12MarMarch 12, 2020 By Patrick

Asset Based Loans – How To Figure The True Cost

Understanding the cost of an asset based loan when contemplating the business loan options available in the marketplace is critical to making an informed decision. Most all business owners need capital from time to time to meet the needs of a growing business. They self-fund operations for as long as they can and if they hit their growth goals, they often require additional capital to get there.

The problem is that fast growing companies are often not profitable and have little in the way of retained earnings. This due to the fact that every dollar going in to the business is going back out to meet working capital needs. This is where asset based business loans are a dependable source of capital.

However, the analysis is much different. Your typical business loan is an SBA loan with a 10-year amortization and fixed monthly payments. This type of term loan is great for fixed costs and long term assets such as equipment, real estate, etc. But what if your needs are revolving in nature?

For example, our typical client comes to us because he has a big order that they can not fulfill on their own. Here’s a breakdown of a common scenario we secure funding for:

$1,000,000 loan request to cover the cost of goods and pay suppliers
The company has a 30% margin or can make $1,300,000 upon the sale to their customer (if they can get a hold of $1,000,000 to fulfill the order!)
They have a verifiable purchase order from their credit-worthy customer
They are expecting the total business cycle to be 60 days from the time of the order to shipment to the customer to being paid by the customer
Cost of the revolving credit (in this case purchase order financing, a form of asset based lending) is 2% of the loan amount per month
Simple equation: $1,000,000 x 4% equals $40,000 (cost of capital), $1,000,000 carrying a 30% margin equals $300,000 profit
Net profit on the transaction after the funding cost is $300,000 minus $40,000 or $260,000.

The question becomes, would you spend $40,000 to make $260,000? The answer for almost everyone is yes! As seen, figuring the cost of an asset based loan is much different than a typical business loan. The review consists mainly of looking at the return on capital versus “interest rate” which so many people are obsessed with.

We have actually had clients say that this cost of capital is “too expensive” on an annualized basis. If the business loan revolves every 60 days, the cost is $40,000 multiplied by 6 (60 days divided in to 360 days for the year) the cost is $240,000 in annualized capital cost. However, we need to remember the profit the company stands to make with this type of asset based loan. The net profit per turn was $260,000. If we multiply that by 6 we get $1,560,000 income on an annualized basis.

So, the question becomes, would you spend $240,000 to make $1,560,000? The answer is a resounding, YES, of course!

If your business could grow using a creative asset based business loan, we would like to hear from you and discuss the options.

To your success!

Patrick Zazueta | Huntington Coast Capital, Inc.
714-719-8966

27DecDecember 27, 2019 By Patrick

The Difference Between Bank Asset Based Loans And Private Asset Based Loans

Huntington Beach, CA Owning a business takes a lot of cash on hand. Cash to make payroll, pay rent (or a commercial mortgage), purchase supplies, marketing and advertising, etc. Business owners reach out first to the bank they have their business deposits with to see if they can provide them with a loan. Their bank is a good place to start, and if they can qualify, their journey ends there.

Different types of asset based loans.

Asset based loans can be made against any asset seen on a company’s balance sheet. The common assets used as a collateral for a loan are real estate loans, equipment loans, inventory and accounts receivable. Other collateral considered assets by a lender are purchase orders and supply chain funding lines.

Asset Based Loans Obtained From Banks.

Banks provide asset based loans, but have stricter requirements than the private sector. The first difference you will notice is that a bank will most typically require you to open a deposit account with them in exchange for doing the loan. Depending on the size and type of asset based loan, the bank will require you to switch you entire banking relationship over them as a requirement for doing the loan. Switching your banking relationship is no easy or convenient task.

If deposits are not required, that means that the bank will look to fit you in to an SBA loan program. Banks mainly offer term loans under the SBA loan program versus revolving lines of credit. Loans made against accounts receivable, purchase orders or for supply chain funding are not on the menu for most banks.

The preferred type of asset based loan banks like to issue are for real estate and equipment purchases. The range of your required down payment will depend on the type of loan being considered, your business and personal credit and the amount of liquidity you have on hand post purchase. Most banks set their bottom limit at a 680 credit score or better to be considered for an asset based SBA loan.

Private Sector Asset Based Loans.

In the private sector the whole credit picture is also considered, but not scrutinized quite as closely. The main consideration is the asset quality itself. For example, in an accounts receivable loan, the credit quality of customers, average collection days and historical bad debt write offs are of paramount importance. The private lender will look at business and personal credit scores and evaluate the company’s financial position, however they will also listen to the story. Many business owners have lower credit scores because all of their cash has gone in to their business and this sometimes creates issues meeting their obligations on time. The private asset based lender understands that an asset based loan will improve the company’s cash and allow them the growth opportunity they wouldn’t otherwise have without access to capital. This especially true when considering loans to finance purchase orders or establish a supply chain line of credit.

What Asset Based Loan Is Right For Your Business?

Our advice is to always check with your business bank first. They are the ones that have the experience with your business and it’s always prudent to confirm their ability to assist.

The facts are that most business owners do not qualify for bank loans. This is the reason there is a market for the private asset based lender. Private capital can be used as a bridge or as a permanent financing for those that prefer less oversight from their lending partner.

What Value Does Huntington Coast Capital Bring?

In a word, experience. We have decades of experience in the private capital and institutional capital markets. We navigate our clients through the options, saving them time and when finding the right asset based lending partner for their business. If your business could use some additional capital to purchase equipment, real estate or to finance growth opportunities, we would like to speak with you.

Call us to learn more 714-719-8966.

19DecDecember 19, 2019 By Patrick

What An Asset Based Loan Can And Can Not Do For You

We occasionally receive calls from people who are looking to buy a business. The advice when seeking an asset based loan is always to target a company with at least some assets. Service companies such as accounting or legal practices for example, typically do not have hard assets that they use on a daily basis. This disqualifies the possibility of an asset based loan assisting in the purchase of the company.

What assets do lenders like to use as collateral for their loan? Essentially, any asset found on a company balance sheet can be used as collateral for a business purchase. These assets include accounts receivable, inventory, equipment and real estate. Ideally, a company has more than one of these available to be used as collateral for the lender.

When dealing with a new business acquisition loan request, the first course of action is to explore the SBA loan program and see if you can qualify for a government insured loan. The advantage of this loan is the low down payment of 10 percent required from the buyer. The disadvantage is that the SBA loan program is difficult to qualify for. The underwriting guidelines review the target company tax returns to ensure that the company can take on the additional debt used in purchasing the business. Tax return analysis is the most conservative form of cash flow analysis because everyone looks to minimize profits on their tax returns to avoid paying high taxes.

Secondly, the SBA is also required to take outside collateral when making a loan. This usually means a 2nd position on the buyer(s) residence. Not all applicants own a home, or if they do, have equity to offer in the home. The psychological effects of placing your home as collateral can also be a bit intimidating.

If the applicant can not qualify for an SBA loan, there are private money solutions available. Asset based lenders outside of the SBA program are a bit more flexible. They look at the collateral of the business and see what cash can be taken out of the existing assets. For example, if a company owns equipment and real estate, can those assets be leveraged and applied toward the purchase price? Another popular way of purchasing a business is through factoring the accounts receivable. Invoice factoring companies are asset based lenders focused strictly on the accounts receivable of the business to be acquired. By factoring the accounts receivable, they can make additional cash available for the purchase. For example, if a company has $1,000,000 in open accounts receivable a cash availability of up to $850,000 can be made available for the purchase.

The last piece is what is referred to as a “seller carry back.” This is simply an amount of the purchase price that the seller agrees to accept over the course of a payment plan agreed to between buyer and seller. Asset based lenders view this as equity, but also prefer that the buyer has cash to bring in to the purchase. Cash investment from the buyer is important because it keeps them invested in making the acquisition a success. If the buyer has no capital at stake personally, it is easier to walk away from a failed acquisition. Buyers prefer 100% financing and lenders want some “skin in the game” in order to keep the borrower invested.

Asset based loans can make your business acquisition goals a reality. However, buyers need to be realistic in their expectations. If a buyer has zero capital to put down towards the acquisition or the company targeted for purchase has zero assets, the likelihood of success is very slim.

Advice: if you are looking to acquire a business using mostly outside capital, make sure the business has hard assets and you have a portion to apply to the purchase price. What was not mentioned previously is buyer experience. You should also have some experience in the industry your acquisition is in. For example, purchasing a repair shop and have adequate prior experience as a mechanic.

If you would like to talk about acquiring a business, give us a call 714-719-8966.

To you success!

Patrick Zazueta
Huntington Coast Capital, Inc.

04OctOctober 7, 2019 By Patrick

Working Capital. Every Business Needs It!

How long would your business last without enough money to cover expenses? Most businesses fail within the first three years due to lack of enough working capital, and even well established operations can experience cash crunches. Competitors are a constant. How financially strong your business is, will determine how well you can compete.

The frustration for many business owners is this – traditional lending sources either require you to be financially solid before they lend you money to grow or are conservative in the amount of credit they extend to the seasoned business operator.

So where do most business owners obtain the financing they need to grow their business? In short, asset based lenders. There is a 2nd tier of lenders below bank financing that finance purchase orders, equipment needs, inventory, real estate and accounts receivable. Essentially any asset listed on a given company’s balance sheet can be eligible for financing. Their focus is either on the quality of the asset they are financing or the financial strength of the customer placing the order (in the case of purchase order and accounts receivable financing). This approach makes financing growth much more obtainable for business owners.

What about financing for the established companies? A challenge remains here as well. Financing available for the established business owners is often inadequate to meet growth needs. Banks are most typically conservative and provide small lines of credit, even to companies with strong net worth and income. Companies need creative solutions when seeking additional capital and this creativity comes from the non-regulated, more entreprenuerial thinking, capital sources in the market. Could your business benefit from knowing a partner like this?

About Huntington Coast Capital.

Huntington Coast Capital secures funding for companies in a broad base of industries. Our clients come to us to find a more flexible lending partner to meet their growth needs. Many are declined by the bank and are in need of a more creative and entrepreneurial funding solution.

We consult on a wide range of funding options for business owners throughout the United States in the following areas:

Supply chain financing
Equipment loans and lease programs (learn more about our equipment loan platform offered through our subsidiary)
Lines of credit for working capital needs
Term loans for marketing, hiring staff and general expansion needs
Factoring services for accounts receivable financing that also provides for back office credit and collection functions
Purchase order financing
Asset based loans
Business acquisition financing
Inventory financing
Private commercial real estate bridge loans
SBA loans for business and real estate needs

Whether you are a startup or established, in need of $100,000 or $10,000,000 we have the capital partners to meet your needs. Contact us to see how we can assist in taking your business to the next level. To your success!

26FebMay 19, 2018 By Patrick

Asset Based Loans Versus Bank Loans. Which Is Better For My Business?

Huntington Beach, CA: Our clients come to us with an asset based loan or financing need that almost always is required in order to grow their business. If you are like most business owners, cash flow is tight and if you receive a big order outside the normal course of business, it could be challenging coming up with the cash to cover the cost of goods and deliver the product. Your cash need could also be to finance additional equipment and require an asset based equipment loan in order to meet the increased capacity required to fulfill a contract.

Traditional banking places the emphasis on the cash flow and financial strength of the company, the borrower. They are primarily concerned with how financially solid the company they are lending to is. This is good practice, and it makes sense that the companies that the banks deal with are in good financial health. The obstacle to clear however, is that most companies are leveraged to a high degree and can not meet all of the required ratios banks look for when making a credit decision.

If your company is growing quickly and every dollar is going back out the door to cover ongoing working capital needs, it is likely that you will not meet all the requirements of bank lending. For example, banks look at the leverage ratio of the company. This ratio is figured by dividing the total debt of the company by the equity of the company. Equity being the total assets minus the total liabilities. If you have more than 3 or 4 times the liabilities as you do equity, banks will shy away from offering you more credit for fear that your profits and company cash flow will not be able to pay off the new debt. Again, a prudent way to look at things, but the problem is that most borrowers do not qualify.

The advantage to bank lending is the cost. If your company can qualify, then banks will be able to offer the lowest borrowing rates.

The other option are asset based loans. Asset based loans have a broad spectrum of categories. An asset based loan can be used for commercial real estate purchases, inventory loans, equipment loans and purchase order financing to name a few. In an asset based loan, the lender is looking at the asset being used as collateral in the transaction. For example, if your company received a large purchase order and needs additional cash to pay the upfront costs or deposit required by the supplier, and asset based loan is a good option. The asset in this instance is the purchase order itself. Purchase order financing is often accompanied by a factoring loan. Factoring loans are asset based loans secured by the invoice sent to the customer versus the purchase order sent to the supplier. For more information on factoring loans click here.

In our experience, business owners are qualified for asset based loans more often than bank loans. We explore each option as appropriate and the obvious choice is always revealed in the end. Our clients like the unbiased consultation and industry insight we bring to the table. Because we are not lending our own money and acting in a consultant capacity, we are able to align ourselves on your side of the table and deliver the best options for you and your funding needs. Additionally, in the majority of cases, our services are free to our clients. Our lender network compensates us for bringing them asset based loan opportunities.

If your business would benefit from an asset based loan or equipment loan, give us a call. My direct line is 714-719-8966.

To your success!

13SepSeptember 13, 2017 By Patrick

Asset Based Loans In California In Demand!

Huntington Beach, CA: Business owners have been increasingly inquiring about asset based loans in California and nationwide. Frustrated with the banks, they come to us for answers. We have successfully secured loans for inventory purchases, equipment lease and purchase programs, purchase order financing, lines of credit, term loans and SBA loans to name a few. Is your bank making it difficult to get a loan to grow your business? Contact us and explore your options 714-719-8966 or at patrick@huntingtoncoastcapital.com. How far can your business go?

15AugAugust 18, 2017 By Patrick

Asset Based Loans On The Rise

Huntington Beach, CA Asset based loans are the rise in the second half of 2017. We have seen an uptick in asset based loan requests in California and across the country. The main reason for this, we believe, is that bank credit remains difficult to obtain. For example, SBA loans have traditionally been the choice for business owners looking for asset based loans to acquire another business or to expand an existing one. The SBA is a good option and we have many sources participating in the SBA loan program. However, the is a big IF attached to SBA loans and that is, SBA loans are a good option, IF, you can qualify.

The SBA loan process is stringent and not at all subjective. You either fit in to the credit box, or you do not. There is very little accommodation given for those falling just outside the credit parameters. If you are able to qualify, there is a mountain of paperwork attached that some borrowers do not have the stamina for.

We are seeing an increasing number of applicants opt for the document-light, but more expensive term loan options. There are a crop of lenders in the market place offering asset based loans in California and nationwide. They have grown in popularity due to their quick turn around decisions on credit and their requirement for fewer documents throughout the underwriting process. They still underwrite the cash flow and make sound loans, however, the process is not nearly as tedious.

The reason that SBA loans require so many documents is because they are backed by the government and the lender is partially insured against loss. Understanding this, there are very strict controls in place in order for the bank to receive the insurance on the loan. SBA loans, as stated previously, provide a good option for business owners who qualify, if they can. However, borrowers will need to bring their patience because the process requires a fair amount of endurance.

When working with our clients on asset based loans in California or elsewhere, we always suggest we run two applications in tandem. One through the SBA and another through one of our private sources. This allows them to pick the best option for their needs and provides them with the greatest chance at success.

Could your business use and asset based loans to fund growth? If so, we would like to speak with you. Our unbiased consultation bring the lenders and options to you. We are not a direct lender and as such, we are not “selling” our program. We align ourselves on your side of the table and negotiate on your behalf. Asset based loan, equipment loan, purchase order financing or a line of credit – whatever the need is, we can assist.

To your success!

Patrick Zazueta | Founder
Huntington Coast Capital, Inc.
714-719-8966 Direct

25JulJuly 26, 2017 By Patrick

$50,000 Asset Based Loan For A Chiropractic Office

Huntington Beach, California – Huntington Coast Capital secured an asset based loan for a chiropractic office. The use of proceeds was to consolidate existing debt and additional funds for marketing and working capital. These smaller sized loan requests are difficult to be approved under due to the return to the funding source. However, we were able to get two separate approvals, one through the SBA and another through a private capital source. The SBA option was naturally more attractive from an interest rate perspective and the borrower elected that option.

The SBA loan will be an asset based loan with a blanket lien on all of the business assets. The loan was approved due to strong debt service coverage and the borrower’s strong credit score. The term asset based loan is a broad term and can be used to describe a number of different loan products. Some asset based loans are specific to accounts receivable, inventory or equipment and others are more of a blanket loan on all assets of a business, as in our most recent example.

If you business could use an asset based loan to take advantage of growth opportunities, call us! 714-719-8966.

To your success!

10AprApril 10, 2017 By Patrick

How Will A Rise In Interest Rates Effect Business Owners?

Huntington Beach, CA – How does a change in interest rates effect business owners? Business owners borrower money in order to grow their company’s and expand. Whether the need is for an equipment loan, SBA loan, factoring services, a commercial real estate loan, inventory loan, or asset based loan or line of credit in California or any other state, the cost goes up.

Things That Traditionally Increase When the Fed Increases Interest Rates

The recent rise in the Fed funds rate will likely cause a ripple effect on the borrowing costs for consumers and businesses that want to access credit based on the U.S. dollar. That has an impact across numerous credit categories, including the following:

The Prime Rate: A hike in the Feds rate immediately fueled a jump in the prime rate, which represents the credit rate that banks extend to their most credit-worthy customers. This rate is the one on which other forms of consumer credit are based, as a higher prime rate means that banks will increase fixed, and variable-rate borrowing costs when assessing risk on less credit-worthy companies and consumers.
Credit Card Rates: Working off the prime rate, banks will determine how credit-worthy other individuals are based on their risk profile. Rates will be affected for credit cards and other loans as both require extensive risk-profiling of consumers seeking credit to make purchases. Short-term borrowing will have higher rates than those considered long-term.
Savings: Money market and credit-deposit (CD) rates increase due to the tick up of the prime rate. In theory, that should boost savings among consumers and businesses as they can generate a higher return on their savings. However, it is possible that anyone with a debt burden would seek to pay off their financial obligations to offset higher variable rates tied to credit cards, home loans, or other debt instruments.
U.S. National Debt: A hike in interest rates boosts the borrowing costs for the U.S. government and fuel an increase in the national debt. A report from 2015 by the Congressional Budget Office and Dean Baker, a director at the Center for Economic and Policy Research in Washington, estimates that the U.S. government may end up paying $2.9 trillion more over the next decade due to increases in the interest rate, than it would have if the rates had stayed near zero.

Things That Are Largely Unaffected When the Fed Increases Benchmark Interest Rates

Auto Loan Rates: Auto companies have benefited immensely from the Fed’s zero-interest-rate policy, but rising benchmark rates will have an incremental impact. Surprisingly, auto loans have not shifted much since the Federal Reserve’s announcement because they are long-term loans.
Mortgage Rates: A sign of a rate hike can send home borrowers rushing to close on a deal for a fixed loan rate on a new home. However, mortgage rates traditionally fluctuate more in tandem with the yield of domestic 10-year Treasury notes, which are largely affected by inflation rates.

Things That Traditionally Decrease When the Fed Increases Interest Rates

Business Profits: When interest rates rise, that’s typically good news for the profitability of the banking sector, as noted by investment giant Goldman Sachs. But for the rest of the global business sector, a rate hike carves into profitability. That’s because the cost of capital required to expand goes higher. That could be terrible news for a market that is currently in an earnings recession.
Home Sales: Higher interest rates and higher inflation typically cool demand in the housing sector. On a 30-year loan at 4.0%, home buyers can currently anticipate at least 60% in interest payments over the duration of their investment. Any uptick is surely a deterrent to acquiring the long-term investment former President George Bush once described as central to “The American Dream.”
Consumer Spending: A rise in borrowing costs traditionally weighs on consumer spending. Both higher credit card rates and higher savings rates due to better bank rates provide fuel a downturn in consumer impulse purchasing. (For more, read How Interest Rates Affect Spending.)

11DecDecember 11, 2016 By Patrick

HCC Funds $1,300,000 In Business Loans In The Month Of December

Huntington Beach, CA. During the month of December Huntington Coast Capital secured a $650,000 equipment loan and two SBA loans for $500,000 and $150,000 for a total of $1,300,000 in business loans! The scenarios are outlined below:

$650,000 equipment loan for a southern California contractor – The company was paying a high rate of interest on the equipment they used in their day to day operations – The high cost of financing was impacting their cash flow. They engaged Huntington Coast Capital for their equipment loan needs and we were able to reduce their financing costs by almost half, saving them thousands in monthly finance expense.
$500,000 SBA loan for a growing company in the stencil business – The company produces custom stencils for any design and application. The company had an existing SBA loan and were looking to borrow an additional $350,000 to purchase additional equipment to meet growth demands. Huntington Coast Capital secured a $500,000 SBA loan to cover the equipment costs and refinance the existing SBA loan.
$150,000 SBA Express Loan for a custom glass manufacturer – An established custom glass manufacturer was looking for additional funds for advertising and marketing to break in to new markets and broaden their customer base. They have a profitable business serving general contractors and are looking to expand in to direct commercial work.

Whether your business loan needs are for equipment purchases, inventory or general working capital demands, we can assist. We serve companies of all sizes from startup to established.