January 2005 Archives

Forget all the negative press about "predatory practices" that have put some of the major sub-prime lenders out of business lately - there is much more to the picture! A sub-prime lender is one who lends money to high-risk individuals.

The biggest players, including some large banks and insurance companies, are losing tremendous sums of money at the sub-prime game.

Over the past several months, most major sub-prime lending companies, including the biggest and oldest in the business, experienced some difficulty in one way or another. Many have either struggled to keep their doors open or have actually decided to file for bankruptcy.

Those still standing have had their investment ratings downgraded due to the industry's legal and political risks, not to mention the financial realities of doling out money to high risk borrowers, secured only by high risk, high loan-to-low-equity-value properties.

The strategy of aggressively creating loans and then selling them off in pools of securities, known as "securitization", has given fuel to this multi-billion dollar industry, at the expense of profits.

Equity Is Still King

Spending money to make money might make sense in the right business platform - but giving it away tends to spill red ink all over the place.

Consolidation in sub-prime lending markets will likely make equity king again - forcing deal-makers to return to "practical solutions" for real estate financing options, and not always just for sub-prime borrowers.

How This Affects You

Okay, it’s time to think of new ways to help your clients. Creative solutions for everyone.

For many of you it will be a whole new educational process. Fortunately, you don't have to look far - I am a quick phone call away. And the time to get started is sooner rather than later.

Remember, every deal is different and I can always give you some basics so you'll have a complete understanding, and the ammunition, for counseling your clients on closing deals in a less fluid environment. For example, did you know that table funding (otherwise known as simultaneous closings) has become one of the hottest techniques in real estate transactions over the past eight years - making up an estimated 20% of all private note sales? Several issues ago, I explained how Sellers needing cash could sell a newly created note simultaneously with the sale of their property.

Installment Sale

Additionally, in the last issue, I pointed out that most Sellers assume that they need all the cash at closing. However as I explained, an installment sale can often be a better alternative, both from a tax and a reinvestment standpoint.

Also in the last issue, I illustrated how a client holding existing paper can use that paper as collateral to secure more assets, while continuing to enjoy higher returns and more tax benefits.

The Best Strategy

If you or your clients are disposing of real estate assets or need to liquidate existing notes, feel free to give me a call ahead of time. I am happy to help you determine which strategy might work best.

What I am proposing is that you use one of the many alternative-financing techniques, providing a broad range of options so your clients can complete transactions in a manner that is acceptable to them.

More Options

Here are a handful of options you can choose from: 1. Private seller carryback purchase mortgages; 2. Table funding; 3. Trading equities; 4. Exchanging; 5. Substituting collateral; 6. Bartering; 7. Using land contracts; 8. Converting existing notes to cash; and 9. Structuring lease options. All of these deal-making strategies have been used for decades and are valid, viable, and valuable techniques.

Problem Solving

Professionals such as Realtors, attorneys, CPAs, and mortgage brokers have used these techniques reliably for years - knowing that they offer practical solutions for their clients.

If you are involved with a legal decision, financial claim or insurance arrangement, the financing process to settle and resolve the claim can often take two forms. Either a one-time lump sum payment, or a long-term periodic series of deferred structured settlement payments. But which is best for your situation?

A structured settlement involves a financial or insurance arrangement which includes a periodic stream of payments, that a claimant or plaintiff accepts in order to resolve a personal injury claim or other legal case. They were first utilized in Canada and the United States during the 1970s as an alternative to lump sum payments and are now part of the statutory tort law of several common law countries.

A structured settlement is a deferred payment method for compensating injury victims, and is a voluntary agreement between the injury victim ( plaintiff ) and the defendant. The plaintiff will receive the monetary payout over the course of a number of years through this deferred payment agreement. Under a structured settlement, an injury victim does not receive compensation for their injuries in one lump sum, but rather, they will receive a stream of tax free payments designed to meet future expenses and living needs. This type of compensation method is becoming more popular in a wide variety of legal cases.

The benefits of a structured settlement over a lump-sum payment include the security of a guaranteed long-term income with deferred payments that are exempt from income taxes. The federal government encourages the use of structured settlements in personal injury cases. Structured settlements also attract support from plaintiff attorneys, state attorneys general, legislators, consumer and disability advocates.

Structured settlements can be ideally suited for cases with:
• Persons with temporary or permanent disabilities
• Guardianship cases that may involve minors
• Workers compensation cases
• Wrongful death cases
• Severe injury

Want to Sell Your Structured Settlement?
Not everyone benefits from a long-term payment situation and some may want or need a lump sum instead. The owner of a structured settlement, such as lottery winners, medical, insurance, accident and lawsuit settlement owners, can often sell their rights to the deferred payment stream, in exchange for a one time lump sum payment from a variety of financial institutions. All situations are different, and as with any legal issue, you should always consult your attorney.

Written by Greg Smith of settlements-i.com

This is the second of a three part series designed to educate you on the elevating financial crisis within the healthcare industry and shed some light on the mysterious and relatively untapped aspect of factoring within the medical industry (For Part 1 see December 6, 2004). We invite you to read on and learn more about how you could be the finishing piece to the healthcare cash crunch puzzle.] Last month I gave an overview of the healthcare financial crisis that currently exists in our country. And I challenged you, as cash flow consultants, to take a part in solving the cash flow equation by offering your financial expertise to those vendors who sell to healthcare institutions. Allow me to elaborate.

There is an underlying irony in our countrys healthcare system. About 14 percent (or $1.2 trillion) of the United States federal budget is spent on healthcare every year, which is more than any other country, yet one third of our nations healthcare providers operate in the red, and another one third are barely able to stay afloat. But how can that be? An aging Baby Boom population, a steady rise in uninsured Americans, and inadequacies in the payment systems of government aid programs all add elements to the healthcare financial crisis equation.

The Baby Boomers are getting older and living longer — so much so that by 2050, it is projected that one in five Americans will be included in the oldest adult segment, according to the U.S. Census Bureau. This surge of older adults is expected to cause a substantial flux in our countrys healthcare system because of the increased need for services that treat and manage chronic and acute health conditions for the elderly.

In addition to the aging population, rising health insurance premiums, and a significant increase in federal healthcare coverage add more twists to the cash flow crisis. For example, 45 million Americans went uninsured last year, and almost half (20.6 million) were fulltime employees whose employers could not afford to provide them with health insurance due to costly premiums. Now, keep in mind that hospital emergency rooms are required to help any patient who walks through their doors, whether or not he/she has health insurance. So what happens when they provide medical care to a patient who is uninsured? The hospitals are left to foot the bill on their own.

Furthermore, a majority of unemployed Americans living in poverty, as well as the retired elderly adult population, depend solely on federal healthcare programs, such as Medicaid and Medicare, to pay their medical bills. Both programs appear to solve the cash flow problem because they pay for medical procedures that these people would otherwise be unable to pay for. But in reality, its not so simple.

Both federally funded programs pay slowly, and more often than not, the cost of the actual medical care is higher than these programs are willing to reimburse. In the meantime, hospitals and nursing homes are forced to take the financial hit. Thus, the never ending cycle begins. Healthcare institutions have to wait to be paid for their services, so they are unable to pay their bills on time. In other words, healthcare providers are not the only ones who suffer in this funding crisis; their vendors suffer too.

Welcome to the healthcare financial crisis equation. As cash flow consultants, you have the power to help this cash flow problem from the ground up. By reaching out to those vendors who are selling to healthcare institutions, understanding their positions, and pairing them with a funding source, you have the ability to impact the healthcare funding crisis in a positive and revitalizing way. The trick is finding the right kind of financial assistance for these vendors.

Many of you may be asking the obvious. Why couldnt the vendor just take out a small business loan from a bank? However, conventional borrowing increases business expenses because it creates debt that must be paid back, and it normally requires additional collateral that many of these healthcare vendors do not have. some companies, especially smaller ones, are turned down by banks because of tight borrowing regulations and restrictions. In addition, equity financing is generally harder to find than debt financing, and once found, it takes longer to arrange, which does not address the companys original need for working capital now.

However, another financial route works especially well for these healthcare vendors — accounts receivable factoring. A viable option for companies in the early stages of business development and/or during rapid growth, factoring is a financial solution that gives companies immediate cash to manage operations more efficiently. Through the sale of its accounts receivable to a factor, a company can maintain its present obligations, such as payroll and taxes, without having to wait months to be paid.

Now that you have taken a moment to investigate the healthcare industrys financial crisis, its easy to see how time plays such a crucial role in the payment process. Its not a question of whether or not healthcare providers will pay their vendors; its a question of when they will be able to pay their vendors. Because they are paid slowly and inadequately, many hospitals and nursing homes provide their vendors terms of net60 or longer, which means that they wont consider paying an invoice until it is at least two months old. In other words, healthcare institutions do pay their bills, but they pay slowly. So if healthcare vendors would factor their receivables, they could stabilize their cash flow and continue servicing their clients without having to worry about when they would get paid.

On that note, it is important to understand that there are two ways that a factoring company can handle healthcare receivables. One way introduces a third party (i.e., Medicaid, Medicare, or a private insurance company) to the invoicing process. For example, when you go to the doctor for a cold and you have health insurance, your doctors office sends a claim to your insurance provider after you have paid your portion (or copay), which bills your insurance company for the remainder of the bill. Because there are three parties involved (you, your doctors office, and your insurance provider), the factoring deal is referred to as third party medical receivables, which many of you are already very familiar with.

On the other hand, there is a vendor side to healthcare receivables, which oftentimes goes unnoticed in the factoring industry. A good way for any business to save money is to outsource work that the company does not specialize in. This works especially well for healthcare providers. For example, a nursing home could hire another company to cook all of their food and run their cafeteria services, or a hospital could hire a temporary nurse staffing agency to meet its peak demand periods. Whatever the case, the bottom line is that each of these vendors ends up waiting much longer to be paid than it would take for a traditional commercial transaction. Thus, these kinds of vendors could and should take advantage of all the benefits that factoring has to offer.

So now that we have narrowed down the financing field to factoring, the next step is finding the right factor for the job. What are the pros and cons between choosing a big factor or small one, a general factor or a specialty one? Please read next months article, which will go into further detail about these differences and more, and find out which type of factor would make the best fit for your healthcare clients.

From American Cash Flow Journal Jan 2004. Written by Nicole Spiezio of PRN Funding.

Signs point to first national funding increase since 2000

Venture capital funding may finally be pulling out of a four year slump.

Investing nationwide is projected to be around $20 billion in 2004, up from $18.7 billion in 2003, according to MoneyTree Survey data.

If that figure holds official tallies are due later this month it would mark the first increase in national venture funding since 2000.

The survey, prepared late last week by PricewaterhouseCoopers, Thomson Venture Economics and the National Venture Capital Association, said that investors are targeting a much broader range of technologies and companies than in years past.

I think we definitely turned the corner as far as VC funding, said Tracy Lefteroff, global managing partner, venture capital and private equity practice at PricewaterhouseCoopers.

While the number of dollars invested is still far below the more than $105 billion invested in 2000, Mr. Lefteroff said indicators are moving in the right direction.

There were a lot more large rounds of financing in 2004 than there were in 2003, he said. In 2003, there were 13 deals in excess of $50 million. In 2004, there could be ... 20 or more.

He pointed to the $105 million raised by Internet telephony firm Vonage Holdings Corp. and the $110 million raised by online matchmaker eHarmony.com Inc.

But John Jaggers, general partner in Dallas with venture capital firm Sevin Rosen Funds, said that theres a limit to how much money can be effectively invested in start ups.

I have always said that our industry can spend or invest $10 billion very effectively every year, he said At $20 billion, its kind of a big question mark in my mind. North of $20 billion, I think its not a good thing.

He said venture funding could increase again in 2005, but it would not represent a setback if funding were to decline slightly.

Mr. Lefteroff said companies are attracting those sums because the number of initial public offerings is rising, allowing investors to profitably cash out their investments.

I think one of the bigger factors is the fact that the IPO window started to open up again, he said.

A report released Monday by Thomson Venture Economics and the National Venture Capital Association said that there were 93 IPOs in 2004 by companies that had received venture funding.

The total value of those 93 companies at the time of their IPOs was $11.01 billion, more than all the venture-backed IPOs in the previous three years combined.

John Taylor, vice president of research at the NVCA, said the average time from first round of funding to IPO is typically six or seven years, and 62 percent of the companies that went public in 2004 received their first funding between 1997 and 2000.

I think one thing thats misunderstood about the IPO market is the reason were seeing the increase is because these companies finally have enough maturity to go public, he said. Its not that the IPO markets are embracing anything more liberally or are somehow more accepting. I dont think the IPO market has changed at all.

Companies that go public also know that they have to have a source of revenue, Mr. Taylor said.

The consumer sector, you can sell things based on whats hot, he said. But in the commercial area, you have to be able to show to a cost benefit analysis.

Found in The Dallas Morning News