals and the venture capitalist.

To entrepreneurs unfamiliar with venture capital, it may appear that the venture capitalist is seeking an extraordinary high return on his investment. However, it is important to understand that, even under the best of circumstances, only a minority of the companies in which the venture capitalists invests will be successful. He is well aware of this, and must make a sufficient return of his successful investments to come out with an acceptable return overall.

Alan L. Olsen

Need Operating/Working Capital For Your Small, Mid-Size Business?

We Say Yes When Banks Say No, Get The Cash You Need Now!

Call Us Today! Toll-Free

+1 (800) 413-5167 Ext. 9

or visit: SECA Funding Company


Skip to content