REAL ESTATE LOANS - ALL LOANS SECURED BY A MORTGAGE OR TRUST DEED ON REAL ESTATE WHETHER RESIDENTIAL OR COMMERICIAL, REFINANCE OR NEW PURCHASE. INCLUDES 1ST & 2ND MORTGAGES. MAXIMUM LOAN-TO-VALUE RATIO FOR OWNER OCCUPIED IN MOST CASES IS 80%. CAN BE 90-100% IF CREDIT IS VERY STRONG. MAXIMUM ON-OWNER OCCUPIED 70% - MUST CASH FLOW, (DEBT SERVICE SUPPORTED BY RENTAL INCOME).

EXPLANANTION: REAL ESTATE LOANS COME IN MANY FORMS. MORTGAGES ARE THE MOST COMMON. IN SOME CASES THE FORM OF SECURITY MAY BE CALLED A TRUST DEED OR LAND CONTRACT. REGARDLESS OF THE FORM, WHICH THE SECURITY INSTRUMENT TAKES, THE BASIC IDEA IS THE SAME. A"MORTGAGE" IS THE LEGAL AGREEMENT BETWEEN A BORROWER AND A LENDER, WHERE THE VALUE OF THE BORROWER'S REAL ESTATE IS OFFERED AS SECURITY FOR A LOAN. IF THE LOAN IS NOT REPAID, THE LENDER CAN FORCE THE SALE OF THE PROPERTY TO RECOVER THEIR MONEY.

A "CONVENTIONAL MORTGAGE" (OR FIRST MORTGAGE) IS THE BASIC FINANCING FOR REAL PROPERTY, WITH PAYMENTS USUALLY SPREAD OUT OVER A LONG PERIOD OF TIME, (15 TO 30 YEARS). A "JUNIOR MORTGAGE", (2ND OR 3RD MORTGAGE) IS ANOTHER MORTGAGE THE BORROWER CAN MAKE OFFERING A "JUNIOR" OR SUBORDINATE POSITION ON THE PROPERTY AS COLLATERAL WITH THE SAME OR A DIFFERENT LENDER IN ORDER TO RECEIVE ADDITIONAL FUNDS.

IN ADDITION, LENDERS ALSO MAKE A DISTINCTION BETWEEN MORTGAGES ON RESIDENTIAL PROPERTY, WHERE THE OWNER RESIDES, AND COMMERCIAL PROPERTY, WHICH IS HELD TO PRODUCE INCOME. THERE SOME OVERLAP IN SMALL DUPLEXES AND TRI-PLEXES, WHERE THE OWNER RESIDES AND RENTS ONE OR MORE OF THE UNITS FOR INCOME PURPOSES. THE IMPORTANT POINT TO REMEMBER IS THAT THERE IS A STRONG MOTIVATING ELEMENT IN A RESIDENTIAL MORTGAGES THAT WORKS IN THE LENDERS FAVOR. IF THE BORROWER DEFAULTS ON THE PAYMENTS, THEY NOT ONLY LOSE THE PROPERTY. THEY LOSE THEIR HOME AS WELL. THIS IS ONE FACTOR THAT CONTRIBUTES TO LOWER RATES AND HIGHER LOAN-TO-VALUE RATIOS FOR OWNER OCCUPIED RESIDENTIAL MORTGAGES.

 

ADVANTAGES:

  • LOW COST SINCE REAL ESTATE IS THE MOST SECURE FORM OF COLLATERAL.
  • LOW PAYMENTS WHEN THEY ARE SPREAD OUT OVER A LONG PERIOD OF TIME.
  • QUALIFICATION IS EASIER WHEN THERE IS ADEQUATE EQUITY IN THE PROPERTY.

DISADVANTAGES:

  • PROPERTY VALUE MAY BE A LIMITING FACTOR IN THE AMOUNT AVAILABLE.
  • FAILURE TO REPAY MAY RESULT IN LOSS OF THE PROPERTY.
  • COSTS SUCH AS APPRAISAL FEES, TITLE FEES & INSURANCE, DOCUMENTARY TAX, ETC. REPAID BY BORROWER, REDUCING LOAN PROCEEDS.

 DEBT CONSOLIDATION - A DEBT CONSOLIDATION LOAN IS A LOAN TAKEN BY AN INDIVIDUAL TO PAY OFF THE BALANCE WOING IN SEVERAL OTHER LOANS, AND TO PROVIDE FOR ONE, USUALLY LOWER MONTHLY PAYMENT. IT IS A SPECIALIZED TYPE OF PERSONAL LOAN THAT CAN SOMETIMES BE PROBLEMATIC.

 

ADVANTAGES:

  • PAYING OFF SEVERLA LOANS CAN SIMPLIFY KEEPING TRACK OF PAYMENTS.
  • REDUCING MONTHLY PAYMENTS CAN EASE FINANCIAL PRESSURE.
  • CREDITOR'S FUNDS ARE DISBURSED DIRECTLY TO THEM BY LENDER.

DISADVANTAGES:

  • THE FUNDS AVAILABLE ARE LIMITED BY THE TOTAL OUTSTANDING DEBT, COMPLETE CONSOLIDATION DEBT, COMPLETE CONSOLIDATION MAY NOT BE ACHIEVED.
  • REPAYMENT OF THE OBLIGATION IS EXTENDED OVER A LONGER PERIOD OF TIME, WHICH MEANS AN OVERALL HIGHER PAYBACK ON THE TOTAL OBLIGATION.
  • A DEBT CONSOLIDATION LOAN MAY CARRY A HIGHER RATE OF INTEREST THAN THE LOANS IT IS USED TO PAY OFF, WHEN A HIGHER RISK IS PERCEIVED.

 

PERSONAL LOANS - LOANS MADE TO INDIVIDUALS FOR PERSONAL USE LIKE; DEBT CONSOLIDATION, VACATION, ETC. GENERALLY ON SIGNATURE WITH NO COLLATERAL REQUIRED. MUST HAVE GOOD CREDIT AND STRONG EARNINGS TO QUALIFY OR COLLATERAL MAY BE REQUIRED.

 

ADVANTAGES:

  • THE LOAN CAN BE UNSECURED, WITH NO COLLATERAL SUCH AS REAL ESTATE OR PERSONAL PROPERTY REQUIRED.
  • IF COLLATERAL IS REQUIRED PERSONAL PROPERTY OR HOUSEHOLD GOODS MAY BE ALL THAT IS NEEDED.
  • THE LOAN CAN BE MADE WITH SIMPLE INTEREST TERMS OFFERING MAXIMUM FLEXIBILITY USUALLY WITH NO PRE-PAYMENT PENALTY.

DISADVANTAGES:

  • THERE IS A LIMIT ON HOW MUCH CAN BE BORROWED WITH NO COLLATERAL OR SECURITY.
  • WITH LIMITED OR NO COLLATERAL REQUIRED THE INTEREST RATE MAY BE HIGHER.
  • REPAYMENT IS MADE OVER FIVE YEARS OR LESS WITH MONTHY PAYMENTS PROPORTIONATELY HIGHER THAN WITH SECURED LONG TERM FINANCING.
  • BORROWERS WITH LITTLE OR NO NET WORTH OR INSUFFICIENT TO MARGINAL CREDIT HISTORIES WILL NORMALLY NOT QUALIFY FOR UNSECURED FUNDS.

 

BUSINESS LOANS - LOANS MADE TO BUSINESSES FOR EXPANSION OR OTHER ORDINARY AND NECESSARY BUSINESS EXPENSES. MADE TO EXISTING   BUSINESSES, (3 YEARS MIN. IN BUSINESS), THAT CAN DEMONSTRATE VIABILITY AND PROFITS. START-UP BUSINESSES WITH NO HISTORY MUST SEEK FINANCING FROM VENTURE CAPITALISTS OR SECURE THE LOAN PERSONALLY WITH STOCKS, PROPERTY, OR OTHER ASSETS. SEE FSFB SECTION ON ARRANGING VENTURE CAPTIAL.

 

NEW EQUIPMENT LEASES - LEASES MADE TO BUSINESSES FOR NEW EQUIPMENT OR VEHICLES. SOME AUTO LEASES TO INDIVIDUALS. ALLOWS FOR THE USE OF THE EQUIPMENT LEASED FOR A SPECIFIC PERIOD OF TIME.

EXPLANATION: A NEW EQUIPMENT LEASE IS A WAY FOR THE BUSINESSPERSON TO ACQUIRE THE UNLIMITED USE OF EQUIPMENT NECESSARY TO OPERATE AND EXPAND THEIR BUSINESS (FACTORY, OFFICE, ETC.) BY SIMPLY PAYING A RENTAL PAYMENT EACH MONTH RATHER THAN PURCHASING THE EQUIPMENT OUTRIGHT.

 

ADVANTAGES:

  • SINCE THE LEASING COMPANY (LESSER) PAYS FOR THE EQUIPMENT IN FULL THERE IS USUALLY NO SUBSTANTIAL CAPITAL OUTLAY.
  • A BUSINESS PAYS ONLY FOR THE USE OF THE EQUIPMENT-NOT FOR THE OWNERSHIP RIGHTS, FREEING UP ADDITIONAL CAPITAL TO BE UTILIZED IN OTHER BUSINESS AREAS.
  • AT THE END OF THE LEASE THE EQUIPMENT MAY BE PURCHASED FOR ITS THEN REDUCED VALUE OR TRADED FOR NEW EQUIPMENT THEREBY AVOIDING OBSOLESCENCE.

DISADVANTAGES:

  • LEASE FINANCING IS TRADITIONALLY AT A HIGHER RATE OF INTEREST THAN CONVENTIONAL BANK LOANS.
  • DEPRECIATION AND/OR TAX CREDITS ARE USUALLY KEPT BY THE LEASING COMPANY OR PASSED THROUGH TO THE BUSINESSPERSON ONLY IF THEY ARE WILLING TO PAY A HIGHER RATE.
  • WORKING CAPITAL AND OTHER INCIDENTAL COSTS ASSOCIATED WITH ACQUIRING EQUIPMENT MAY NOT BE INCLUDED REQUIRING ADDITIONAL FINANCING FROM OTHER SOURCES.

REMEMBER:

IF IT GOES UP IN VALUE OVER TIME - BUY IT!

IF IT GOES DOWN IN VALUE OVER TIME - LEASE IT!

 

SALE-LEASE BACK - TAKES INTO ACCOUNT THE PURCHASE AND SUBSEQUENT LEASING BACK OF USED BUSINESS EQUIPMENT AND FURNISHINGS. THIS USUALLY CREATIVE TYPE OF FINANCING DEPENDS ON CLIENT'S INCOME AND TAX BRACKET. PRIMARILY RESTRICTED TO PHYSICIANS, DENTISTS, AND OTHER HIGH EARNING PROFESSIONALS ANS SOME BUSINESSES.

 

EXPLANATION: SALE-LEASEBACK (TAX-DEDUCTIBLE FINANCING OR USED EQUIPMENT SALE-LEASEBACK) IS SPECIAL FINANCING USED BY SOPHISTICATED (SOMETIMES DESPERATE) BORROWERS. INCLUDED ARE PHYSICIANS, DENTISTS AND CERTAIN QUALIFIED BUSINESSES.

IN A SALE-LEASEBACK FUNDING SOURCE PURCHASES USED EQUIPMENT FROM THE CLIENT THEN RELEASES IT BACK TO THEM. WHEN THE EQUIPMENT IS PURCHASED CASH IS GENERATED WHICH THE CLIENT CAN PUT TO IMMEDIATE USE. MONTLY LEASE PAYMENTS ARE MADE FOR A SPECIFIED PERIOD OF TIME. AT THE END OF THE LEASE THE EQUIPMENT CAN EITHER BE RE-PURCHASED FOR IT'S THEN REDUCED VALUE OR IF THE CLIENT NEEDS ADDITIONAL CASH ANOTHER SALE-LEASEBACK ON THE EQUIPMENT CAN BE NEGOTIATED. AS IN ALL LEASES OF BUSINESS RELATED ASSETS PAYMENTS ARE A 100% TAX-DEDUCTIBLE BUSINESS EXPENSE!

 

ADVANTAGES:

  • LEASE PAYMENTS ARE ENTIRELY TAX-DEDUCTIBLE.
  • USED DEPRECIATED EQUIPMENT MAY BE ONLY ASSET PLEDGED.
  • CREDIT APPROVAL CAN BE MORE LIBERAL FOR LARGER AMOUNTS. EXISTING BANKING RELATIONS CAN REMAIN UNCHANGED.

DISADVANTAGES:

  • SOME USED EQUIPMENT HAS A LIMITED VALUE AS SECURITY.
  • REAL ESTATE AND/OR PERSONAL GUARANTEE MAY BE REQUIRED.
  • THE RATES FOR SALE-LEASEBACK ARE TRADITIONALLY HIGHER.
  • RE-PAYMENT IS LIMITED TO  A MAXIMUM OF 5 YEARS WITH PROPORTIONATELY HIGHER MONTHLY PAYMENTS.

 

ACCOUNTS RECEIVABLE FACTORING OR ADVANCE - BUSINESSES WHO EXTEND CREDIT FOR GOODS OR SERVICES AND ADVANCED MONEY SECURED BY PLEDGING THE RECEIVABLES OWED TO THEM.

 

PURCHASE ORDER FINANCING - CASH ADVANCED AGAINST A WRITTEN ORDER. (PURCHASE ORDER), FOR BUSINESS GOODS OR SERVICES TO BE DELIVERED OR PERFORMED.

 

CONTRACT FINANCING - A MONETARY ADVANCE AGAINST A WRITTEN CONTRACT FOR SERVICES TO BE PERFORMED OR GOODS TO BE MANUFACTURED AND/OR DELIVERED.

 

DISCOUNTING MORTGAGES - CASH PURCHASE OF A NOTE SECURED BY REAL PROPERTY. INCLUDES MORTGAGES, TRUST DEEDS, AND IN SOME CASES LAND CONTRACTS.

EXPLANATION: THE DISCOUNTING OF A MORTGAGE IS A WAY FOR A PRIVATE PARTY WHO IS ACTING AS A MORTGAGE LENDER TO RECEIVE A LUMP SUM OF CASH INSTEAD OF HAVING TO WAIT OVER A LONG PERIOD OF TIME TO COLLECT THE MONTHLY PAYMENTS. THE TYPICAL PRIVATE PARTY LENDER IS A HOMEOWNER WHO HAS SOLD THEIR HOME AND AGREED TO HELP THE BUYER WITH THE DOWN PAYMENT BY ACCEPTING A NOTE TO BE REPAID OVER TIME.

 

ADVANTAGES:

  • DISCOUNTING A MORTGAGE IS NOT BORROWING MONEY. ONCE THE PRIVATE PARTY RECEIVES THEIR CASH THERE IS NO FURTHER OBLIGATION.
  • GENERALLY, NO ADDED FEES OR PROCESSING COSTS ARE CHARGED TO THE PRIVATE PARTY.
  • PROCESSING TIME AND PAPERWORK ARE KEPT TO A MINIMUM.

DISADVANTAGES:

  • THE AMOUNT MADE AVAILABLE CAN BE SIGNIFICANTLY LESS THAN WOULD ORDINARILY BE COLLECTED DIRECTLY.
  • LENDERS ARE VERY CHOOSY ABOUT WHAT TYPE S OF PROPERTIES AND TERMS THEY ARE WILLING TO DISCOUNT.
  • ALTHOUGH THIS TYPE OF FINANCING HAS BEEN AROUND FOR MANY YEARS, POTENTIAL CLIENTS ARE NOT FAMILIAR WITH IT AND MAY NOT BE AS RESPONSIVE AS THEY ARE TO A TRADITIONAL LOAN FOR ARRANGING MONEY.

 

BUSINESS FINANCING LOANS, LEASES, ACCOUNTS RECEIVABLE FINANCING, CONTRACT/PURCHASE ORDER FINANCING & VENTURE CAPITAL - EXPLANATION: "BUSINESS FINANCING" COVERS DIFFERENT METHODS BY WHICH A BUSINESS OWNER CAN BORROW MONEY INCLUDING:

  • SECURED LOAN - A LOAN SECURED BY BUSINESS EQUIPMENT, ACCOUNTS RECEIVABLE, INVENTORY, CONTRACTS, PURCHASE ORDERS, REAL ESTATE OR SOME COMBINATION.
  • EQUIPMENT LEASE - A METHOD BY WHICH A BUSINESS CAN ACQUIRE THE USE OF BUSINESS EQUIPMENT WITHOUT BUYING IT.
  • EQUIPMENT SALE-LEASEBACK - A WAY FOR PROFESSIONALS (SUCH AS PHYSICIANS OR DENTISTS) TO ARRANGE FUNDS USING THE EXISTING USED EQUIPMENT OF THE BUSINESS AS SECURITY.
  • VENTURE CAPITAL - A FORM OF BUSINESS FINANCING IN WHICH FUNDING IS NOT SECURED IN THE TRADITIONAL SENSE RATHER THE OWNER OF THE BUSINESS USES A PORTION OF THAT OWNERSHIP AS THE INDUCEMENT FOR AN INVESTOR TO PROVIDE THE NEEDED FINANCING. THIS OWNER IS LITERALLY GIVING UP A PERCENTAGE OF FUTURE BUSINESS PROFITS IN RETURN FOR OPERATING, EXPANSION OR START-UP CAPITAL.

ADVANTAGES:

  • GROWTH CAN BE FUNDED USING EXISTING ASSETS COMBINED WITH GOOD CREDIT STANDING.
  • PERSONAL LIABILITY MAY BE KEPT TO A MINIMUM.
  • NEW AVENUES FOR PROFITS CAN BE OPENED.

DISADVANTAGES:

  • THERE IS A LIMIT ON HOW MUCH CAN BE BORROWED USING EXISTING BUSINESS ASSETS AS COLLATERAL.
  • FAILURE TO REPAY CAN RESULT IN A FORCED SALES OF THE ASSETS AND POSSIBLE LOSS OF THE BUSINESS.
  • A BUSINESS MUST SHOW A HISTORY OF PROFITS IN ORDER TO QUALIFY FOR A LOAN OR LEASE.

OTHER FINANCING ALTERNATIVES FOR BUSINESSES - SBA LOANS

ONE OTHER NOTED AREA OF BUSINESS FINANCING YOU SHOULD KEEP IN MIND IS A LOAN MADE OR GUARANTEED BY THE US GOVERNMENT UNDER THE AUSPICES OF THE SMALL BUSINESS ADMINISTRATION. THE SBA ARRANGES FOR SECURED FINANCING FOR QUALIFYING BUSINESSES ANYWHERE IN THE UNITED STATES FOR BOTH EXPANSION AND START-UP SITUATIONS.