Factoring Agreement

A factoring agreement details the responsibilities of both the billing company and the factor in a factoring transaction. Factoring is not just about turning some invoices over for cash. There must be an agreement made on how many invoices are to be purchased, for what length of time, how much money will be paid upfront, what the fees and rates will be, which type of invoices will be purchased, and a recourse or non-recourse clause.

Factors may agree to purchase a set dollar amount of invoices, or they may agree to purchase invoices for an amount of time, typically between 3 months and a year. The factor typically reserves the right to review the billed clients’ credit records and may not agree to purchase invoices that are more than 60 or 90 days past due.

Once the invoices are purchased, the factoring agreement may state that the factor is responsible for collecting the entire balance from the client through whatever means necessary, or, it may designate this responsibility to the small business owner.
The factoring agreement should clearly stipulate the fees that will be deducted from each transaction as well as the percentage of the invoice to be paid up front. The factoring agreement also needs to include a recourse or non-recourse clause. A recourse clause places the burden of uncollected invoices back on the business and requires the business to pay that amount to the factor. With a non-recourse clause, the business sheds all responsibility of the invoices, and the factor assumes all risks for collection. Most experts would advise consulting an accountant and a lawyer before signing a factoring agreement.

Government Grants

Government grants refer to business capital offered by the government to support the efforts of a small business.

The first step in determining if your business can qualify for government grants is to research which government grants are available. Look to your industry, but be aware that many industries will not qualify for this type of funding. Government grants are usually reserved for nonprofit organizations that serve the public in a tangible, measurable way.The qualifications for nonprofit grants are stringent, likely focusing on the business type, the business owner(s), and the public that the business serves.

If you find your small business does qualify for government grants, you may want to seek some professional help to apply. There are copywriters who specialize in writing winning grants, and can be a good move to let a professional help you focus your efforts.

For businesses that qualify, government grants make a great way to finance a variety of projects that help drive success.

Import and Export Financing

Import and export financing is available through the Export-Import Bank of the United States and the Small Business Administration (SBA) through their joint effort: the Export Working Capital Program (EWCP). Through EWCP, exporters are able to get credit, insurance, and other financial products. Exporters must be qualified either directly through EWCP or indirectly through intermediary lenders, in which case EWCP can guarantee the loans.

EWCP backing can be vital to obtaining import and export financing. Not all lenders are willing to extend credit to exporters, but by securing backing on these loans, a lender becomes more willing to offer the loan. An EWCP-backed loan will be repaid up to 90% in the case of default.

To qualify for financing through EWCP, a company will have to have been in business at least a year before applying for funding. It could have been in an industry other than exporting. However, in special instances where the exporter has had prior experience in the industry, this requirement may not be necessary.

The SBA is specifically designed to help small businesses obtain funding and provide assistance to them. However, the Export-Import Bank works to help exporters with import and export financing regardless of the business’s size.

IPO

IPO stands for Initial Public Offering. The Initial Public Offering is the first time a company begins to offer stock to the public. It is also called “going public.” Normally, companies will begin offering limited stock options to their employees, close affiliates, or customers. An IPO is a chance for growth on a much larger scale. Once the company has gone public, stock can be traded to those outside the company, and the stocks enter the jurisdiction of the Securities and Exchanges Commission (SEC). An IPO can happen at any point of a company’s lifespan, but it is more common in the early stages, when a company’s financial needs are increasing. Those who purchase stock from the company are investing in it. The IPO is considered to be a form of external financing, and depending on the industry and the company, can offer a substantial influx of cash.

An IPO can be a complicated endeavor. Investors naturally hope to receive a return on their investments. Public perception and other factors can contribute positively or negatively to the value of the stocks. If the company reports recent high earnings the stock value may increase, while poor earnings or news of bad decisions could have drastically bad effects on stock prices, with investors selling off quickly. An additional complication of an IPO is that the investors receive a voice in the decision-making process, which can reduce the amount of control exercised by the company’s higher-ranking executives.

In most cases, to coordinate its efforts when making an IPO, a company may hire an investment bank or other firm with valuable expertise.

Joint Venture

A joint venture, sometimes abbreviated “JV,” is an agreement between two businesses to share the profit and expenses of a common business activity. The businesses involved effectively form a partnership typically governed under a unique joint venture agreement. They also agree to share a portion of their current knowledge, assets, and other resources in effort to achieve their shared goal or goals.

A joint venture is often useful for two companies that wish to work on common efforts without the expense and complications of merging. A joint venture is not always limited two businesses. Non-profits, individuals, and government entities can also become JV partners.

A joint venture is often used to bring together two companies that are skilled in different areas. A joint venture allows two parties to cooperate and share specialties, but there are also inherent risks and liabilities to be considered. Taxation on joint ventures is regulated by federal and applicable law and their income tax is typically determined in the same way it is for partnerships.

Lien

A lien is a claim held by one party on another party’s asset or assets that is released upon fulfillment of one or more stated conditions. A lien is essentially the legal contract governing collateral. It is also sometimes a reflection of the duty of a party to compensate another for work or services performed.

A lien is very common in situations where assets are being purchased or pursued through the use of borrowed funds. A mortgage is an example of a lien in which the property purchased is the subject of the lien. Similarly, an auto loan is an example of such a lien. These are both particular liens, meaning that the obligation to the creditor regarding the particular asset must be satisfied in order for the lien to be cleared.

Another example of a lien is that of a trade worker claiming ownership of property that was built or worked upon. When work is performed by a laborer, he or she may be entitled to hold a lien on the property until they are compensated for their labor.

Certain liens are known as express liens — in other words, liens that are created expressly. This is the case when loan contract is signed and collateral is presented as security for the loan, as is the case with a mortgage or auto loan. A legal relation may also create a lien. This is when work is performed on property and it is the duty of the recipient to compensate the laborer.

Merchant Cash

Merchant cash refers to the money (or capital) that is controlled, borrowed, or earned by a small business owner. The terms merchant cash and merchant capital are commonly used, however, when a business owner is looking for funding.

Merchant cash can be obtained in a variety of ways, from the traditional (such as bank loans) to the alternative (such as angel investors). No matter how the merchant cash is accessed, it’s most often used to invest back into the business.

If your own small business is seeking merchant cash, it’s advisable to explore all of your options. For instance, you could seek a bank loan, an equipment lease, a Merchant Cash Advance, or a line of credit for exactly the same purposes. They will all have different terms and conditions, but by understanding your options, you can make a better, more balanced decision.

Commercial Loan

A commercial loan is provided to businesses to fund their business ventures and operations. The loan can be used, for many business-related purposes such as to purchase or lease property, stock inventory, pay overhead, perform renovations or repairs, and purchase equipment. There are different types of commercial loans available to meet different needs such as small business and start-up loans, equipment loans, real estate loans, and construction loans.

Business owners must often prepare a formal loan proposal before approaching a lending institution. The proposal needs to include a business plan covering at least the first five years of operations, with details about the advertising and marketing strategy, the targeted customer base, the goods or services that will be provided, and financial planning.

Commercial loan lenders also evaluate the owner’s personal and business credit history before approving an application. Start up business owners must have a good personal credit rating as that is the only way a lender can evaluate the owner’s ability to successfully manage finances.

Some commercial loans have slightly different requirements than others. A construction loan may have less rigid payment requirements, and an equipment loan can be secured by the value of the piece of the equipment. Real estate loans or mortgages can also be secured by the value of the property.

Balance Sheet

A balance sheet is a statement of the financial position of a company that reflects a single point in time. A balance sheet is prepared with other financial statements on a particular date usually calculated at the close of a financial accounting period such as a month or fiscal year. A balance sheet is required by the Security and Exchange Commission (SEC) as part of the financial reporting of public companies. The balance sheet is used to convey the responsibility of the business to stakeholders. A balance sheet reflects the accounting equation described by the relationship between your company’s assets, liabilities, and equity. Your business assets include cash, accounts receivable, inventory, real property, and intangible property. Liabilities include accounts payable, income taxes, mortgage notes, and other forms of debt. Owners’ equity includes issued stock and retained earnings – those revenues that have been reinvested as opposed to being distributed to owners. The total of all assets should equal the total of your liabilities plus owners’ equity for the same accounting period. A balance sheet is used to inform you and your stakeholders of the type and nature of assets you hold, and your obligations to your creditors and yourself. The balance sheet compliments the other financial statements (the income statement and statement of cash flows) by summarizing their details and describing how the current state of assets, liabilities and owners’ equity directly impacts those with interest in the company.

Bad Credit and High-Risk Business Loans

A high-risk small business loan is a loan extended to a business with little or poor credit. If your business has a bad credit history, or even no credit history, it’s not impossible for you to get a loan or a line of credit for your business. However, if your business does have challenged credit and is considered “high risk,” chances are good that your best lines of credit won’t necessarily come from a traditional bank loan.

How to Get a Business Loan with Bad Credit

When seeking a high-risk small business loan, expect to pay a very high interest rate. A lender will want to minimize their risks by charging greater interest, or perhaps ensuring a short-term agreement. Another place to look for a high-risk small business loan with bad credit is a web-based lender, which is often a microlender. You can borrow a relatively small amount of money with bad credit from one of these lenders ($5,000-$25,000) and start to improve your credit score by paying the microloan back on time. “Non-bank” providers are the ones most willing to lend to businesses with low credit scores, an arrangement sometimes called a poor credit business loan, and some will report your payments to credit bureaus.

Non-Traditional or Alternative Lenders

Perhaps you need a high-risk small business loan because you have an unusual business idea or you’re looking to get into an industry that’s considered “high risk, high return.” For these types of businesses, you might want to look at alternative or non-traditional funding, as conventional lenders tend to shy away from anything risky.

Raise Your Credit Score

The most important thing to remember is that rebuilding your credit score is the best way to avoid having to arrange a high-risk small business loan, and you can start building better credit anytime.