Business Balance Sheet and Escrow Loans Learn to think about money the way a banker does - as a bookkeeping entry – and get your balance sheet to work for you.
Wouldn't it be wonderful if one's business could create net worth just like a bank? With an accommodating financial institution and a little creativity on the part of the business owner, it is
possible. The case history that follows shows how small businesses can use these methods to get the financial help they need. The names were changed but the following examples are real live transactions undertaken by our company (consultant).
William Ballast is the owner of a wholesale distribution company. When one of his suppliers announces a gigantic inventory sale, Ballast is eager to take advantage of it. He knows that if he can increase his inventory with goods at the lower price, his average unit cost will be lower and profits would increase accordingly.
Balance Sheet Debt Financing Ballast calls a financial consultant to discuss his problem. Ballast is advised to submit a current Balance sheet reflecting higher cash assets to obtain a more favorable line or credit from the wholesaler. Although Ballast favors such a move, he also wants to avoid a long term debt commitment. He fears that the interest payments from such a debt would wipe out any gains made by buying the additional inventory on sale. The consultant explains that the assets are placed as equity not debt, which pleases him even more.
Step 1: Owner accepts a equity investment in the form cash or cash equivalents provide by the investor. The assets placed in a Money Market fund and/or investment account in the name of the company. After the funds are deposited, the company will have a new balance sheet
Prepared according to accepted accounting practices, which will reflect its increased liquidity.
With the stronger financial picture presented, the supplier is likely to be more favorably disposed toward extending the line of credit. Ballast is convinced that this is a sound approach and enters into an agreement to implement the plan whereby the funds would be provided by a investor supplied by his consultant. The consultant explains to Ballast, now that he has the increased liquidity on his balance sheet, he will also be able to obtain a line of credit for working capital which will allow him to hire additional personnel to help with the additional inventory. The next paragraph explains how Ballast can get his working capital.
Step 2: Ballast receives an increased supplier line of credit. Based on the updated balance sheet, the supplier increases the line of credit for Ballast's company. After the new credit line is established, and he receives his inventory, he needed additional capital to handle the added work load. He can now use the inventory to obtain a floating line of credit from a lender. The cost of the program was kept to a minimum and the desired funding is realized generating a win-win proposition.
Step3: Ballast will need additional capital to handle the added inventory. Ballast now has a strong balance sheet that he can take to a lender for a revolving line of credit or term loan. Since the inventory is not fully owned by Ballast, the lender might need additional collateral.
The consultant will arrange to have a Money Market account opened up in the name of the lender and pledge assets from Ballast’s account to secure any liability on the loan, the lender is happy to make the loan because it is a “wash” transaction. Off -balance sheet account, yes! It is a legal transaction, ask your friendly CPA, “Never ask an Attorney.”
Using Escrow Loans to Purchase Commercial Property Robert Jensen knows of a valuable parcel of land that he believes could be profitably developed.
If he could get an option on the property, he could organize a highly successful joint venture to develop the land. Jensen is afraid that if he doesn't act quickly, someone else will buy the land from under him. He needs time to secure funding for the option and line up partners for his joint venture.
Step 1: Secure Option on Land. Jensen convinces the landowner to give him 90 days to raise the total purchase price of US $2million. In order to hold the land for 90 days, Jensen needs to show 10 percent in an escrow account as a demonstration of his good faith and financial strength.
Step 2: Working with the Consultant, an investor is introduced and agrees to put up the $200,000
to “show” as a good faith deposit After the account is opened, the company provides Jensen with documents showing that the monies are on deposit. The escrow company then writes a series of letters indicating the steps being taken to assure the successful completion of the transaction.
this satisfies the seller and gives Jensen time to put his investment group together.
Step 3: Mr. Jensen forms joint venture Limited Partnership with his company being the general partner. Potential investors approached by Jensen are excited by the project and are especially impressed by the fact that Jensen has already secured an option on the land and put up $200,000.00
of his own monies. They agree to fund the project with Jensen as equity partner and project manager. Jensen contributes his option.
Step 4: Substitute New Escrow Account. The joint venture then opens a new escrow account for US$ 200,000 and substitutes it for the one originally opened by Jensen. The old account is closed The funds in the original escrow, having served their purpose, are returned to the investor.
As a result of the above transaction, Jensen now holds substantial equity in a commercial real estate development worth several million dollars. His only costs up front were a few points for the use of the assets, the escrow account, and the supporting documents that went to the various interested parties.
The financial and banking world has changed in terms of small businesses being able to obtain any type funding (debt or equity). The sooner the small business entrepreneur learn to turn to more creative and non-conventional means of going after financing for his project, the sooner he will be successful in obtaining financing. The above examples are fairly simple and one-hundred percent
legal transactions and will work every any day of the year. But you will not find it listed your friendly college accounting/business courses, thus is the term “think outside of the box”.
If the reader can learn to think about money the way a banker thinks of it - as a bookkeeping entry - then he can get his balance sheet to work for him.
Jason Kuruso,M.B.A., CPA email;info@fargofinancial.com
Happy and Successful Funding
To learn more about this author, visit Jason Kuruso's Website.
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Jason Kuruso
(Visit Jason's Website)
Over ten years experience mentoring small
and medium businesses in creative
financing and investment programs. Provide
innovate and creative loans and small
capital investment. Pre-IPO and reverse
mergers, Acquisitions, write award willing
business plans and prospectus.Education
;MBA,CPA. Have a great securitalization
loan program, fund i8n two weeks and pay
two years after receipt of loan.
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