Small Business Factoring

Aidan Kellsey asked:


Short-term Commercial Financing Options After Your Commercial Mortgage

To buy warehouses, buildings, and operations centers, business utilize commercial mortgages. Businesses are likely to need funds for other expenses in its operations and commercial mortgage will be unable to accommodate these. Businesses have several options and chances for finding funding from various sources of commercial financing that is on hand.

There are 3 types of commercial financing loans: long-term, medium-term, and short-term. Short-term commercial financing options on hand will be discussed here.

With a maximum term of only one year, short-term loans are very common. Some common types include:

1. Operating Loan. This is for a business’ different operating expenses. Though some lenders give extensions, full settlement is needed at the end of the usual 3-6-month terms.

2. Business Line of Credit. This is a very popular commercial financing type and is offered by banks for 24 months. Just like a credit card, a business can borrow from an imposed credit limit.

3. Business Inventory Loan. Business inventory loans have terms of normally between 6 and 9 months. Funds are provided for the purchase of seasonal supplies. Proof that they will be able to repay the loan and that it’s seasonal are needed by banks and commercial lenders from the business.

4. Accounts Receivable Financing. In accounts receivable financing, companies put up receivables as a collateral for the loan. Collateral is chosen among certain receivables. The loan is assessed upon 60% to 80% of the receivable’s value and must be settled when the product is sold.

5. Factoring. A business can sell its receivables to a factor who takes over the danger and provides discounted but immediate funds if the business does not qualify for an accounts receivable financing loan. The factor is paid by the end-customer. This is a very costly option.

6. Letter of Credit. If a business doesn’t have the funds to purchase supplies and inventory from a vendor, a letter of credit is issued. If the businesses cannot pay the vendor, the bank will guarantee settlement, charging a percentage point rate on the funds.

More than the typical commercial mortgage, these are only some short-term commercial financing products. Commercial mortgages are perfect for the purchase of commercial properties, but there are various other commercial financing options and products beyond commercial mortgages.



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Ann Knapp asked:


For business owners looking to increase inventory or purchase goods from an international supplier, one of the hindrances often lies in providing the supplier with proof that they will receive payment. Without that proof, it can be a challenge to secure the inventory the business needs to generate its own sales. A Letter of Credit (LC), usually issued by a financial institution, acts as an irrevocable guarantee of payment to the beneficiary. In other words, if the company ordering the inventory cannot meet their repayment obligations, the bank will pay.

The LC is also used as a source of payment for a transaction, as in the case of an exporter who is guaranteed payment with the redeeming of the LC. These are primarily used in international trade transactions between a supplier of one country and a customer in another. Generally, the supplier would be required to present proof of a shipment in the form of a commercial invoice or bill of lading, as well as insurance against loss or damage during transit, in order to receive payment.

Consider this example:

Calculators Plus, based in the U.S. imports products from a Korean manufacturer called Calculator Manufacturing, which banks at a Korea-based Bank. Calculators Plus banks with a America-based bank. In this example, Calculators Plus serves the role of applicant. Calculator Manufacturing is the beneficiary. The America-based bank is the issuing bank and the Korea-based bank is the advising bank.

Calculators Plus desires to purchase $50,000 worth of products from Calculator Manufacturing, which agrees to sell the merchandise and gives the company 60 days to pay it with the condition that they provide a 90 days LC for the full amount. The applicant would have to take the following steps to secure a LC:

1. Request a $50,000 LC from the America-based bank with Calculator Manufacturing as beneficiary.

2. The issuing bank goes through its full underwriting process. Although the bank is not advancing money, they are extending credit on the behalf of the applicant and are taking on a contingent liability. As long as the company qualifies from a credit standpoint, the LC is issued.

3. Issuing bank sends a copy of the LC to the advising bank, which notifies the beneficiary that payment is available and they may ship the merchandise ordered by the applicant with full assurance of payment.

4. Once the required documents have been presented and compliance with the terms and conditions of the LC has been met, the issuing bank transfers the $50,000 to the advising bank, which credits the account to the beneficiary for the full amount.

As mentioned before, the LC itself can also serve as the source of repayment of the transaction. Say for example that the Korea-based bank is interested in receiving payment as soon as the merchandise is shipped. The LC would then indicate that payment should be made as soon as Calculator Manufacturing can present proof of shipping.

The above example describes the simplest of LC transactions. Although there are other factors involved such as the role of correspondent banks and confirmations, the issues a business owner should most be aware of is expediency and the fees involved, which can cost between 1.5% to 8% of the value of the LC.

There are several types of letters of credit which a business should be aware:

Revocable Letter of Credit: The LC can be revoked by the issuing bank without the agreement of the beneficiary.

Irrevocable Letter of Credit: The LC cannot be cancelled or amended without all parties in agreement.

Revolving Letter of Credit: This type of LC is established when there are regular shipments of the same commodity between supplier and customer; eliminating the need to issue a LC for each individual transaction.

Stand-by Letter of Credit: A payment or performance guarantee used primarily in the United States. These LCs are used as backup should the buyer fail to pay as agreed. Thus, the Stand-by LC allows the customer to establish a rapport with a seller by showing that it can fulfill its payment commitments. Stand-by letters are generally less complicated and involve far less documentation requirements than irrevocable LCs.



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