Home Finance – Different Alternatives Available for You to Purchase Your Home

When it comes to buying a house it is not easy to pay all the money up front. Also, even if you have the ability to do so, you never need to make such payments as you have reasonably good hire purchase arrangements at your disposal to finance it. With a small down payment, you could buy your house on a mortgage. There are several methods to do it.

• Get a conventional mortgage on the property you buy.
• If your credit score is not good, go for alternative mortgage.
• Get owner financing to close the deal quickly.

Conventional mortgage
If you are able to fulfill all the requirements of a conventional mortgage to finance the property you are going to buy, that is the best way to get a mortgage. You only need to fill up your application and submit to your lender. After careful scrutiny of your credit score and other details he will provide you with the mortgage. Then it is a case of making a small down payment and subsequent monthly installments. The mortgage may span a long term of 10 or 20 years.

Alternative mortgage
In case you are not in a position to go for a conventional mortgage due to your not having a good credit score, you have the option to look for an alternative mortgage company. When you go for this type of mortgage you could not expect the same treatment as for a person who has a good credit score. Instead, they could offer you finance on stricter terms. They could ask for stricter terms on the following.

• Down Payment.
• Interest rate.
• Loan amount.

You could get your mortgage on higher down payment and interest rate. In addition to that they could limit the amount given on the mortgage also.

Owner financing
If you are unable to get conventional mortgage due to your poor credit score or because you want to pay your debt quickly and own the house quicker, getting the owner to finance the hire purchase is the best. There is no third party involved in an owner financing deal. The owner will tell you his terms and if you agree, the deal could be closed. You will make a down payment agreed upon with the seller and afterwards will pay a monthly sum. In a short period of around five years, you will finish the payment to own your house.

Startup Financing For Small Businesses

Startup financing for small business is necessary and hard to acquire. Financing the startup of a business is a particular challenge during tough economic times, as small business startups need money when money for starting up is hard to find. During these challenging economic times, it is difficult to obtain startup financing from traditional business financing sources; particularly for small businesses, which are considered a high risk for business failure.

However, fueled by a growing unemployment issue (caused by shrinking businesses and lay-offs), individuals are following their dreams and opening a small business. If their business idea is perceived to be very strong and if they have a unique product or service with a good strategic plan, they might be able to get traditional business start up loans. If there is a perception of risk, those entrepreneurs need to find an alternative method of raising startup funds.

Traditional business financing includes commercial lending organizations, banks and government financial programs. These organizations provide loan products, operating lines of credit, equipment leasing and asset financing, and more. But, due to current global financial market conditions, it can be challenging to qualify for this startup financing (lending criteria has tightened as most traditional lending institutions want a high level of security and low risk) and it can also be challenging to get cash-strapped lending institutions to disperse business start up loans, asset financing, or operating funds promised.

One alternative to traditional financing is to see if you can interest an Angel investor in providing an investment in your business. Angel investors typically charge higher interest rates and are in for a short term period; they want an exit strategy within a specified period of time (therefore they will want their money back, with interest, quickly). Angel investors are often interested in the high tech or biotech industries; or other high reward (and also high risk) industries. To attract Angel investors, your business needs to have strong and fast growth potential, a talented management team, a compelling business plan, and well priced equity. Angel investors usually look for up to 50 percent equity in the business; this is really dependent on the business proposal and the investment amount. You typically give up some control when you develop a relationship with an angel investor.

Another alternative is to find a strategic partner or to build a strategic alliance that allows your business to reduce its cash and/or startup financing needs. This also means a loss of control over the business; and partnerships can end up like marriages, in divorce. Yet another alternative startup financing is bootstrapping. Bootstrapping is financing a business startup or business growth through non-traditional methods. Bootstrapping is about raising funds (for example, to start a new business), without startup capital. If you plan to startup a business that has a significant investment in capital equipment, consider asset financing. Asset financing will provide a loan for equipment that you buy to operate your business.

For new business owners, that might mean working several jobs to raise cash. Or revising your plan to start your business with less money, or fewer products or services. Consider leasing furniture, computers, sharing office space and administration staff. Make sure you carefully consider your cash flow needs and do a cash flow projection for at least a two-year period. Cash flow management is a way of reducing startup financing needs; effectively manage your cash flow by managing receivables, payables, inventory, and short term debt (in other words, increase incoming cash and reduce outgoing cash).

Some other non-traditional business financing methods might include:

use of credit cards;
second mortgages on the entrepreneur’s home;
equity loans, secured by personal assets; loans from key suppliers;
partial pre-payments or progress payments from large customers;
and/or loans from family, friends and associates.

For small business owners, obtaining the financing to startup your business or to keep it operating is usually a challenging experience. Before you borrow the money you need for startup, ensure that your business can support that level of debt and can repay on the lender’s debt schedule. You need to have a strong business plan and be able to present a strong business case to your lenders.

Financial lenders will assess your knowledge, your capability, and your business proposal. You will likely have to put up personal guarantees for the money you need; this means you have to have assets to back up your guarantees. Unfortunately, not all prospective business owners have the credit rating to qualify with their lending institutions. Business financing and business start up loans are serious endeavors. You will owe a lot of money and if your business doesn’t succeed, your money and your lenders’ or investors’ money will be gone.

Alternatives to Debt Financing

Here, we are going to discuss the alternatives that you can use as it pertains to the ongoing financing needs of your start up business or existing operations. When a business does not usually qualify for traditional bank based funding then the entrepreneur often turns to using capital from private investors. There are usually many issues involved when working with a private financing source. However, the benefits can be substantial if you can go through this process successfully. It should be noted that any time that you solicit capital from a third party investor that this individual or company is going to want a negotiable percentage of your business. As such, you may lose a certain level of control regarding how your business is operated on a day to day basis. Additionally, if you are seeking capital from an angel investor then you can expect that they are going to want an ongoing stream of payments as it relates to their investment.

If you decide to use an alternative to debt funding then it is imperative that you work closely with both your attorney as well as a certified public accountant so that you can ensure that you receive the best deal possible as it relates to selling a portion of your business to a third party. Most importantly, your attorney will be able to provide you with the necessary guidance that is required as it relates to working with an individual that is able to provide you with the capital that you need in order to start or expand your business operations. If you are working with a private funding source then you may be required to have a private placement memorandum. This document is the formal agreement between you and a potential investor. Typically, within any jurisdiction, there are a number of applicable securities laws that may apply to how an investor provides the capital for your business. Only a duly licensed and qualified attorney can make the appropriate determination as to whether or not you need to have additional documentation as it relates to working with an angel investor or venture capital firm.

A frequent alternative to debt financing, if your company is already in business, is to use your ongoing cash flow from credit card receivables or accounts receivables in order to receive the funding that you need. However, this type of financing is usually very expensive. It is not uncommon for a company that finances credit card receivables to charge an interest rate upwards of 18% for their services. Although this is an alternative to traditional debt financing, it is extremely important that you weight the costs, benefits, and risks that are associated with this type of debt funding.

In summation, there are a plethora of avenues that you can take if you do not qualify for traditional debt financing. However, it is extraordinarily important that you continue to evaluate the issues that come from working with third party financing sources as they are typically far more expensive as it relates to interest and principal repayments that are associated with traditional business loans.

How To Finance Multiple Investment Properties

Financing multiple properties

We have all heard phrases like; “Buy land, they are not making any more of it.” Own land, my son and you will never be poor.” “No man feels more of a man in the world if he has a bit of ground that he can call his own.”

These and many similar sayings are weaved into the character of every real estate investor inspiring each to go forth and nobly create a substantial portfolio of properties. Too over the top? OK, maybe you just want the income real estate can provide and realize that building a real estate portfolio can help you reach your financial goals.

As a real estate investor, I have seen firsthand the effects the new mortgage qualification rules set down by the banks are having on both the individual home buyer as well as the investor. Many lenders have further tightened their own guidelines, in turn making it extremely difficult for many investors to successfully grow their portfolios. (Many lenders have eliminated their rental property “products” while others have closed their doors altogether)

So what are the current financing options, what lenders are available and how do we “present” ourselves to potential lenders to get favorable results in order to buy our first rental property or add to our portfolios?

First, let’s address the lender presentation. When we can present ourselves (and our portfolios) professionally, we stand a better chance of getting more mortgage approvals. Many real estate investors do not have a proper “financing binder” and consequently have a tougher time with financing. You want to show any potential lender that you know how to run a legit real estate business.

A professional financing binder should include the following:

1. A copy of a recent credit bureau. You must know your credit score and you “standing” with your creditors before the lender does. Almost 50% of people who have not seen their credit bureau discover errors. These errors are usually from poor reporting on credit cards, loans or car lease accounts. In many cases the client has completed and fully paid an account (perhaps years prior) but the account has not been documented as a closed account. These issues are easily repaired by contacting the credit bureaus as well as the creditor. In the meantime that “open account” can be adversely affecting your credit score.

Go to Equifax or Transunion to “pull” your bureau. These companies provide your credit score at low cost (or free) and provide an historic outline with your creditors. There is no negative impact on your credit score if you pull your bureau 2 or 3 times a year (which I personally recommend).

Speaking of credit, it is wise when mortgage qualifying to reduce or better yet, eliminate credit card, line of credit and other debts. High credit card balances, leases, loans or credit lines can impede the qualifying process, as these debts are part of your overall debt service calculations.

2. Your last 2 years of Tax Returns). If you have existing income properties, make sure your accountant is properly reporting your rental income and expenses in the “Statement of Business Activities” section of the return. This gives a lender a realistic view of your business and indicates the income, expenses and write offs you are taking.

3. Your last 2 years of Notice of Assessments. (NOAs) It indicates whether there are still taxes owing to CRA and provides your (net) taxable income amount, which appears on line 150, both which are key to any lender.

Regarding your line 150… The result of a higher line 150 means we pay more tax, but it is better in terms of receiving more mortgage approvals, so this is clearly a double edged sword situation.

4. If you are self-employed, include a business registration or business license as a sole proprietor or Articles of Incorporation if a Provincial or federally incorporated company. If you T4 yourself from your company, include your recent T4s.

5. For salaried individuals, include your most recent paystubs and a Letter of Employment which includes your length of time with the company, your position and your annual salary.

6. Include statements for any non- real estate investments such as registered funds, stocks, mutual funds or insurance policies.

7. Include the latest mortgage statements from all the properties you own including your principal residence. These statements should include the current balance, interest rate, monthly payment and maturity date. It is also helpful for the lender to know the original purchase and original mortgage amount.

8. A current property tax statement or tax assessment is important to have for all properties.

9. If you hold any condo style properties, all up to date condo/strata documents such as minutes from the most recent Annual General Meeting (AGM), maintenance and engineering reports should be included.

10. A recent appraisal on your properties gives the lender an idea of the equity amount of your portfolio.

11. A net worth statement should give the lender a cross section of all income, assets, liabilities and expenses. Your assets may also include vehicles, precious metals as well as jewelry, furniture and art (providing it has real value… I’m not referring to your synthetic diamond earrings, Ikea couch or your black velvet Elvis painting… not that there’s anything wrong with these!)

12. Finally, you’ll need a section which outlines your properties. This should include pictures, all current leases, a list of repairs, a breakdown of chattels (if applicable) and a DCR or debt coverage ratio spreadsheet.

DCR is a calculation which equals a ratio that lenders consider (especially if you have multiple properties) for the purposes of understanding if your property or portfolio is “carrying” itself. Basically lenders want to see the ratio at 1.2% or higher (although some lenders only require 1.1%). What this means is the property is generating enough income to carry itself without the owner having to go into their own pocket to service the mortgage.

Once you have a well put together financing binder you increase your options as to the lenders you can go to and your chances for approval. That said, adding another mortgage to an already significant portfolio, even with a slick financing binder can still be challenging. It is entirely possible to exhaust the traditional ‘A’ lender’s risk tolerance, forcing investors to utilize alternative lending sources.

Most alternative lenders are less concerned with your personal financial situation and more concerned with their equity position in the property, often resulting in lower LTVs. You should be prepared for slightly higher rates, possible fees and shorter loan terms… usually 1 year. They are also concerned with the marketability of the property should they have to foreclose, so “geography” and current market activity are major factors in the approval process.

Loan of this nature can be accessed through mortgage brokers who have relationships with “Alt A” or “B” lenders, private individuals/estates and Mortgage Investment Corporations (MICs). Let’s break these lending sources down for clarity.

An “Alt A” or “B” lender can be owned or a subsidiary company of an “A” lender (although as of this writing, many of the A lenders have closed these divisions). Other alternative sources are trust companies and credit unions. Many of these institutions have both A and B lending divisions. Because many of these lenders are regionally based, they are often more favorable to purchases in smaller communities where many national “A” lenders are hesitant.

Private individuals or estates which are often represented by a lawyer can be excellent sources for financing. These sources often lend their own money or pooled money from a few investors. They each have their own guidelines as to the loan amounts, types of properties and geographical areas they are comfortable with. Some of these sources advertise locally but are commonly known to well-connected mortgage brokers.

The other alternative source which I am quite familiar with is Mortgage Investment Corporations (MICs). These entities are relatively unknown to many mortgage brokers and investors alike depending on where in Canada you are located. MICs came on the lending scene in the 80s but have gained significant momentum as of late, making their presence known initially in single/multi-residential properties, with some MICs lending to development projects and commercial properties.

MICs are governed by the Income Tax Act (Section 130.1: Salient Rules) and must operate in a fashion which is similar to a bank. In a nutshell, MICs get their mortgage funds through a pooled source of investors; the MIC then carefully lends the money out on first and/or second mortgages. The investors/shareholders make a return on their investment and mitigate their risk by being invested into many mortgages. MICs may also own properties like single for multifamily homes, apartments, commercial buildings and even hotels. All of the net income is returned to the investor/shareholders often on a quarterly or annual basis. MICs can also use leverage similar to a bank. (For more info on MICs, refer to my article entitled “Optimizing MICs” in the March 2011 issue of this magazine)

As stated previously, many of the above institutions may only lend 65% or 75% loan to value which can often fall short of the required amount needed. This is where you can enlist a combination of lenders. Using an “A” lender or any other lender for a 1st mortgage and getting a 2nd with another lender at a higher LTV is possible. Some lenders will offer both a 1st and a 2nd with different rates.

Other financing challenges may stem from the property itself. Lenders have become increasingly more concerned with the property’s age, condition and usage. Lenders want to make sure your properties are well maintained and the units are safe.

Remember, lenders are always concerned about the implications of resale should they have to foreclose, so a well maintained and well located the property is easier to finance and to market… which is good for the investor as well.

How Asset-Based Loans From Commercial Finance Companies Differ From Traditional Bank Loans

When it comes to the different types of business loans available in the marketplace, owners and entrepreneurs can be forgiven if they sometimes get a little confused. Borrowing money for your company isn’t as simple as just walking into a bank and saying you need a small business loan.

What will be the purpose of the loan? How and when will the loan be repaid? And what kind of collateral can be pledged to support the loan? These are just a few of the questions that lenders will ask in order to determine the potential creditworthiness of a business and the best type of loan for its situation.

Different types of business financing are offered by different lenders and structured to meet different financing needs. Understanding the main types of business loans will go a long way toward helping you decide the best place you should start your search for financing.

Banks vs. Asset-Based Lenders

A bank is usually the first place business owners go when they need to borrow money. After all, that’s mainly what banks do – loan money and provide other financial products and services like checking and savings accounts and merchant and treasury management services.

But not all businesses will qualify for a bank loan or line of credit. In particular, banks are hesitant to lend to new start-up companies that don’t have a history of profitability, to companies that are experiencing rapid growth, and to companies that may have experienced a loss in the recent past. Where can businesses like these turn to get the financing they need? There are several options, including borrowing money from family members and friends, selling equity to venture capitalists, obtaining mezzanine financing, or obtaining an asset-based loan.

Borrowing from family and friends is usually fraught with potential problems and complications, and has the potential to significantly damage close friendships and relationships. And the raising of venture capital or mezzanine financing can be time-consuming and expensive. Also, both of these options involve giving up equity in your company and perhaps even a controlling interest. Sometimes this equity can be substantial, which can end up being very costly in the long run.

Asset-based lending (or ABL), however, is often an attractive financing alternative for companies that don’t qualify for a traditional bank loan or line of credit. To understand why, you need to understand the main differences between bank loans and ABL – their different structures and the different ways banks and asset-based lenders look at business lending.

Cash Flow vs. Balance Sheet Lending

Banks lend money based on cash flow, looking primarily at a business’ income statement to determine if it can generate sufficient cash flow in the future to service the debt. In this way, banks lend primarily based on what a business has done financially in the past, using this to gauge what it can realistically be expected to do in the future. It’s what we call “looking in the rearview mirror.”

In contrast, commercial finance asset-based lenders look at a business’ balance sheet and assets – primarily, its accounts receivable and inventory. They lend money based on the liquidity of the inventory and quality of the receivables, carefully evaluating the profile of the company’s debtors and their respective concentration levels. ABL lenders will also look to the future to see what the potential impact is to accounts receivable from projected sales. We call this “looking out the windshield.”

An example helps illustrate the difference: Suppose ABC Company has just landed a $12 million contract that will pay out in equal installments over the next year, resulting in $1 million of revenue per month. It will take 12 months for the full contract amount to show up on the company’s income statement and for a bank to recognize it as cash flow available to service debt. However, an asset-based lender would view this as receivables sitting on the balance sheet and consider lending against them, depending on the creditworthiness of the debtor company.

In this scenario, a bank might lend on the margin generated from the contract. At a 10 percent margin, for example, a bank lending at 3x margin might loan the business $300,000. Because it looks at the trailing cash flow stream, an asset-based lender could potentially loan the business much more money – perhaps up to 80 percent of the receivables, or $800,000.

The other main difference between bank loans and ABL is how banks and commercial finance asset-based lenders view the business’ assets. Banks usually only lend to businesses that can pledge hard assets as collateral – mainly real estate and equipment – hence, banks are sometimes referred to as “dirt lenders.” They prefer these assets because they are easier to control, monitor and identify. Commercial finance asset-based lenders, on the other hand, specialize in lending against assets with high velocity like inventory and accounts receivable. They are able to do so because they have the systems, knowledge, credit appetite and controls in place to monitor these assets.

Apples and Oranges

As you can see, traditional bank lending and asset-based lending are really two different animals that are structured, underwritten and priced in totally different ways. Therefore, comparing banks and asset-based lenders is kind of like comparing apples and oranges.

Unfortunately, many business owners (and even some bankers) don’t understand these key differences between bank loans and ABL. They try to compare them on an apples-to-apples basis, and wonder especially why ABL is so much “more expensive” than bank loans. The cost of ABL is higher than the cost of a bank loan due to the higher degree of risk involved in ABL and the fact that asset-based lenders have invested heavily in the systems and expertise required to monitor accounts receivable and manage collateral.

For businesses that do not qualify for a traditional bank loan, the relevant comparison isn’t between ABL and a bank loan. Rather, it’s between ABL and one of the other financing options – friends and family, venture capital or mezzanine financing. Or, it might be between ABL and foregoing the opportunity.

For example, suppose XYZ Company has an opportunity for a $3 million sale, but it needs to borrow $1 million in order to fulfill the contract. The margin on the contract is 30 percent, resulting in a $900,000 profit. The company doesn’t qualify for a bank line of credit in this amount, but it can obtain an asset-based loan at a total cost of $200,000.

However, the owner tells his sales manager that he thinks the ABL is too expensive. “Expensive compared to what?” the sales manager asks him. “We can’t get a bank loan, so the alternative to ABL is not landing the contract. Are you saying it’s not worth paying $200,000 in order to earn $900,000?” In this instance, saying “no” to ABL would effectively cost the business $700,000 in profit.

Look at ABL in a Different Light

If you have shied away from pursuing an asset-based loan from a commercial finance company in the past because you thought it was too expensive, it’s time to look at ABL in a different light. If you can obtain a traditional bank loan or line of credit, then you should probably go ahead and get it. But if you can’t, make sure you compare ABL to your true alternatives.