http://www.expressbusinesscapital.net/receivables_factoring

http://www.expressbusinesscapital.com

 

 

Financing through a securitization of receivables does not create a liability. An asset--the receivables--is sold for cash; no accounts receivable

loan has been granted. Another way to look at it is that the accounts receivable financing

money is never due back to the ABS company. We often forget that a line of credit, like any loan, is due back at some point, and that point may come at a very unpropitious time. If a company has other loan agreements with financial accounts receivable factoring covenants, often the deleveraging effect of selling an asset for cash rather than obtaining another billing accounts receivable

loan greatly helps companies trying to remain in compliance with account receivable financing debt-to-worth ratios.

 

A securitization program is therefore a viable financing source for a nursing home. The extent of its viability varies, however, depending on the individual account receivable factoring program. The better programs in the industry can advance funds even if a receivable has not yet been billed. This works to the monthly billing and paying accounts receivable loan

cycle of much of a nursing home's receivables. Another important feature of a securitization program is that each nursing home should not have to cross-guarantee the accounts receivable loan

financing by funding some reserve that is available to the securitization sponsor to protect against cash-flow problems that may develop because of some other customer.

Finally each securitization accounts receivable lending

program quotes fees in a different way. In order to make good comparisons, a nursing home should insist on getting a complete disclosure of all costs. The business financing

mechanics of each program and the sponsor's ability to deliver should also be kept in mind. A bad credit business financing

sponsor which is a subsidiary of a large, financially solid institution will be able to better weather worsening financial conditions than a small startup business financing

sponsor with no creative business financing

institutional backing. Also the sponsor's information-processing and reporting systems should be studied in depth in order to determine whether they will be able to efficiently process all the small business loans

data they will receive. An inefficient sponsor may delay payments and create serious bottlenecks in the flow of cash to the nursing home -- a problem that most nursing homes definitely don't need.

 

 

 

 

 

 

Prior to the late 1980s, accounts receivable purchase programs were of limited use and availability to provider organizations because retrospective reimbursement practices dominated the healthcare industry. Accounts receivable financing programs began to appear when prospective reimbursement policies forced provider startup business financing

organizations to become more adept at managing their financial resources. The drive toward managed care only has accelerated the need for creative financing mechanisms to improve cash flow as well as fund asset acquisitions and joint ventures.

The growth of accounts receivable purchase programs initially was slow, in part because executives believed the sale of accounts receivable would be perceived as a sign of financial weakness in their financing small business loan organizations, and in part because this type of financing mechanism was not well understood in the industry. Since 1990, however, there has been a market for accounts receivable purchase programs among healthcare providers that recognize the need for a vehicle for improving cash flow. An increasing number of nursing homes, home health care providers, psychiatric/alcohol and substance abuse facilities, and acute care hospitals are entering into receivables purchasing programs.

Benefits for small business loan debt consolidation

providers The objective of an accounts receivable purchase program is to provide immediate funds to healthcare bank small business loans

providers so they do not have to wait to obtain quick small business loan

capital until receivables are collected. The resulting acceleration of bank small business loan cash flow allows the provider to reduce unsecured small business loans

payables, prepay accounts to obtain discounts, or pay off tax liens and other debts that threaten the financial stability of the business. It also improves the balance sheet. With a properly structured sale of accounts receivable, a provider can remove from its balance sheet the receivables that have been sold and substitute cash without recording any significant new small business loans

liability other than the small business loans start

liabilities that may arise as a result of failure to comply with the terms of the sale small business loans government

agreement.(a) In addition, accelerated cash flow provides a source of unsecured small business loan

funds from which the seller can make acquisitions of other small business loan program

businesses, real estate, or equipment.

The availability of this type of financing also is important to small business loan application providers because it provides funds when existing covenants restrict additional funded debt or when other sources of financing are unavailable because of the organization's poor financial condition. The financial condition of a provider organization is significantly less important to a purchaser of receivables than it is to a lender. Unlike a loan from a va small business loan

lender that is secured by accounts receivable, the purchase of receivables insulates the minority small business loan

purchaser from a provider's bankruptcy. For example, accounts receivable that have been sold are not part of a provider's bankruptcy woman small business loans

estate. The small business financing

purchaser therefore does not have to adhere to the automatic stay that is imposed by bankruptcy laws. The small business finance purchaser also is not subject to the loss of any overcollateralization that may have been structured into the financing program.

Program small business equipment financing

structure

 

 

Though the small business financial planning

company could have used its own capital to fund the small business lines of credit transaction, Geis thought there were more productive ways to use the direct financing

 cash. "We used financing instead of small business resources

cash to remain prepared for a variety of competitive potentials, such as media campaigns," he says. The ease with which he could obtain short-term funds also allowed the small business advice

company to capitalize quickly on geographic expansion financing leasing

opportunities, which are imperative in his industry. "We might have to make major asset financing

decisions, like opening up a new market, in four days," says Geis, who now operates nationally. "There is no way to go out and acquire equity capital or long-term high-dollar financing."

Filling a Temporary Void

For a quick-moving company like Geis', a primary benefit of short-term financing is its flexibility; with it, a business can adapt swiftly to changing receivable financing market conditions while conserving working capital. Short-term financing can also serve as a lifeline, helping sustain a shaky business operation until it gains commercial footing.

In reality, too little bootstrap financing

capital can quickly derail a developing company, yet many entrepreneurs don't appreciate the important role that short-term financing--usually a loan or line of credit of up to one year--plays in cashflow management. Indeed, an interim funding arrangement not only allows expansion financing businesses to take on bigger deals and increase sales, but also helps ensure they won't run out of operating receivables financing

capital before securing more permanent financing. Rapidly growing companies are often the most vulnerable to capital shortages, despite their sometimes-spectacular sales records. "Often, the businesses that are growing have a need for cash that's just as great as a business in decline or in temporary trouble," stresses Houston accountant Calvin Martin. "Growth requires additional accounts receivable, and they do not generate cash until they're collected. At the same time, you're paying for rent, for labor, for all your expenses that require cash."

Whether a business is growing at breakneck speed or developing at a more controlled pace, winning the cash-flow battle requires vigilant monitoring of sales activity, expenses and customer payment patterns. This allows owners to pinpoint and deal with a cash-flow deficiency before it evolves into a full-scale crisis. "If sales are declining, you need to find out why," Martin advises. "You may need short-term financing to pump up those sales through advertising and promotion."

Spend Wisely

Bear in mind that short-term accounts receivable financing isn't ideal for all kinds of capital shortfalls. As a general rule, short-term debt should fund business activities that will generate cash flow to repay the loan. Businesspeople need to distinguish between a temporary investment in current assets and a permanent investment, says consultant John Barrickman, president of New Horizons Financial Group in Roswell, Georgia. "With a temporary investment, you finance the purchase of the asset with the intent of liquidating the asset in the normal course of business." An example is a retailer who builds up inventory in the fall in anticipation of the holidays: "They'll sell the inventory during the Christmas season and pay the loan back in January, and not have another need until the subsequent fall," Barrickman says.

On the other hand, a company that has to constantly replenish its inventory may have difficulty managing short-term debt. "A lot of times, the lender will finance it with a line of credit," he says. "But every time that line matures, the borrower better be sure the lender is prepared to renew it or [convert the debt to a term loan], because, if they don't, the borrower is going to have to find another institution to loan them the money." Short-term financing is also risky if a business suffers a temporary setback but its lender refuses to extend the loan period. "It's a shame to see a company with positive sales growth and positive earnings [lose] its ability to obtain supplies to build their products or to deliver their services," says Rick Vycital, regional director of the Idaho Small Business Development Center in Boise.

While entrepreneurs sometimes have only themselves to blame for cash-flow difficulties, external market forces, such as labor shortages or oil prices, can wreak havoc on even well-run companies. In Geis' case, soaring gas prices generate uncertainty. "If gas goes to $3.50 a gallon, using an airplane is going to go right down the tubes," he declares. But rather than sit back and hope that rising fuel costs won't limit operations, he has used interim financing to help fund the purchase of energy-efficient gear. "[Without short-term financing], I'd be stuck with a particular business model for two or three more years every time I did something," Geis adds. 'And two or three years is two generations right now in terms of business cycles in my industry."

NO SURPRISES

When short-term financing is necessary to "bridge a problem," an entrepreneur should demonstrate that the funds aren't merely a temporary resolution to a permanent predicament, says Rick Vycital, regional director of the Idaho Small Business Development Center in Boise.

According to Vycital, financial backers are more likely to lend their support when the business owner has genuinely sought solutions to a crisis. "Just to keep borrowing and not change the source of the problem is not the type of loan that a bank or investment company would be wiling to, or should be asked to, entertain," he says. "You'd better show how you're going to support the loan with changes, improvements and increased profits."

The good news is that lenders and investors are often receptive to short-term funding interventions because they have a vested interest in an entrepreneur's success; in many instances, they have contributed more funding to the developing business than the owner. What they expect in return is an open line of communication. "Your job as the owner is to communicate the status of your company," Vycital stresses. "Getting to the point where you have a calamity and surprising them--why would you do that?"

In 2003, informal investors provided more than

$100 BILLION

in financing

to

3.5 MILLION

startups and small businesses.

Expanding lines of credit at a time when credit is tight

THINGS SEEM TO BE GETTING BACK TO NORmal for many businesses. Demand has revived in many economic sectors. Some electromechanical service and sales companies report a return to pre-recession sales volume. Others continue to show unstable cash flows.

In the meantime, as sales grow, some firms need to expand lines of credit to cover larger levels of inventory and accounts receivable emerging on their books. Others may need financing for new equipment or for dealing with seasonal peaks and valleys. Still others may have been asked to exit their current banking relationships.

In an economy that has left many banks feeling conservative, it may be difficult for service and sales firms and other recovering businesses to satisfy their borrowing needs. Companies may bring in bank after bank, only to be rejected time and again.

A key to avoiding frustration is to understand the criteria that conventional lenders use. These may explain the rejection. Once a company recognizes where it falls short with respect to those criteria, it can seek out alternative lenders that are better suited to deal with its unique risks.

Conventional criteria

One set of basic criteria are applied by conventional cash flow lenders, which include commercial lending departments of most banks. They are the three C's of collateral, cash flow, and capital. If any one of these is deficient, unfortunately, conventional lenders will usually reject the loan.

Collateral is another name for a borrower's bankable assets. It is what the lender can expect to draw upon in the event of the borrower's default. Naturally, collateral does not reflect dollar-for-dollar the value of the assets on the company's accounting records. Rather, various levels of discount, known as "advance rates," are applied.

Accounts receivable, for example, are applied a 70% to 85% advance rate in determining how much the bank will lend against them. Inventories have a rate of 30% to 65%, which usually excludes work in process unless tied to a particular customer order.

For equipment and real estate, the value is based upon an appraisal. Eenders will advance 70% to 80% of equipment's orderly liquidation value, and 50% to 80% of the appraised value of real estate. For equipment in use, 25% of original cost is a rule of thumb.

Together, assets valued at these advance rates comprise the pool of collateral upon which the bank lends. Conventional lenders expect their loans to be fully collateralized.

The second criterion is cash flow. Adequate cash flow must not only be expected in the future but also historically proven. Companies with cash flows that vary from positive to negative from month to month will have a difficult time obtaining conventional financing.

Lenders compare cash flow with debt service. Debt service includes the amount of interest expense plus the repayment of principal on term debt. Cash flow is operating profit before interest minus income taxes. The formula assumes that depreciation approximately equates to the need to purchase new equipment. If not, actual anticipated purchases may be substituted for deprecation.

The expected minimum ratio of cash flow to debt service ranges from 1:1 to 1.5:1, depending on the lender's perceived risk. This means that for every dollar of interest and principal repayment, the business must generate an equal or greater amount of cash after tax.

Finally, capital is an essential ingredient. Capital is the equity of the company, which includes amounts initially funded by stockholders plus cumulative earnings of the company from inception, minus dividends distributed. Debt that is explicitly subordinated to the bank's is included with equity or capital rather than debt.

Lenders compare capital with a company's total indebtedness. The relationship is expressed as the ratio of debt to equity. Total debt divided by equity or capital must be in the maximum range of between 2:1 and 4:1. At a 2:1 debt to equity ratio, $1 must be equity for every $2 borrowed from banks or vendors. Companies that fall short are considered undercapitalized.

Fortunately, there are alternatives to the conventional criteria.

Asset based arrangements

Businesses that have operated for many years often have built up substantial collateral, such as owned real estate. These businesses may be unable to satisfy the cash flow requirements of conventional lenders. Or, if the business was recently acquired, it may be short on capital. In these situations, asset based lenders are an excellent option.

Asset based lenders take higher risks because of their focus on collateral. In return, their interest rates are somewhat higher than those of conventional cash flow lenders.

They also monitor loans much more closely and require frequent collateral reporting. Their advance rates generally follow those outlined for conventional lenders.

In more extreme situations, asset based lenders do not go far enough in terms of their risk tolerance. Other types of lenders may be able to relax cash flow and capital requirements even more, while offering higher advance rates. Ultimately, lenders actually take title to assets themselves. For accounts receivable, the arrangement is known as factoring.

But selling assets also applies to larger things that the company needs in order to operate. Equipment and real estate can be sold to and then leased back from third party investors.

Many of these are private investor groups that have raised funds just for this specialized purpose. The availability of these funds enables businesses to free themselves of more onerous arrangements and, for real estate, to obtain time to shop for less expensive facilities.

 

 

 

 

Companies specialized in raising money through securitization have started to focus on financing health care providers in general and nursing homes in particular. These ABS companies typically will buy a nursing home's receivables but leave the collection and whole receivable management process in the hands of the nursing home. ABS companies are highly experienced in an extremely narrow field. They can derive a greater amount of confidence than a bank from the assets they finance. Consequently they do not focus on a company's financial standing as much as a traditional lender does. But these are not the only reasons they can be an attractive alternative to traditional lenders for nursing homes.

Cash flow alternatives

Less established companies may have significantly fewer assets to offer. Because of their kick of collateral, they likewise have trouble obtaining conventional financing. Often, however, they have cash flows that can attract alternative lenders.

The major sources of funding that focuses on cash flow are providers of subordinated debt or mezzanine financing. They measure cash flow using EBITDA, or earnings before interest, income taxes, depreciation, and amortization. They view their niche as being able to provide a layer of financing over and above what the collateral advance rates support.

For example, a conventional bank would prefer to keep its loans at less than the borrower's EBITDA multiplied by three. If a borrower has EBITDA of $1 million, for example, lenders would rather not provide more than $3 million. Providers of subordinated debt or mezzanine funding, on the other hand, are willing to raise the multiple to four with another $1 million in debt.

Accounts receivable purchase programs differ in complexity and cost; however, from the perspective of the healthcare provider, their basic structure is fairly standard. Under a purchase program, a provider organization sells its accounts receivable to an small business

entity that has been established for the sole purpose of purchasing the factoring small business

receivables. Usually, the purchasing entity is controlled by the bank or firm that sponsors the program, and the entity funds purchases by using the receivables as collateral for loans or investments from third parties or from an affiliated company. The purchasing entity on occasion may be controlled by the healthcare provider. In such circumstances, the loan small business

entity obtains funds for the purchase of receivables through loans made by the small business accounting

program sponsor.