November 22nd, 2009 | Credit Lending |
This credit crisis has gotten everybody up in arms. It’s caused banks to scale back significantly on who they loan to. In fact, the bailout money that banks received from the government was used to shore up the balance sheets of the banks instead of lending it to businesses. But it is not entirely the banks’ fault. Businesses are afraid to expand or hire because they don’t know what the government is going to do with respect to health care or other programs that could squeeze profits.
This causes a dilemma because businesses still have their operations to fund. Getting a bank loan has become a difficult proposition. There is a method of finance that is actually quite old but has become out of favor since credit had been easy to get (pre crisis). It is the ability for a business to get financing from its own accounts receivable. This sounds a little odd but it is both valid and legal. The concept is called factoring.
As a part of doing business, many companies will extend credit to their customers. This is done typically as an incentive for the business to get the sale. In fact, many of the larger retailers like Home Depot may require their suppliers to extend credit. So when credit is extended, from an accounting standpoint, it needs to be recorded as is done so on the company’s books as an account receivable.
Receivables can be great from the perspective of getting sales but they leave the company in a bind. Receivables are often for thirty days out but the company needs to have cash to pay for operations today, tomorrow, and the next day, and everyday thereafter. That thirty day period puts the company in a cash shortage situation. When times were good, the company would contact a bank and ask for a short term loan. When credit was flowing banks were all to eager to provide this financing. Today though, credit is not so easy to come by, at least not from a bank.
So a factor can come to the rescue by advancing the company the face value of the receivable minus the fee that the factor would charge. This is often a win-win because the factor makes money through the fee and the company has access to the much needed cash. Unlike a bank the factor becomes the collection agent for the company and as such has his or her hand involved with the operations of the business. This is advantageous because the company can forgo the hiring of a credit department to handle this aspect of the business.
Now this is a very simplistic description of factoring. The factor will do credit checks on the customers of the client and there are other procedures that will need to take place. But when compared to getting a loan from a bank, the steps are usually much easier and faster access to cash is possible. What’s great is if new sales are generated during this period those receivables can be factored as well.
When a business takes a loan from a bank, that generates a liability on the business’ books. With factoring however, the receivable is an already an asset and there is no loan being generated. The factor is simply exchanging one asset (cash) for another (the invoice). So the financial position of the company isn’t adversely affected because it took on more debt. There is no debt here. Again, it’s an exchange of assets.
Factoring is not for every company. In fact the fees are typically significantly higher than interest rates that banks would charge. But remember, a business would turn to a factor because it couldn’t get financing from a bank. Further, the factor provides a service that would otherwise have to be handled by the company, i.e., collecting the money from the client’s customer. In the end it can be a great arrangement.
November 19th, 2009 | Investing |
If you want to start investing to get ahead or to start saving money for a rainy day an automatic investment plan is a good and easy way to do it and make money in the process. Now, do you want a savings plan, or a retirement plan? Maybe you just want your own investment fund for some special purpose.
No matter what your financial goal, investment companies can help you save money and make money through an automatic investment plan. Very simply, they set you up so that money is automatically transferred from your bank account to them every month (no charge).
These investment companies are better known as mutual fund companies or fund families. To avoid sales charges go with a major no-load fund family like Vanguard, Fidelity or T. Rowe Price. Their investment plans do not involve a contract, they are simply an arrangement. A minimum investment may be involved, so ask for information.
Now let’s get specific. Say you want to set aside $200 a month in an investment fund. These fund companies offer a wide variety of funds to choose from. Do you want safety, income or growth?
Or, you want to set up your own retirement plan and contribute $400 a month. What kind of account do you open and which of their funds should you invest in?
Let’s start with saving money to accumulate a cash reserve. You need safety here, so go with a money market fund and possibly short-term bond funds as your savings plan.
If your investment plan has a time horizon of several years (like for college expenses in 5 to 10 years) consider adding some intermediate-term bond funds and a little in stock funds to the above.
If you want to set up a retirement plan of your own, open up a traditional or Roth IRA with the fund company. You will have money market funds, bond funds and stock funds to choose from; the latter being growth oriented and riskier than the other two.
If you really want to make money and are willing to accept some risk start investing vs. just saving money. For short term goals, saving money is best because safety is paramount. However, if you have a longer-term time horizon start investing in stock funds and bond funds.
Here’s another advantage of the automatic investment plan. You have a set amount of money each month flowing into your investment plan. When stock prices are low this money will buy more shares in a stock fund. When prices are higher you automatically buy fewer shares. This reduces your investment risk and works to lower your average cost per share.
November 18th, 2009 | Investing |
Life insurance settlements go hand in hand with death. But, individuals investing in life settlements need to know some strategies before investing in any life insurance settlement simply because death may be imminent, but if it’s not immediate and you have money invested in a life insurance settlement you may find yourself wishing someone would just roll over and die. Life settlements are interesting investments because you know the face value you will receive from the life insurance policy but you have no absolute answer as to when that will be and how much money you will make/lose in the process. It’s a gamble, just like any other investment, but there are ways to make the gamble pay off in your favor more often.
First of all, a life insurance settlement is when an individual sells their life insurance policy for less than face value before they die. Individuals investing in this will want to consider the following tips to ensure they only buy policies that have the best possibility of a good return. Remember as well that the longer a person is expected to live the cheaper the policy will cost. The “when” aspect of death is what has many investors wondering about life insurance settlements and whether or not they are good options. Illness, life expectancy, and new technologies that could extend life should all be considered when looking into life settlements.
The first strategy is to make sure you only work with a broker who represents the buyer. There will be less risk of a conflict of interest occurring in this situation. The next step is to talk to your agent and tell them what you feel comfortable investing in and what you don’t. If you only want to invest in terminal cancer patients that is your decision and your agent will help you find those kinds of life settlements. Be sure your agent is aware that you only want to invest in life settlements from A+ rated insurance companies. You don’t want to invest and the person die and then you can’t get the payoff. Finally, make sure the policies you buy are at least two years old. New policies may be part of a scam not to mention insurance companies may not pay the face amount of the policy upon death if the policy is less than two years old.