Compound Profit Blog

As I meet business owners at networking or social events within the Washington DC Metro area and tell them about what we do, the first thing I state is that Compound Profit is an “Alternative Business Financing” solution provider to the small business community. The first question that usually follows is… ”What is Alternative Business Financing?”

So what is Alternative Business Financing? In today’s tight economical times when traditional banking institutions have stopped lending money to small businesses and have slashed lines of credit by 30-50%, the small business owners must look at “Alternative Business Financing” solutions or tools to stabilize and grow their business. That answer makes sense but usually does not make the proverbial “light bulb” go off. So these are examples of Alternative Financing Solutions that are available to the small business owner to help them grow and expand their business:

• Accounts Receivables Financing – Factoring, as it is most commonly referred to, is the practice of selling a company’s customer invoices (B2B invoices) to an authorized 3rd party (otherwise known as the Factor) and they will advance your company up to 90% of the invoice amount, collect the money from your customers, and then refund you the remaining 10% minus their processing fee. Unlike banks or other lending institutions, these companies do not lend based on your credit, but focus mostly on your customers' credit worthiness and / or strength in repayment. This is a great way for businesses to better manage their cash flow, purchase needed inventory, or cover operating expenses. There is no need to wait more than 30 days to be paid by your customers when you could take that capital and generate even more revenue for your business in only a few days. Our Smart Capital Advance program is an example of this type of solution.
• Friends & Family - If a bank is not willing to give you a loan, sometimes friends and family are more than willing to provide you the initial seed money or working capital for your business. Usually, friends and family can be the best source of financing because they know you well, and understand the social consequences of you failing to repay their investment.  However, sometimes it is best to keep business and personal relationships separate; otherwise, you risk to ruin those personal relationships. If you do move forward with getting financing from friends and family, make sure that you get all agreements in writing, even if your family members insist that it isn’t necessary.
• Purchase Order Factoring / Financing – Similar to Accounts Receivables Financing, Purchase Order Financing is the advance of funds to a company, based on the amount of the purchase order, so that the company can fulfill the purchase order. Purchase Order Financing is a solution that enables small businesses to go after and fulfill large orders. When used correctly, this can enable you to grow your company quickly. As opposed to bank financing, purchase order funding does not rely on your business credit profile, but rather on the financial strength of your customers. In other words, if you sell products to large companies or to government entities, purchase order funding can be a great way to finance those sales. To qualify for purchase order financing, your company must sell products. An ideal candidate for this type of financing would be a product reseller or distributor who is buying products from a supplier and then shipping the products to the client. Purchase Order Factoring is one of our core solution offerings as well.
• Angel Investors - Angel investors are private parties, and sometimes businesses, that invest their own funds into selected businesses. The angel investor becomes, in essence, a stockholder in your company, and is as concerned about your business' success as you. Each investor establishes his own guidelines, application methods and standards.  Angel Investors do require a fair amount of documentation (i.e. business plan, sales forecasts, sales and marketing plan) before they will invest any funds. In addition to that, the business owner must be willing to give some equity in the business to the angel investor.
• Merchant Cash Advance - Merchant Cash Advance programs grew from accounts receivable financing solutions. Merchant Cash Advance is a financing solution based upon the merchant’s future credit card sales. Specifically, the lender purchases a portion of the business' future credit card sales at a discount, the rate of which is generally based on the business' sales volume and history. In order to receive a cash advance, a business must be operating for a minimum of three to six months and must process a minimum amount of credit card sales (around $3,000 a month). Many lenders provide a short online application that can be reviewed within 24 hours. After approval, most lenders can send the money within a week. The merchant will receive all the money, while the lender collects a fixed daily percentage of the business' credit card sales until the debt is paid in full. Our Merchant Card program is an offshoot of Merchant Cash Advance programs within the industry.
• Peer-to-Peer Lending - With peer-to-peer (P2P) lending, the financial transaction occurs directly between individuals or "peers" without any involvement of a traditional lending institution. Companies such as Prosper.com monitor an online marketplace where borrowers post their loan requests and are connected with lenders who "bid" on the chance to finance the loan. P2P business loans are usually limited to $25,000, and if you default on your P2P loan payment it can negatively affect your business credit profile.
• Equipment Leasing – Leasing vs. Purchasing is a question that small businesses ask themselves every time they need equipment. Leasing offers many benefits over actually purchasing the equipment. For example, leasing does not require large down payments of cash, which can be put to better use inside the business to pay for current operating expenses. In addition, some leases allow customers to expense 100% of each monthly payment, thus resulting in a real tax benefit to the customer. We offer many types of leases: Small Ticket Leasing, Commercial Leases, and Municipal Leases but this is a discussion for another day.

These are just some examples of alternative financing solutions that are available to small business owners. By using these alternative sources of capital, many business owners will be able to grow their business to a point that they do become creditworthy in the eyes of their financial institutions. Compound Profit is the #1 Brand in Alternative Financing and we have a variety of solutions to help small businesses grow and expand their business.

Anuj Mehta, Regional Director/Principal Advisor

Phone: 877-386-3716 ext. 221

Fax: 877-490-4224

http://www.cprofitdc.com

amehta@cprofit.com

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Episode 2: Municipal Lease Financing - questions and answers

Questions and Answers

Municipal Lease Financing can take several forms depending on state and local laws.  They come in widely varying amounts, ranging from a few thousand dollars to several million.  And they are usually short term, from three to eight years.

From a strict legal standpoint, a municipal lease is not really a "lease".  The equipment is not rented and used for a time and then returned to the owner, but actually is bought by the municipality and paid for over time.  The municipality owns the equipment, subject to a lien.

The municipality only borrows the money used to acquire it.  The principal and the tax-free interest on the remaining balance are then repaid periodically, usually in equal amounts over a fixed period of time.  Payments are made in advance or arrears, often on a monthly basis, but sometimes quarterly, semi-annually or annually.

State and local governments use municipal leases to acquire everything from cars, trucks and emergency vehicles to computers, other office equipment and even buildings.  Virtually any piece of equipment that is needed by a municipality can be purchased using a municipal lease.

What is a Municipal Lease / Purchase Agreement? A Tax-Exempt Municipal Lease / Purchase Agreement is essentially an installment sale contract that fully amortizes during the term of the Agreement. There is no balloon payment or purchase option at the end. The Lessee owns it from day one. The issuer (lessee) is able to acquire and utilize equipment or facilities and pay for them over a specified time period.  If structured properly, the interest portion of the lease payment is exempt from federal and state income tax, resulting in low tax-exempt interest rates to the borrower.

 Why is a Municipal Lease / Purchase generally not considered debt? A Municipal Lease/Purchase Agreement is a yearly obligation renewable at the option of the lessee.  The obligation is subject to the annual appropriation of funds by the borrower.  If funds are not appropriated in a given year, the Municipal Lease / Purchase Agreement may be terminated.  While voter approval is generally not required for a public agency to enter into a Municipal Lease / Purchase Agreement, terms of the transaction are fully disclosed in their annual audited financial statements.  Due to a non-appropriation clause in the contract, payments are considered an operating expense rather than debt.

Who is eligible to utilize tax-exempt leasing? Basically, any municipality or political subdivision who can issue tax-exempt securities may utilize tax-exempt leasing.  Examples:  State & Local government agencies, special assessment districts, public hospitals, fire districts (including volunteer departments), public transit districts, school districts, etc.  The interest can also be done at a taxable rate.

Why should Government Officials consider Lease / Purchase Agreements? Lease / Purchase Agreements should be used to compliment, rather than replace, traditional bond financing.  Many times Lease / Purchase Agreements can be a more timely, efficient, and cost effective means of financing essential equipment and facilities.  In addition to the low cost of issuance, uncomplicated financing documents save both administrative and legal expenses.  For issuers expecting to do multiple transactions over a period of time, additional savings can be attained by use of an Advance Payment / Purchase Agreement.

What type of equipment should I consider leasing? Virtually any type of essential use equipment may qualify for a Lease / Purchase Agreement.  In general, terms may be offered from two to ten years or more, depending on the useful life of the asset. Compound Profit’s Municipal Lease program allows state and local governments to acquire everything from cars, trucks, and emergency vehicles to computers and office equipment and even buildings.

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Episode 1: Municipal Lease Financing – definition, usage and benefits

What is Municipal Lease Financing?

Municipal Lease Financing is an agreement entered into by state, county, city, town or other local government, in order to acquire essential equipment by paying for it over time. The government is the single largest customer in the world; they use (and buy) the same products as private sector companies.

There are over 90,000 separate municipal agencies in the U.S., including state, county and local governments, school districts, water districts, hospital districts, fire districts, utility districts… the list goes on. Each entity has a Board and can issue debt without permission from another agency.

What are the Benefits of Municipal Lease Financing?

Municipal Lease / Purchase Financing is designed to compliment, rather than replace bond financing.  As governmental units have learned about the advantages of Municipal Lease / Purchase Agreements over bonds, they have increased their utilization of this unique financing vehicle to satisfy many of their equipment and facility financing needs.  These are just a few of the advantages of Municipal Lease Financing:

No Cash Down Payment - These financings may provide for 100% of the equipment purchase price or facility construction cost, plus related expenses.  The governmental lessee only makes periodic lease payments.

Tax-Exempt Interest - When properly structured, these transactions result in each payment representing some principal and some interest; the Internal Revenue Service has determined that interest paid in this manner is exempt from federal income tax.  The interest may also be exempt from state and local income tax.

No Public Debt Created - Since the lease payments due in the transaction are subject to annual appropriation, the obligation created by the lease is not subject to constitutional or statutory debt limitations in most states.  Since public debt is not created, voter approval for a Municipal Lease / Purchase Financing transaction is not usually required.

Matching Cost with Revenue - payment obligations correspond more closely to the useful life of the asset(s) that are financed by the lessee.  A full cash purchase charges one year's operating budget with the cost of an asset, which will be in use for several years.  Lease / Purchase transactions can and should be designed to match the finance terms with the expected useful life of the asset, thereby spreading the cost over the budgets for all the years benefiting from the use of the asset.  Amortization can be designed on a monthly, quarterly, semi-annual, or annual basis or even on a SKIP payment basis.

Flexibility - Shorter lead time to arrange a financing, as the procedural aspects of traditional bond financing may be complicated by rigid constitutional requirements which serve capital project financing control, but are inflexible for asset acquisitions and future refinancing.

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