Dennis Zink: Fred, our topic today is alternative financing, interesting topic. What is alternative financing? Can you explain that please?
Fred Dunayer: It’s an interesting question just to answer that because alternative to what? I mean traditional financing is where you have bank loans, traditional bank loans, loans against real estate that sort of thing but a lot of people don’t realize that other assets that they have are also usable for financing. The textbook definitions of alternative financing, well, actually I’ll start with asset-based lending is a term you might hear, is where the lender provides funds secured by the borrower’s assets. Collateral could include accounts receivable, inventory, machinery, patents, trademarks or other assets where value can be determined.
Alternative financing which is a little bit different from lending is where the finance company actually purchases the collateral while continuing to provide the use of these assets to the clients.
Dennis Zink: Okay, great. Why would a company seek alternative financing?
Fred Dunayer: Well, there’s all kinds of reasons that companies needs funds, the obvious is for working capital, could be to buy equipment, funding for an acquisition, merger or a leveraged buy out, perhaps debt consolidation, turnaround financing, hopefully not bankruptcy, re-organization financing, buying inventory. There could be financing needed for import-export trade or just plain growth.
Dennis Zink: What kinds of alternative financing is actually available?
Fred Dunayer: There’s a number of different resources. The ones I want to talk about today are basically four categories. There’s equipment leasing, purchase order financing, inventory financing and factoring.
Dennis Zink: What’s involved in equipment leasing?
Fred Dunayer: Basically, equipment leasing is like automobile leasing. It’s very similar in concept. There are a few differences. In general, equipment leasing is where the lessor, that is the person doing the financing, purchases the equipment needed by the client for the duration of the term or even beyond. The equipment remains the property of the lessor until the borrowed funds plus interest have been repaid. Businesses will typically need to have established credit and have been in business a couple of years before a company will actually do that.
Some firms will purchase equipment that is already in place and the terms are typically up to six years. You would want to consider leasing when the client requires a lot of expensive equipment but wishes to avoid tying up large sums of money on the down payments required by purchasing. They might also consider it when they need to have their equipment changed frequently and want to avoid having capital tied up in obsolete equipment and they have the cash flow which can readily cover the monthly payments but don’t have the money to lay out for the purchase of equipment.
Steve Lovinger: What types of companies provides lease financing and how would I find one?
Fred Dunayer: There’s a couple of different ways to find the companies. One is you can go to the internet and just look up equipment leasing. There’s actually a equipment leasing association that has a directory and you could look for equipment leasing companies. Obviously, if you can find a company that’s in your area, it can be beneficial because then you can sit down face to face and chat with them. Your bank also might do equipment leasing. After all, banks look for hard assets and the equipment is a hard asset. A third option is the manufacturer themselves. A lot of the times that if they’re selling expensive equipment, they see leasing the equipment as another source of income to themselves.
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