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WHY DEBT FINANCING IS A GOOD THING WHEN USING SECURITIZATION FINANCING

Written by: Jayson Curuso

Article Overview: This article address how to get around the three most difficult obstacles facing small and medium size businesses seeking financing. How to look out-side the box to alternative lending programs called securitization financing and the advantages to considering such programs.

WHY DEBT FINANCING IS A GOOD THING WHEN USING SECURITIZATION FINANCING

Just about everyone that owns a business know about the Small business Loan (SBA) program. Many have mix feelings about the program requirements, the interest rates and a few other things that come with the program. Be it pro or con the program has helped a large number of businesses but more have been left out in the cold because of not being able to qualify, i.e., your first born, house and kitchen sink.

Let examine a few of the none conventional debt financing transactions being use by the larger corporations which can also be applied to small and medium size businesses. For over fifteen years I have assisted small business in raising start-up and expansion capital. There is no shortage of ways to go about raising start-up and expansion capital for small and medium size businesses. Over the years the biggest problem I have encountered is in getting the small business owners to open their mine to ways of raising capital other than the SBA loan program. In another article I wrote which is on the Yahoo web site I addressed the subject of creative equity financing for the small business. In this article I will address one of the most innovative and creative financing programs that I have encountered in the fifteen years I have been assisting companies in raising capital. The program is called securitization financing but first let’s take a look at three of the key obstacles facing small business when seeking debt financing.

Three key Problems facing small and medium size companies seeking debt financing

Three problems facing the small business seeking start-up and expansion capital are; no credit history, in my next article I will tell you a way around that if you are seeking conventional financing, the second problem is not having sufficient collateral,(net worth) there is a way around this as well, it’s called balance sheet enhancement, the third problem is the ability to service the debt (make payments on the loan) since I cannot cover all three issues in this one article I will address the problem of getting around servicing the debt which will help some with the first two obstacles. What if you were able to get a loan and did not have to start making payments on the principal and interest until, two, or three years from the time you received the loan? No! It’s not a scam. It’s called Securitization financing.


What is Securitization Financing?

First let’s define the term securitization financing. It is a means of using some form of soft security (asset) such as a bank guarantee, letter of credit from a major commercial bank, solid contracts , tax credits, equipment financing as security against a loan provided back to the borrower. Since the lenders are using Pension fund and insurance company’s monies they play by different rules, there are no long drawn out application, FICO scores, Income tax returns, assessment of number of years in business. They only need a business summary plan description and the name of the bank issuing the instrument for verification and the loan can be funded within two weeks. The key to the loan is the quality of the institution issuing the instrument.

The best way to introduce this concept is to say it is not the bank or financial companies that offer this type program. It is usually offered by venture capital and Investment banking firms.
Their funding comes from pension funds and insurance company endowments with which they have proprietary long term relationships. firms offering securitizing transactions and has many significant and compelling advantages over other debt funding and equity-VC-private equity funding. A few VC firms structure funding through securitization in United States and foreign market below $75 million-per-transaction, as most major investment banks provide similar financing for projects over $75 -$100 million deals.

How securitization financial is used in the larger commercial transactions

Securitization has been around for many years and is used more over in the investment banking and some commercial banking side. You will find Securitization and structured finance, jointly representing the fastest-growing and largest sector of the fixed-income market, deal with non-recourse financing pieces of the corporation balance in various forms: Asset-Backed Securities (ABS), Mortgage-Backed Securities (MBS), Collateralized Debt Obligations (CDOs) and Asset-Backed Commercial Paper (ABCP). But there are no rules that say the small and medium size business cannot use these programs to secure financing for their programs.

No payment of principal and interest for up to 4-7 years.

This type of debt financing is very much like an equity investment in that the major advantage of the funding program is for the borrower to not repay funding until 4-7 years after receipt of loan funds, thus allowing corporate growth/cash flow prior to repayment of principal and interest Characteristics of our debt funding deals are:

1. Very low institutional-level interest rates often below prime (on account of our low cost of funds). 2. Borrowers can structure repayment to match cash flow and availability to make no payment of debt
interest or principal for 4-7 years after receiving funding.
3. Borrower can structure repayment of funding over any time frame from 2 years to 25 years
4. Very streamlined transactions can close in less than two weeks, no covenants.
5. Their financing sources-pension funds and insurance company endowments- do not focus on
underlying business, no review of business model of borrowing entity receiving funding.
6. All funding are private placements, and are off-balance sheet so corporate assets are not attached for
debt transaction.
7. No upper limit on funding per transaction, there have been many over $100 million per transaction
deals. As one can see based on the above terms and procedures securitization financing has many
advantages over other debt funding options.

The key requirements of the VC lender is a $2,000,000 Minimum loan request, A letter of Credit, CD or any investment grade security, even a contract deal (not receivable financing) with a major D&B rated company, or tax credits. They are one of the few available lenders that will structure their financial transactions below the $100,000,000 funding level. For more information on this program contact information below.

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Article Tags: funding, loans, securitization



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