Also known as seller financing, owner financing is growing in popularity in today’s economy. With the credit markets slowing down and people finding it harder and harder to borrow, owner financing is looking better and better as an alternative to traditional financing. Owner financing is when the seller of the property basically agrees to take payments rather than a lump sum. Here are a few things that need to happen in order for the owner to be able to finance your deal:1. The owner needs to have considerable equity in the property. The owner will usually have their own mortgage they will need to pay back in full when they sell the property to you. If they don’t have a whole lot of equity, they usually can’t offer to finance a whole lot of the deal. The best scenario is an older owner that is close to retirement. Odds are that they have a good amount of equity or even own the property free and clear. They are looking to retire and just want a steady cash flow rather than a lump sum when they sell the place.2. The owner should have a desire to accept owner financing. If the seller wants to roll the funds over into another property or needs the lump sum of cash for one reason or another, they probably won’t want to take on very much seller financing.3. The terms need to be right for both parties. The interest rate, duration and repayment structure need to be acceptable for both parties. This usually requires a good deal of negotiation.If you have all your ducks in a row and seller financing seems like it might be a possibility, here are some of the benefits to consider if you are thinking about locking in owner financing:1. You might not have to get traditional financing. This depends on how much the owner is willing to finance. If they are willing to finance just a little bit, this might help you lower your down payment or help you qualify for traditional financing, but won’t completely eliminate traditional financing unless you pay the remaining amount due as a down payment.2. You could get more flexible terms than you would on a standard mortgage. You have the power of negotiating so that both the buyer and the seller walk away with a fair deal. You typically can’t do this with a traditional bank.3. The seller is still somewhat on the hook for the property. You know that you aren’t getting totally ripped off, because the seller still hasn’t received all their money. There is a possibility that you could pay a little bit of a premium for the deal. If they end up totally screwing you, and the property completely falls apart in a few years and you let it fall into foreclosure, the seller only stands to get the property back. The seller isn’t going to want to lend to you using a bum property as collateral.If owner financing seems like it would work for you, there is no reason to start looking for properties for sale with owner financing. Even if a property isn’t advertised as offering owner financing, you may be able to talk with any seller and see if they are willing to negotiate on terms.
The Advantages of Buying With Owner Financing
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Alternative Financing Can Help Offset Cash Flow Challenges Presented By Slow-Paying Customers
The statistics may say that the U.S. economy is out of recession, but many small and mid-sized business owners will tell you that they’re not seeing a particularly robust recovery, at least not yet.There are various reasons for the slow pace of recovery among small businesses, but one is becoming increasingly apparent: A lack of cash flow caused by longer payment terms instituted by their vendors. Dealing with slow-paying customers is nothing new for many small businesses, but the problem is exacerbated in today’s sluggish economy and tight credit environment.This is ironic given the fact that many big businesses have accumulated large cash reserves over the past couple of years by increasing their efficiencies and lowering their costs. In fact, several high-profile large corporations have announced recently that they are extending their payment terms to as long as four months, including Dell Computer, Cisco and AB InBev.So here’s the picture: Many large corporations are sitting on huge piles of cash and, thus, are more capable of paying their vendors promptly than ever before. But instead, they’re stretching out their payment terms even farther. Meanwhile, many small businesses are struggling to stay afloat, much less grow, as they try to plug cash flow gaps while waiting for payments from their large customers.How Alternative Financing Can HelpTo help them cope with these kinds of cash flow challenges, more small and mid-sized businesses are turning to alternative financing vehicles. These are creative financing solutions for companies that don’t qualify for traditional bank loans, but need a financial boost to help manage their cash flow cycle.Start-up businesses, companies experiencing rapid growth, and those with financial ratios that don’t meet a bank’s requirements are often especially good candidates for alternative financing, which usually takes one of three different forms:Factoring: With factoring, businesses sell their outstanding accounts receivable to a commercial finance company (or factor) at a discount, usually between 1.5 and 5.5 percent, which becomes responsible for managing and collecting the receivable. The business usually receives from 70-90 percent of the value of the receivable when selling it to the factor, and the balance (less the discount, which represents the factor’s fee) when the factor collects the receivable.There are two main types of factoring: full-service and spot factoring. With full-service factoring, the company sells all of its receivables to the factor, which performs many of the services of a credit manager, including credit checks, credit report analysis, and invoice and payment mailing and documentation.With spot factoring, the business sells select invoices to the factor on a case-by-case basis, without any volume commitments. Since it requires more extensive controls, spot factoring tends to be more expensive than full-service factoring. Full recourse, non-recourse, notification and non-notification are other factoring variables.Accounts Receivable (A/R) Financing: A/R financing is more similar to a bank loan than factoring is. Here, a business submits all of its invoices to the commercial finance company, which establishes a borrowing base against which the company can borrow money. The qualified receivables serve as collateral for the loan.The borrowing base is usually 70-90 percent of the value of the qualified receivables. To be qualified, a receivable must be less than 90 days old and the underlying business must be deemed creditworthy by the finance company, among other criteria. The finance company will charge a collateral management fee (usually 1 to 2 percent of the outstanding amount) and assess interest on the amount of money borrowed.Asset-Based Lending: This is similar to A/R financing except that the loan is secured by business assets other than A/R, such as equipment, real estate and inventory. Unlike factoring, the business manages and collects its own receivables, submitting a monthly aging report to the finance company. Interest is charged on the amount of money borrowed and certain fees are also assessed by the finance company.Overcoming Fears and ObjectionsSome businesses shy away from alternative financing vehicles, due either to a lack of knowledge or understanding of them or because they believe such financing vehicles are too expensive.However, alternative financing is not hard to understand-an experienced alternative lender can clearly explain how these techniques work and the pros and cons they may offer your company. As for cost, it’s really a matter of perspective: You have to ask whether alternative financing is too expensive compared to the alternatives?If you’re in danger of running out of cash while you wait to get paid by large customers and you don’t qualify for a bank loan or line of credit, then the alternative could be bankruptcy. So while factoring does tend to be more expensive than bank financing, if this financing isn’t an option for you, then you must compare the cost to possibly going out of business.Most business failures occur because the company lacked working capital, not because it didn’t have a good product or service. Unfortunately, this problem is currently magnified for many small businesses dealing with ever-longer payment terms from their large customers. Alternative financing is one possible solution to this common cash flow problem.
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