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| September 30, 2005 |
| David v. Goliath Revisited: Funding Companies Help Level The Litigation Playing Field |
Trial lawyers who represent tort victims know it, and defense lawyers do too: Time is almost always on the side of the defendant. The longer a case chums through the pretrial process, the less likely the parties will face off before a jury or judge and the more likely the plaintiff will settle for merely a fraction of the damages claimed.
Only 3 percent of tort cases filed in state or federal court are tried to a verdict, according to data from the Bureau of Justice Statistics, a research arm of the U.S. Department of Justice. Some cases that don't make it to trial are dismissed because of a legal or factual flaw, but most cases--about 75 percent--are settled. (U.S. Dep't of Justice, Bureau of Justice Statistics, Trials and Verdicts in Large Counties, 1996 (Aug. 2000).)
One reason cases settle is that trials are risky and expensive--for both sides. But plaintiff lawyers say most of their clients settle because they simply can't afford to wait the nearly two years it takes for the average case to come to trial.
It's expensive to be injured. Medical bills mount quickly, and often they are not covered by insurance. A disabling injury can result in demotion or job loss, leaving the victim with little or no way of avoiding financial ruin.
"So many plaintiffs are in dire circumstances," said Al Cone, a retired plaintiff attorney in Ocala, Florida, and a former president of ATLA. "They need money now, not a year or two from now. And a lawyer can't ethically lend money to clients or take them to a banker to get a loan." The only money the lawyer can advance is the cost of trial preparation, he said.
Enter Advance Settlement Funding, a company Cone launched in 1998 to provide loans to cash-strapped plaintiffs. It's one of dozens of a new breed of finance enterprises commonly called "litigation funding" companies.
Their services vary. Some, like Cone's, issue checks to plaintiffs only. Others also advance money to plaintiff lawyers to help defray costs like experts' fees. Some limit their funding to parties that have won at trial and are facing an appeal of the verdict.
On the surface, these cash advances would seem little different from the standard loans that banks make every day. But one key requirement of that typical bank loan is missing in an advance from a litigation funding company: collateral.
Litigation funding sources provide money to applicants on a strict contingency basis. If the plaintiff loses, the funding company gets nothing back--not even the principal. And given that plaintiffs win fewer than half of all tort claims that go to trial, this is high-stakes business.
So why would a reasonably prudent investor want a piece of this action? Because the rewards can be as high or even higher than the risk. If the plaintiff wins, the funding company often reaps a gain of 100 percent or more on its investment.
Funding company executives say the burgeoning industry provides a much-needed service to plaintiffs who have long been outgunned by deep-pocket defendants. The plaintiff is still like David going to battle against the corporate Goliath, funding proponents say--it's just that these companies give David a bigger rock for his sling.
"We help plaintiffs go the distance, allow them to hold out for a better settlement," said Andrew Savage, founder of Law-Funds, LLC, based in Boston. By removing external financial pressures on plaintiffs, he said, these companies enable a case to be resolved on its merits.
When things go well, it's a "win, win, win" transaction, Savage said. The plaintiff wins, the lawyer wins, and the funding company wins.
But not everyone is cheering. Critics of the new industry say funding companies take advantage of desperate plaintiffs, create conflicts of interest, and may even violate usury laws by charging exorbitant interest rates or fees.
"All personal injury lawyers would love to see their clients get a little money to last them however long a case takes, but the clients don't realize what it will cost them," said Steven Bagen, a Gainesville, Florida, plaintiff lawyer who recently took his concerns before a Florida Bar AssOciation ethics committee.
Last summer, the committee approved an advisory opinion that would have given an ethical green light to Florida lawyers considering litigation funding for their clients or cases. But at a meeting in January of this year, the committee decided to reconsider its decision after Bagen told them one of his clients had been approached by a funding company that offered to advance money at an excessive rate.
"The loan was for $8,000, and he would have had to pay back $25,000, and that was for [a loan] under a year," Bagen said. "It's a promise of easy money. They say we can fund you however many thousand you need, and clients are suckered in by this. But a year or two down the road, they're having to pay triple or quadruple what they got."
The Florida committee decided to take its opinion under advisement, referring it to a subcommittee for further study, until a meeting scheduled for mid-June. At that point, "committee members could table it, or vote to adopt it, or vote not to adopt it, or change it," said Lili Quintiliani, an assistant ethics counsel with the Florida Bar Association. "Ultimately, it could go before the board of governors, and then they could do the same thing--table it, or adopt it, or not, or change it."
Most state bar associations that have looked into funding companies have issued opinions that allow lawyers to use them, according to Savage. "They say it's permissible, but it has pitfalls, and the lawyer needs to be cautious," he said.
A key concern is conflict of interest, said Stephen Gillers, a legal ethics professor at New York University School of Law.
"There's a danger that the lawyer's head will get turned," Gillers said. "For example, the opportunity to settle a matter may arise, and the lender may prefer settlement because it can cash out its investment and get the compensation it bargained for.
"But it may be in the client's best interest to hold out for more. The lawyer should ignore the lender's desires, but this may result in alienating a lender" that the lawyer may want to turn to again in future matters, Gillers said.
Other concerns that raise the eyebrows of ethics experts include a possible breach of client confidentiality--the lawyer must be careful what information is revealed to the funding company--and a potential compromise of the lawyer's ability to make objective and independent decisions, especially with regard to whether a client should accept litigation funding at all, Gillers said.
Funding companies also must steer clear of states that enforce the centuries-old legal doctrines of champerty, barratry, and maintenance, which prohibit nonparties from promoting or investing in lawsuits. Most states have abolished these "ancient and imprecise" laws, Gillers said, because modern rules dealing with conflicts of interest and solicitation are adequate to deal with the evils these doctrines were meant to address. But in some states, like Maine, the doctrines live on in common law or statutes.
Bagen said his only concern with litigation funding is its price, which he thinks should be regulated. Most states have usury statutes that cap interest rates to protect consumers. But "these agreements avoid usury laws through a technicality because a contingent loan doesn't come under them," Bagen said.
Advance Settlement Funding's Cone said he looked into this issue before setting up his company. "This is not usury," he said. "I researched this, and Florida courts and many others have said that if repayment is contingent on the happening of an uncertain event, it's not usury."
Savage agreed. "It's impossible in any jurisdiction to have a usurious situation in a contingency arrangement. If that were not the case, every venture capital investment would be usurious, and contingent fees would be too."
Other funding company principals added that the high rates they charge are justified by the high risks they take in underwriting cases.
"You have to look at the risk taken by the person who is putting up the money, and then analyze what is a fair return," said Alan Zimmerman, president of San Francisco-based LawFinance Group, Inc., which provides financing primarily for parties that have won a judgment that is being appealed. ATLA has endorsed the company's appeal-finance program.
Echoing Savage, Zimmerman said, "It's like venture capital used to finance business, and I can tell you that [venture capitalists] don't put money out at 10 percent."
Bagen said he doesn't buy the high-risk argument because the people who screen the cases are usually experienced personal injury lawyers or former insurance adjusters who know a good case when they see it.
"The risk is infinitesimal, minuscule," Bagen said. "The cases are screened very carefully. This is not a contingent loan. The risk is slight, if there is any risk at all."
Savage disagreed, saying LawFunds has lost as much as $100,000 in a single transaction. "We're going through the same type of growing pains that any lawyer opening up a contingency-based law firm goes through," he said.
Yet business is booming. "We receive approximately five new applications a day," Savage said. "In the two years we've been in business, we've received in excess of $250 million in applications. And we fund approximately 10 percent of the applications we receive."
Zimmerman estimated the number of advances his company makes as "in the hundreds" annually.
Citing proprietary concerns, funding entrepreneurs are reluctant to discuss specifics about profits and losses. Cone declined to reveal even how many advances his company makes a year.
Savage said his company has been "happily successful." And hinting at success, Zimmerman said, "We're still in business after seven years." Cone said his three-year-old firm has not yet turned a profit.
All's well that ends well
No two funding companies are the same. Some are small operations that lend modest sums to a limited number of plaintiffs. Others employ large staffs, including advisory panels of lawyers and experts, and extend funding to plaintiffs and their attorneys before trial, after a verdict or settlement (when disbursement of proceeds is being held up by administrative details), or during an appeal.
Some prefer to charge a flat fee to be paid to the company when the case is closed, while others charge interest on the loan, sometimes at a rate that increases over time. Some limit investments to small amounts of money; others advance millions for the right case.
In small companies like Cone's, the decision whether to fund remains with the principals. But larger companies usually farm out the decisions to panels composed of lawyers, judges, and other litigation experts.
"We look for cases with strong liability, clear and demonstrable damages, and a strong attorney who has a proven track record," Savage said.
Gordon Vann's situation is a good example of the type of case that makes the cut. A 75-year-old owner of an auto body shop that rented space for its operations in Berkeley, California, Vann was sued by the shop's landlord in 1991 for environmental damage to the property.
He turned the matter over to his liability insurer, Travelers Indemnity Co., which refused to mount a defense on his behalf. He then contacted San Francisco lawyer Philip Pillsbury, who filed a bad-faith claim against the insurer.
"In the course of litigation, we learned that Travelers had a pattern and practice of turning down claims like Vann's because they are expensive to defend," Pillsbury said.
The case went to trial in 1997, and the jury awarded $26.4 million, which included $25 million in punitive damages. Then Travelers threatened to appeal if Vann didn't settle for $10 million. (Vann v. Travelers Indemnity Co., No. 727815-4 (Cal., Alameda County Super. Ct. Feb. 14, 1997).)
"Here's a guy who is living a hand-to-mouth existence," Pillsbury said. "He was in bankruptcy, the IRS was seeking to attach his house, his business was gone, and he and his wife--who had Alzheimer's --were in poor health. He couldn't stand an appeal that would take years."
Zimmerman's LawFinance offered to help. It offered Vann "a sum in the low six figures to allow him to continue his modest lifestyle" during the appeal if he agreed to pay back twice that amount if he won, Pillsbury said. Vann agreed, and he ultimately did win.
Pillsbury said he was never concerned with the cost of the advance. "To have that kind of staying power" was worth it, he said. "There was a lot of pressure on us to resolve the matter for far less than its value. After the trial, the lawyer for the other side comes over and says, `Phil, I'll give you $10 million in 10 days, no appeal.' That's a pretty serious offer. But the client was pretty serious too. He wanted what the jury had awarded him."
Cases like Vann's are the strongest argument in favor of funding companies, according to ethics professor Gillers. "Experience supports the conclusion that deep-pocket defendants use the fact of the plaintiff's inability to fund the cost of litigation to wear the plaintiff down and encourage the settlement of claims well below their true value," he said.
Gillers would like to see the industry regulated to protect both clients and lawyers. For example, he believes that regulatory agencies should limit the interest rates or fees the companies charge and issue rules or opinions about what lawyers can divulge to them. But he doesn't think lawyers and their clients should be prohibited from using them.
No doubt, many cash-strapped plaintiffs and their lawyers would agree. When offered a choice between a lowball settlement and the opportunity to see a worthy claim through to a fair verdict or settlement, those plaintiffs are likely to say, "Show me the money."
Written by Jean Hellwege for The Association of Trial Lawyers of America
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| September 29, 2005 |
| Origins of Factoring Come Full Circle |
The basic premise of factoring, lending money against a company's receivables, has been around for centuries. But despite a rapidly changing global economy, the business of factoring hasn't changed all that much. In fact, the industry's genesis can be traced to a prior era of global economic expansion.
"It's almost like `Back to the Future,"' explained Jon Lucas, senior vice president and Northeast regional manager, commercial services, at New York-based CIT. "When factoring first got started, it was all about England looking to ship fabric and other goods into the United States. Now it's not England anymore, it's Asia shipping into Europe and the United States."
The factoring industry, Lucas said, has not fundamentally changed, because throughout its history, this unique area of the commercial finance world has played a key role in trade finance. Some would even argue that it played a critical role in the development of the U.S. apparel industry.
Now that manufacturing and the sourcing of goods overseas is changing the dynamics of business, factoring is once again emerging as an important financial service.
"[The factoring industry] has gone full circle....It is a truly international business, and getting more so all the time," said Sidney Rutberg, contributing editor for the Commercial Finance Association's Secured Lender magazine and author of a 1994 book that looks at factoring and related lending institutions titled, "The History of Asset-Based Lending." Rutberg also served as the financial editor for WWD and Fairchild Publications.
Some historical accounts of the factoring industry date the origin of the industry as far back as 4,000 years ago during the reign of Hammurabi, a Mesopotamian king. Other historical accounts cite the Romans, who enlisted commissioned agents to facilitate the transportation and sale of goods about 2,000 years ago.
"From the earliest days of modern civilization, suppliers have had to contend with the conflict of time and money. As the ability to trade over greater distances evolved, intermediaries as agents became necessary to expedite transactions," said Howard Moore, senior vice president, IDB Bank, based in New York.
The industry's rise and evolution in the U.S. is more easily traceable through its ties to the textile industry in the 19th and 20th centuries. Factoring as it is known today most directly evolved out of selling agents for European textile mills in the 19th century. Factors established themselves as agents facilitating the sale of European textiles here and the shipping of domestic raw goods overseas. With the arrival of the Industrial Revolution in the last quarter of the 19th century, which fueled unprecedented population growth and industrialization, the role of factors became increasingly important.
During this period of rapid development, companies were particularly interested in determining the creditworthiness of their clients. What evolved was recourse (or nonrecourse) factoring, which is common today. The stable of services offered by factors at this point in its history included credit guarantees, cash loans, collections and document preparation for their clients. The credit guarantee function would gain in importance over time, sources in the industry said. Following the initial growth of the 19th-century manufacturing in the U.S., factoring expanded in the early part of the 20th century to include a number of other industries including apparel, accessories, furniture and floor covering. But even as the factors grew their client portfolios, they remained strongly connected to the textiles trade.
Following the two World Wars, consumerism emerged as a powerful economic force. And as a result, the factoring industry evolved, too. The period from WWII until the late Seventies was a boom time for factors, and is considered a "golden era" in the industry, said Moore.
"A dramatic change for factors occurred after World War II with the rapid growth of a middle-class consumer society in the U.S. Rapidly increasing consumer demand for textiles and furniture increased the need for working capital and credit protection for manufacturers," Moore said.
Demand in the retail sector grew, but selling to retail establishments at the time meant smaller invoice sizes combined with more customers as well as more invoices.
During the Seventies, a number of trends began to emerge that would further alter business. One of the most significant trends was increased consolidation at retail and on the vendor side of business. There were early indications that manufacturing industries were looking to move overseas.
Between the the Eighties and mid-Nineties, the factoring industry contracted severely. At one point, there were three companies that controlled 50 percent of the factoring market. The contraction of the factoring industry was primarily fueled by bank acquisitions of companies and by consolidation among the factors themselves. There was a period when banks looking to get into a wider range of financial services were buying factors, but many have since divested those businesses. Still, some factoring companies, notably CIT and Sterling Factors, remain tied to financial institutions today.
CIT also has deep ties to the retail side of the industry. An interesting historical side note: CIT was founded by an ex-May Department Stores executive named Henry Ittleson with $100,000 in seed money from company founder David May, according to Rutberg's book. The company Ittleson formed, Commercial Credit and Investment Co., after a few iterations, became CIT, which has been the largest factoring company in the industry since the Thirties.
In recent decades, as the textile and apparel industries increasingly moved overseas, factoring has experienced a bit of deja vu.
"The demands of a global economy have once again turned factors toward reaching across the oceans to facilitate trade. Factors provide timesaving expertise in trade finance and once again factors finance individual import transactions providing cross-border credit protection via relationships with international factors," said Moore.
As companies realized that the highest revenue and profits could be made on the sales, marketing and finance sides of industry, increasing numbers of domestic manufacturers, from yarn and fabric makers to raw material suppliers, shifted overseas to lower-cost countries, Lucas said. The trend started in the Seventies, Lucas said, but accelerated in the Nineties. Today, the global nature of the apparel industry has touched many aspects of the factoring world.
Sourcing for products is the biggest difference in the industry today, said J. Michael Stanley, executive vice president, Rosenthal & Rosenthal Inc., New York. Countries such as Cambodia, Sri Lanka, Vietnam, Pakistan and a host of others have eclipsed U.S. textile and apparel manufacturing.
Those changes have impacted everything from the services factors offer and technology requirements to the location of their offices. John La Lota, executive vice president, Sterling Factors Corp., said he recalls a time when Seventh Avenue and the garment industry in New York were booming, and the California market was very small. Now, he pointed out, the California market is huge on the apparel side because of its proximity to Asia.
"Three weeks ago at midnight, on a Friday, I was sending e-mails back and forth to China because a client needed to get goods shipped to them," La Lota said.
The services offered by factors also have changed. Credit protection services have been and continue to be central for factors, but in recent years, factors have had to broaden the services they offer to stay relevant to their clients' businesses.
"If you go back to the pre-Civil War days, the factor would do everything from soup to nuts. Now, between the soup and the nuts there are a lot of specialized companies that are engaged in transportation and logistics management, companies have taken sales and marketing in-house, perhaps the bookkeeping, perhaps some of the other things that a factor once did, which leaves the factor to be focused on credit protection and lending activities," said Lucas.
Factors now lend against more than just a company's receivables, sources said. They are lending further into the balance sheet in an effort to stay competitive in the marketplace. It's not unusual for factors to lend against inventory, property, plant and equipment, or intellectual property, Lucas said.
Being flexible and creative to find new ways of financing the apparel business is important, whether that entails lending against intellectual property, which was almost unheard of, or lending against licensing streams and trademarks, said Stanley. "If we're not accommodating our client, somebody down the block will."
Written by Liza Casabona for Fairchild Publications, Inc.
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| September 28, 2005 |
| Institutions Reshape Life Settlement Market: A Prediction: Institutional Funding 'Will Be The Only Fund Source For This Industry' |
Institutinal investors are reshaping the U.S. viatical and life settlement markets. Viatical settlement brokers created the modern secondary market, or resale market, for in-force life insurance policies in the 1980s. Back then, most of the sellers were insureds with life expectancies of less than 2 years. Most of the investors were individuals who were willing to put money in a new, untested investment vehicle.
Now, the market is becoming "totally institutionally funded," according to Moritz Roever, an analyst with Scope Group, Berlin, a German fund rating agency.
For money managers, a portfolio of life settlements is "a great asset class because it diversifies investments," Roever says.
Medical advances that improve insureds' lifespans can and do hurt life settlement portfolio returns. But life settlement returns are almost completely independent of the fluctuations in interest rates, inflation rates and other economic factors that drive returns on most other investments, Roever says.
German closed-end funds contributed about $650 million of the $2.5 billion in capital that flowed into the U.S. life settlement market in 2003, Roever estimates.
Scott Page, president of Lifeline Program, the life settlement unit of Page & Associates Inc., Fort Lauderdale, Fla., sees major banks expressing an interest in buying life insurance policies.
Institutional funding "will be the only fund source for this industry," Page predicts.
Scope has reacted to the shift in life settlement funding sources by starting a program that rates the German and U.S. life settlement companies that attract the most capital from German closed-end mutual funds.
Many executives in the life insurance industry say selling a life insurance policy is usually a bad strategy for most insureds.
One traditional argument against the practice is that giving an investor an interest in rooting for the death of an insured is a bad idea.
Another argument has been that the prices insureds get for their policies are too low.
Although Page is a strong supporter of life settlements, he notes that reasonably healthy insureds in their 60s and 70s might get 30% to 40% of the policy's face value. That compares with a typical payment of about 80% of the face value for a policy that covers an insured who has a life expectancy of less than 24 months, Page says.
But for life insurance agents and brokers who believe that selling unneeded life insurance policies is a valid option for at least some of their clients, the shift means that the type of client who ought to hear about the concept has changed, life settlement advocates say.
Doug Head, executive director of the Viatical and Life Settlement Association of America, Orlando, Fla., says he hopes there will continue to be a place in the market for brokers who want to sell small contracts owned by terminally ill viators.
But, today, the typical seller is no longer the terminally ill person but "the sophisticated, high-net-worth individual," Page says.
When institutional investors buy life settlement portfolios, about 80% of the policies are universal life policies, the average age of the seller is 75 to 77, the contracts are issued by carriers rated AA or better, and the average yield on each contract is 15% to 17%, Roever says.
At Lifeline, policy sizes have increased to an average of $1.2 million today, from an average of just $112,000 in 1988, Page says.
Page's firm is looking for returns of about 16% to 20% on the transactions that it handles.
Greater institutional involvement eventually should lead to greater standardization in the viatical and life settlement market, says Carole Fiedler, owner of Innovative Settlement Solutions, San Rafael, Calif.
Fiedler has been a broker in the viatical and life settlement market for the past 12 years.
Fiedler says differences and conflicts between state laws and regulations, the Internal Revenue Code, and the major viatical and life settlement model acts and regulations can make it difficult for agents to negotiate the sale of life insurance policies.
Until the industry becomes more standardized, agents will continue to need to work with brokers who specialize in viatical and life settlements, Fiedler says.
FORECAST
Life Settlement Deal Volume / Total Policy Face Value
2003 / $6 billion
2004 * / $6 billion to $8 billion
2010 * / $15 billion
* Projected
Source: Scope Group. Berlin
Source: National Underwriter Life & Health; 9/20/2004; Connolly, Jim
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| September 27, 2005 |
| Pre Settlement Funding for Personal Injury Plaintiffs Is Growing Industry |
When Michael Lane injured his back and neck in a car accident in May 2001, the 49-year-old Buffalo man suddenly found himself unable to return to work.
The former independent contractor for a courier service received disability payments from his insurance company for a while, but that stopped when the insurer claimed he was fit again. Now he had no money to support his family and no way to pay for furniture in their new house.
He was suing the driver of the other car for $100,000, but hadn't won his case yet. So he searched the Internet for ways to get money -- and found LawCash.
The Brooklyn-based finance company agreed to advance him money based on the expected value of his lawsuit, at a rate of 3.85 percent per month. Within three days of applying, Lane received a check for $5,000, allowing him to buy furniture, pay rent and buy groceries. He later took out another $2,500.
His case settled in February 2003 for $45,000. He repaid LawCash $9,480, including fees and interest.
"I was able to get my spirits back and help my family, because I had nothing coming at that time, nothing at all," said Lane, who has since referred other people to the firm.
LawCash and a Getzville firm, Plaintiff Support Services on North Forest Road, are part of a growing industry that provides "non-recourse" or "presettlement" financing to personal injury plaintiffs to help them with living expenses while they're waiting for a verdict or settlement.
Although the firms charge an application fee and interest -- which they call their "rate of return" -- they say it's technically not a loan because there's no obligation to repay a penny if the plaintiff loses the case. Also, the firms have no security interest in the case, and therefore no "recourse" to go to court to get their payments. And interest is accrued over time until the case is finished, rather than being paid every month.
Instead, the firms think of their role as an investor akin to a venture capitalist -- investing in the plaintiff and the outcome of the case in the hopes of a sizable return. Like a venture capitalist, they can lose their entire investment and not get any money back. But by providing money for living expenses, the firms say they can help people avoid going bankrupt or losing their house.
"We're just trying to keep them afloat, to keep them from losing their house, their car, their heat, their electric," said Helen Jones, underwriter and the second-ranking official at Plaintiff Support. "It's not meant to give them their settlement up front. It's not meant to buy a big screen TV or pay off your credit card or those type of luxuries."
Supporters say the financing makes it easier for plaintiffs to hold out for the big money instead of settling early for less cash out of desperation. And it's completely legal and acceptable in many states -- including New York -- as long as the lawyer doesn't get paid for a referral.
"The legal process takes an awful long time. People need funds to live on and try to maintain as normal a life as they can during the process," said Richard Campbell, a corporate and tax attorney at Hodgson Russ in Buffalo who represents Plaintiff Support. "Having his client able to meet his living expenses ensures the lawyer that his client isn't going to have to drop out of the litigation or be anxious to settle for less because he needs the money for living expenses."
But there are risks to the companies. Although they try to pick plaintiffs with good representation that have a strong likelihood of winning or at least settling their case, there are no guarantees. The firms suffer average losses of about 5 percent, and also have to pay about 15 percent interest themselves to get the money they provide to customers.
"We take an enormous risk in what we do. A bank will never do this," said Joseph DiNardo, owner and president of Plaintiff Support.
So the firms say they have to charge higher fees for their service. LawCash charges 2 percent to 4 percent per month -- in several cases locally, 3.85 percent. That's as much as 48 percent annually, not counting the application fee of between $150 and $250. Plaintiff Support charges an annual rate of 34 percent compounded daily, plus a $350 application fee.
And they're on the low side. Firms in Texas charge more than 6 percent per month, while those in California charge 8 percent and rates in Nevada are as high as 15 percent, according to both LawCash and Plaintiff Support.
But consumer activists cry foul at those numbers.
"I would certainly see a value to this type of service, so that people don't agree to settlements just out of desperation," said Ken McEldowney, executive director of San Francisco-based Consumer Action. "But I don't see any justification for interest rates that high."
Still, the firms say they're filling a niche and defended their business as benevolent. "This is an industry that really does help people," said Dennis Shields, president and CEO of LawCash. "It's an industry that's just starting out. Like any industry, if it's not handled the right way, there's certainly potential for abusing it."
The rise of nonrecourse, presettlement funding services comes as the nation has seen explosive growth in personal injury litigation and personal injury law firms. With multimillion-dollar settlements and judgments coming down all the time, the finance companies are eager to jump on the bandwagon and make a buck at the same time.
The law prohibits attorneys from loaning their clients money, since that is seen as a conflict of interest. And banks and other traditional lenders won't help because there's a high risk involved and they don't have an asset like a house or a car to use as collateral.
Enter the independent firms, which get much of their business through referrals from attorneys and others who have learned about them. Many of the companies in the industry are small operations that exist for just a short period of time, until they get burned and lose money on a few cases.
Besides LawCash and Plaintiff Support, other major firms include Magnolia Funding and Pre-Settlement Finance in New York City and Cambridge Management in New Jersey.
LawCash was founded by Shields and chief operating officer Harvey Hirschfeld, veterans of healthcare finance, who learned of the problems plaintiffs struggle with and decided to start a business in 1999.
The firm now operates in about 28 states, working with almost 3,000 law firms. Clients are typically working-class, and the money is often used for housing, Shields said.
The company advances about 10 percent of what it thinks the case is worth, which averages out to about $7,200. The average case is taking about two years to settle.
Cynthia Kozlowski of Olean turned to LawCash while she was suing a driver who rear-ended her at a red light in December 1999. Kozlowski, a former teacher's aide at Olean High School, has been out of work since then, and was struggling to pay her routine bills.
She was facing the loss of her gas and electric service and even her house when her attorney at Cellino & Barnes referred her to LawCash, who gave her $3,000 at 3.85 percent. That allowed her to catch up on her bills. After she settled her case in January 2004 for about $300,000, she repaid $4,465.
Plaintiff Support was founded in 1992 by Ken Polowitcz, a former mortgage banker who became aware from lawyers that there was a need for such financing. He ran the firm until 2000, when it was purchased by DiNardo, a former prominent Amherst personal injury attorney.
DiNardo had left his law firm in 1998 and was suspended from the bar in 2000 after pleading guilty to filing a false tax return in 1994. He paid a $20,000 fine and was placed on probation for two years.
But he had become familiar with Plaintiff Support and saw an opportunity to take it to a larger scale beyond just Western New York.
Today, it has nine employees and a $13 million portfolio, funded by private investors. It does business in New York, New Jersey, and eight other states, with almost 600 open cases. And even with knowledge of DiNardo's past, major nonbank finance companies are now expressing interest in providing a line of credit to the firm, he said.
"Plaintiffs have been in this predicament forever. It's just in the last eight or 10 years that nonrecourse funding has come along as a tool to assist them," DiNardo said. "There's no place for these people to go. They need this help."
Source: Buffalo News
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| September 26, 2005 |
| With Safeguards, Owner-Financed Mortgages Offer Many Benefits |
Q: Last week, you said qualifying sellers could keep all their profits tax free, even if they received those profits in the form of an owner-financed mortgage. Why would any seller want to take such a risk when the buyer might default on his payments?
A: According to government statistics, about 40 percent of the homes in America are owned free and clear of any mortgage obligation.
When these homes sell, the owners typically have the opportunity to offer some form of financing in association with the sale, if they choose.
There are several compelling reasons for a seller to offer owner financing:
> It can make the house sell faster. There is a substantial segment of the population who simply cannot qualify for any type of traditional loan program, yet wants to take advantage of the benefits of home ownership.
Recently bankrupt individuals are an example. Let's say a family has a catastrophic medical situation that results in the death of the primary wage earner. The remaining spouse is left with impossible medical bills, plus a family to support.
Even though the remaining spouse may have a good job, it still might be best to declare bankruptcy to allow the family to have a fresh start. This person might be an excellent candidate for owner financing.
Another example might be a person recently re-entering the job market and having no history of employment or no credit history. This person might have difficulty qualifying for a traditional loan but might be able to comfortably afford the required monthly payments.
By marketing the home as affordable and available to those unwelcome in traditional lending situations, the home could sell much quicker.
> Owner financing offers investment alternative. Most sellers who own their homes free and clear of any debt are seniors and often have a need for income to supplement their retirement dollars.
Because it is considered totally safe, many sellers turn to certificates of deposit to invest the equity they receive from the sale of their residence.
But yields of CDs have dropped dramatically over the past year, and many seniors are looking for alternatives.
Enter the seller-carried mortgage, where the seller can require a substantial cash down payment, dictate his own term of investment, remain fully secured in the investment and receive a relatively high yield at the same time.
> Down payment. The amount of cash paid to the seller at closing is open to negotiation between the parties. Typically between 5 and 20 percent of the purchase price, this down payment is not refundable, and serves as an incentive to make sure the buyer meets his obligations. The more the seller gets, the more secure the loan becomes. Conversely, the lower the cash required, the more attractive the financing becomes.
> Terms of payment. Most often, sellers offer financing based on a 30-year fixed-rate loan. That's because such a loan is the standard in today's housing market, and most buyers understand how it works.
But most sellers don't want to tie up their cash for the next three decades. So the solution can be a "five-year call."
A 30-year loan with a five-year call simply allows the lender to call the loan due in five years' time, if he desires. That way, if interest rates have risen substantially or the seller prefers to do something else with his money, he can force the buyer to refinance or even to sell the property to pay off the loan.
> Loan security. Smart sellers who offer owner financing use a real estate attorney to handle the transaction. The attorney will make sure that the seller receives not only a "note" at closing but also a "deed to secure debt" that posts the property as collateral for the loan.
Georgia law provides for "non-judicial" foreclosure, meaning that if the borrower fails to make payments as agreed, it is relatively easy to force the property to be sold at auction to satisfy the debt.
The lender does not have to sue the borrower, and the borrower has no right of appeal. As a result, the loan is considered quite secure.
> Relatively high yield. There is always a trade-off between risk and return, and owner financing is no exception.
While a bank CD is backed by the full faith of the U.S. government, the return is modest.
While an owner-carried mortgage can have a nice yield of 7 to 10 percent, the possibility of default is higher. Even so, with a solid down payment and a strong security deed, the chances of loss can be minimized.
Owner financing is certainly not for everyone. But it can be a very attractive alternative for an owner who understands the risks and appreciates the potential rewards.
Written by: John Admas, For the Journal-Constitution
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| September 25, 2005 |
| Can I take your orders? You have no assets. You have no receivables. How do you get financing? Make purchase orders your entry-level collateral - Purchase Order Financing |
For modular office furniture manufacturer Design Resource Group International Inc., timing was everything. Though its niche was small office installations, the Pine Brook, New Jersey, producer wanted to bid on larger projects when the right opportunity presented itself.
Larger competitors, however, had an advantage. Deep pockets allowed them to offer customers flexible financing terms, while Design Resource Group used deposits to fund orders for the three- to four-month period it took to get paid. Meanwhile, some potential clients, particularly government agencies, rarely made down payments.
Even with bank credit, constricted cash flow hampered growth. "Banks tend to say, 'Make money slowly and build your own cash flow so that, at some point, you can do these jobs off of your own profits and your own cash,'" says David LaTorre, CFO of the $50 million company. "The window of opportunity is genemily short, and if we're not there to at least bid on these projects, they may not be there next year or the following year."
LaTorre's previous employer, a gourmet food manufacturer, had a similar funding shortfall during an expansion opportunity in the late 1990s. Its accountant recommended purchase order financing, a form of asset-based lending through which businesses can obtain credit to pay suppliers, laborers and other intermediaries for goods or services they need to generate additional sales. For rapidly growing companies, the need for capital is often acute. Huge orders, seasonal sales spikes and market expansions can place strain on a business's cash flow, thus jeopardizing future sales opportunities.
After joining Design Resource Group last year, LaTorre learned that the company would need extra credit to capitalize on significant business opportunities, such as refurbishing the corporate offices of a multinational firm. He called Westgate Financial Corp., the Hoboken, New Jersey-based lender that financed the earlier growth spurt at his former company.
"It's out-of-the-box financing that banks typically don't like to do on the front side of large projects," LaTorre, 37, explains. "We have grown explosively over the past several years, and much of that is because we're able to obtain financing like this. That can add 20 to 30 percent in growth opportunities right away."
Closing the Credit Gap
Whereas a factor advances funds on a company's receivables, purchase order financing is used to buy inventory. In exchange for advancing funds for inventory--typically finished or nearly finished goods--the lender receives a percentage of the cost of the goods, usually in the range of 1 to 3 percent for a 30- to 45-day transaction. However, the cost varies depending on how the deal is underwritten and the client's historical performance.
While lenders have industry preferences, actual transactions are similarly structured. The funds are applied to the manufacture of goods to fulfill a purchase order, including raw materials and labor, or used to purchase finished goods, either from a domestic or overseas manufacturer. "It fits the gap between traditional bank financing or debt financing and equity," says Paul Schuldiner, national business development director for Northbrook, Illinois-based Transcap Trade Finance, a joint venture with Transamerica Commercial Finance Corp.
Purchase order financing is geared to wholesalers, distributors or importers that outsource production of consumer goods, including apparel, sporting goods, furniture, computer hardware and housewares. "There's a time frame needed to build up the inventory and production requirements," says Schuldiner, "and if they're importing from overseas, frequently the lead times could be 30, 6o or 90 days. They would typically tie up their collateral with their other lenders for that period of time.
Schuldiner maintains that purchase order financing can coexist with bank or venture capital funding. "It creates better cash flow for the client, which flows through to the existing lender," he adds. "Clients may have an equity sponsor or venture capital group that has sponsored the first round or two, but they don't necessarily want to put in additional equity. They're able to leverage off our funding because we provide transaction capital and don't typically take an equity position in a company. As such, we don't dilute the ownership interests of the existing shareholders."
In fact, banks are a leading referral source, along with factors and other asset-based lenders, followed by accountants and consultants, then brokers and attorneys. In terms of lending criteria, industry experience and whether the company has sufficient cash flow to cover expenses are key considerations. Additionally, lenders prefer relation-ships with borrowing companies-the typical credit line is set up for a 12- to 18-month period-to one-off deals.
Bring on the Bank
Niche players who lend against purchase orders are typically providing credit to companies with established bank ties. Even with a bank's support, it's a complicated arrangement in which concerns arise over ownership of collateral. Additionally, banks are reluctant to have multiple institutions filing liens and rights to a company's assets. "Typically, inventory receivables are the most tangible assets a bank wants to have as collateral, and when you're financing purchase orders, the first thing it does is create inventory," LaTorre says. "When that inventory, in our case, is in the water from Korea, it's technically Westgate's inventory. Then it gets sent to the end-user and becomes a receivable. It becomes an issue of who owns and has rights to the two pieces--when it's inventory and then when it becomes receivables."
Businesses can allay concerns by proactively managing the relationship between bank and purchase order lender, says banker Lyle Frederickson. "It's important that the business owner act as mediator to establish and enhance the relationship," he says. "Take them both to lunch and make sure everyone understands the terms. You want everyone to be invested and committed."
Frederickson, senior vice president of Arizona Business Bank in Phoenix, says the financing tool is mutually beneficial for the bank and borrower. The bank can further gauge the company's creditworthiness, while the entreprenear eventually gains access to less expensive credit. "Once the company is through this growth period requiring purchase order financing, they can get into receivables financing," he says. "Once that happens, it will be easier for them to get that financing because we've watched the behavior, we've seen that there haven't been overdrafts, we've seen the lockbox funds coming in, and we know who their customers are. We'll probably be able to move into asset-based lending more quickly than if we hadn't been affiliated with the credit."
Written by: Crystal Detamore-Roadman is a Charlottesville, Virginia, writer who covers the small-business finance market.
Source: Entrepreneur Magazine
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| September 24, 2005 |
| Prescription for Prosperity - Back to Basics: The Opportunity in Medical Receivables Funding |
The Industry
The healthcare industry is now transacting approximately $1.3 trillion dollars annually and is increasing in size extremely rapidly. As the "baby-boomers" enter the system, the industry expected to triple in revenue growth in the next 10-15 years. A tremendous burden is put on providers in this industry to handle the rapid growth, maintain the highest standards of service available, and update equipment to the most modern technology now available. Many issues must be addressed, such as technology changing very quickly and the standards of service rapidly increasing. To provide its patients with the highest standard of healthcare and to compete in an ever-changing market, the providers need a generous amount of working capital.
Many hospitals and healthcare facilities are beginning to experience a crunch, but not like the cash flow challenges we often see in the commercial sector. It is important for the Certified Cash Flow Consultant to understand the differences in the challenges faced by the healthcare industry, the causes of those challenges, and the solutions they can offer to the prospective client.
The Challenge
Healthcare providers, such as hospitals, rehabilitation centers, MRI centers, and many other types of facilities are experiencing "compressed margins." In our daily terminology, we would say less profit. It is no secret that the large healthcare insurance carriers, as well as Medicare and Medicaid, have reduced the amounts of payments for the various medical procedures being billed. Although payments typically are coming more quickly than previously, the compressed margins make operating the facility more difficult. Also, many of the providers seem to create a substantial amount of underused assets. A seemingly mysterious bucket of unpaid claims is often created that is consistently unavailable to use for cash flow. To exist, the provider must increase his "top line," which is the revenue he transacts on a regular basis, and reduce the amount of assets he is not using. If overhead is maintained while sustaining a reasonable increase for increased business, the bottom line will also increase. It is the increase in revenue that will allow a facility to exist and pay its bills. Systems must be in place for the provider to properly valuate his claims, maintain and secure good collection procedures, and monitor billing procedures. There is a cost associated with installing, maintaining, and monitoring of these systems.
The Solution and What You Provide
The role of a consultant in the medical receivables funding industry is to identify a potential client and to introduce the client to the funding source. Many funding sources do not even require an application for the introduction and would still be willing to initiate a conference call with the prospective client. Many times, the application will follow a series of calls between the parties, and the application and Summary Aging by Payor will be acquired directly by the funding source. Inquire from each of the various funders as to what each of them may require.
Most funding sources require a monthly minimum to begin opening an account for a potential client. The consultant may hear "$50,000 per month in collectibles," or something similar. A provider may bill a certain amount each month but may also collect something less than is being claimed. The funding source determines the viability of an account by how much is being collected, not billed. Check with the various funders and discover what the minimum amount of collections is for each of them.
Some funders have upfront fees for audits and some do not. Some funders do batching of invoices. These two techniques are very different and affect more than just upfront fees. The choice can also affect the amount of advance funds or the fees over a duration of time. A professional consultant should discuss and learn the various differences by asking questions and always be in a position to select the best method for his client.
Healthcare is primarily a referral-based business. It is difficult to get through gatekeepers and speak to the decision-maker in healthcare. The best way to participate in the business is to speak to everyone you know who may have a connection in healthcare already and is able to introduce you to the right people. Cold calling and direct mail may work well in commercial receivables but do not work in medical. Attend the right meetings, network in the right places, speak to the right people, and try to attain the best referrals available to you.
Most importantly: What do you offer? Funding in healthcare is often done in two stages. The initial funding will reduce the entire bucket of underused assets to a single, first funding. The facility may receive a windfall of cash by taking every claim due to be paid and receiving an immediate payment from the funder. Millions of dollars can be made available within days of opening an account. In the second stage, the ongoing funding not only gives the provider a consistent cash flow but also prevents that bucket of underused assets from recurring. In essence, you solve many issues that will allow a provider to move forward with what he needs to prepare for the future of healthcare.
Fred Steinberg, CFS, is executive vice president of the business development group at Sun Capital Group, a member of the Million Dollar Club, and instructor for the American Cash Flow Institute, and the recipient of the 2003 Presidents Award. He can be reached at 800-880-1709 or via e-mail at freds@suncapitalinc.com.
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| September 23, 2005 |
| Viatical Companies Break Ground By Pitching Healthy Seniors |
Viatical settlement companies, in a bid to broaden their customer base, are no longer just targeting the terminally ill: they are now prospecting healthy senior citizens with excess insurance.
Viatical companies, whose business is to buy insurance policies and pay the owners a percentage of the face value, see a bright future in purchasing policies where the insureds are healthy men over the age of 70 and women over the age of 75.
The senior market is attractive because of its sheer size, said Brian Pardo, president of Waco, Texas-based Life Partners, a viatical settlement company. Especially when compared to the traditional viatical market that is geared toward the terminally ill, he added.
The senior market is "quickly going to dwarf the viatical market," said Steven Arenson, vice president of Chicago-based Viaticus, a viatical company that is subsidiary of the CNA Insurance Companies.
This year, Viaticus expects to buy between $250 million to $300 million in face amount of insurance, approximately 80 percent of which will come from older healthy individuals. In 1997, the company bought approximately $75 million in total face amount, all in traditional viatical settlements.
Minneapolis-based ViatiCare generated 90 percent of its business last year from viatical settlements. This year the company expects 50 percent of its business to come from healthy senior citizens. "And its not because we are doing less viatical," said Sapa Carlson, the company's national marketing director.
Viatical companies are buying policies from seniors whose insurance needs have changed, said Ms. Carlson. The companies buy policies, pay all future premiums and then collect the face amount upon the death of the insured.
Seniors may have bought large policies when they had a young family, said Ms. Carlson. Then, when they reach a much older age, they realize that they don't need the insurance anymore.
"What many [seniors] have done is stop paying the premium," and the policy lapses, she said. While the elderly may benefit from not having to pay the premiums, "they ultimately get nothing," she said. Now, seniors can sell their policies, and get some of their money back, she said.
Viatical companies are not only targeting the traditional family. They also are eager to buy "key man" and "buy-sell agreement" insurance policies from business owners, where the person insured is over age 70.
This senior settlement option is available for owners of term and cash value policies. Owners of term policies can capture value in a policy that has no underlying cash value. Meanwhile, owners of cash value policies may be eligible to receive more than the cash build-up in the policy.
"It's like found money," said Mr. Pardo.
Healthy seniors are likely to get between 5 percent and 25 percent of the face value of the policy, said Mr. Arenson. This compares to a traditional viatical settlement where the payout range falls between 50 percent and 80 percent.
The reason for the difference, in short, is that the life expectancy of a healthy senior is much longer, Mr. Arenson said. The terminally ill tend to have between 6 months to 5 years to live, while healthy 70-year-old males are expected to live for another 13.3 years.
The life expectancy for seniors is typically based on actuarial tables in conjunction with medical records.
Seniors with medical conditions are likely to receive a greater payout than seniors that are healthy, Mr. Pardo said.
But viatical companies will also scrutinize the policy in determining a payout value. Most companies told National Underwriter that they will review the strength of the insurer, the percentage of premiums to face amount and check to see if there are any loans or exclusions-before they make an offer on a policy. Companies also are very wary of policies that are less than two years old because if there is a misrepresentation of any kind, the insurer can void the policy.
Companies like Viaticus and Life Partners, by and large, target seniors with policies that have at least $500,000 in face amount. For a healthy 70-year-old man, it wouldn't make sense to buy a smaller policy as "we couldn't pay them anything," said Mr. Arenson.
A small percentage of, say, $50,000 would not add up to much at all but a small percentage of $500,000 can add up to a significant total, he said.
Viaticus is more likely to make an offer on a smaller policy as the life expectancy of the policyholder decreases due to increased age or illness.
For example, the typical face amount on a traditional viatical policy at Viaticus is $80,000 to $90,000 said Mr. Arenson; meanwhile, that figure is in excess of $1 million for healthy senior clients.
The selling of senior policies can also benefit life insurance agents, viatical companies said. First, agents will receive referral fees for bringing the viatical companies business, and second, the broker that sold the original policy may continue to receive renewal fees.
If the policy were to lapse, the agent would receive neither, the companies said.
But not all viatical companies are equipped to buy senior policies. Many viatical companies, which act as intermediaries [i.e. they bring the elderly client and investors (often institutional investors) together] are experiencing difficulties in generating investor interest, said Paul Permison, president of the Ardan Group, a viatical company in Woodbridge, N.J., who is also the secretary general of the Washington-based National Viatical Association.
Mr. Permison said that in many instances viatical brokers are presenting more senior policies to viatical companies than the companies can buy and many companies that buy these policies do not have a steady flow of investor money to buy the policies.
He explained that some investors are reluctant to buy senior policies because a healthy senior could live 10 to 15 years. Investors, at this point, are more comfortable buying viatical policies because they typically are short-term investments (i.e. the insured is expected to die in the foreseeable future).
But Carole Fiedler a viatical broker and president of Fiedler Financial in Sausalito, Calif., said she has not experienced too much difficulty in selling seniors' policies to viatical companies.
Ms. Fiedler said that as long as the premium expense is not exorbitant, the policy is incontestable, and the age criteria have been met, she has been able to help her clients sell their policies.
But Ms. Fiedler has found that some funding companies are very selective in terms of the policies they will buy. For example, some companies won't accept senior policies if the insured is under the age of 80 years.
One concern with this new market is that investors that buy these policies may later harass the seniors they bought policies from, similar to what has happened in some instances in the viatical market, said Bob Littell, a principal of Brokers Research Center, Atlanta.
Mr. Littell said he feels comfortable that this type of harassment won't occur when the investors are the big institutions like CNA, however, be is a little wary of the smaller-time investors.
But Sam Mangel, president of LifeTime Benefits in Jenkintown, Pa, said there may be some cases where senior policyholders are harassed, but added, he thinks it is less likely to occur in the seniors' market than the viatical market.
"The cost requirements of keeping these policies up will be prohibitively expensive for the smaller players," he said. The cost of buying a policy is typically very high, and then investors have to pay, on average, large premiums for up to 10 years. This is a market that is more geared toward the big institutions, he said.
While Mr. Permison said the senior market will be much larger in upcoming years, he believes funding groups need to go out and promote the concept to the investment community. Companies need to develop greater confidence among investor groups about the senior market, he said.
Source: The National Underwriter Company
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| September 22, 2005 |
| Bring Structures Into Negotiations - Structured Settlements |
Fear of terrorism, corporate fraud, and the economic downturn have created today's financial turmoil. For the plaintiff with a large tort settlement, the stakes could not be higher. Small wonder that use of tax-free structured settlements has surged more than 50 percent since 1999. Backed by Treasury obligations or lire company annuities, structured settlements are among the safest funding sources for your client.
Equally important, however, is the growing realization among plaintiff attorneys that structured settlements are an excellent way to resolve cases without trial. That's why the savvy trial lawyer needs to know how to incorporate a structure during negotiations.
First, some context: An injury victim rarely invests the entire settlement in a structure. After settlement, the plaintiff usually needs cash for expenses incurred during the lawsuit, as well as immediate needs such as making a home wheelchair-accessible.
Much also depends on the client's long-term situation. A minor in a catastrophic injury case needs far greater protection than an elderly, financially secure survivor bringing a claim for a spouse's wrongful death. Although both cases might settle for more than $1 million, a minor with an uncertain life span benefits from the security of the structured settlement, which guarantees a lifetime of care.
A structured settlement consultant working with a life-care planner and an economist can assist the trial lawyer in protecting the client's future needs--known and unknown. A good consultant will consider your client's long-term medical and living expenses, as well as dependents' needs (for example, a child's college education) and produce a comprehensive financial plan.
Knowing the annuity cost is crucial, because it will indicate the minimum total settlement required to fulfill your client's needs, your expenses, and your fee.
From the initial determination of needs, your team can calculate the amount of money and time needed. For example, you can build in occasional lump-sum payments to fund, say, college tuition, or a specially equipped van. You can also build in annual increases to account for inflation.
Your client also has the freedom to defer payments until a later date. In a case involving a seriously injured minor, for example, the family might elect to wait until the child turns 18 for the payments to begin.
Clients sometimes have a preconceived dollar figure that does not always reflect the lawyer's valuation of the case, but a structured settlement can provide closure that is otherwise unavailable. For example, in one case a grieving mother whose daughter had died was making no progress toward resolution during mediation. Why was the mother so intractable? She was never going to adroit that her daughter's life was worth less than $1 million. With the final payment far in the future, the settlement's structure allowed her to see the amount offered by the defendants as sufficient.
Remember also that under federal law, structure payments are not taxed. A $1 million structured settlement investment will produce a totally tax-free return for your client. A similar taxable investment must overcome the tax rate on the return before equaling the structured investment.
"Joint life" and "life with period certain" options provide comfort along with security. "Joint life" is ideal for couples, because payments continue until both named people die. This permits the plan to focus primarily on the needs of the injured spouse, with a financial hedge that would benefit the surviving spouse in the event of the injured spouse's early death. Many an emotional crisis has been avoided by meeting the needs of a precarious life while protecting the uninjured spouse.
A "life with period certain" plan guarantees your client lifetime payments, with a minimum number of payments guaranteed even if the injured client dies early. A death that occurs before all the guaranteed payments are made does not end the payments: All the remaining ones will be paid to the estate or beneficiary. This can help guarantee that your client or his or her heirs never receive less than the amount paid into the structured settlement.
You will also need to determine your client's eligibility for a "rated age." "To obtain a rated age, you submit medical information such as hospital discharge summaries or physician records to various companies that provide annuities. These companies often inform you that your client's life expectancy is shorter than the average. This is always true for a catastrophically injured client, but it is often true for reasons not associated with injury. For example, a claimant suing because of an injury in a car wreck might receive a high rated age because he has cancer.
A rated age is crucial if a structured settlement's benefits are based on life expectancy--as distinguished from a definite stream of payments or a single payment to be made in the future. A reduced life expectancy results in a higher rated age. Therefore, if your client's life expectancy is reduced, the amount of life-contingent payments--that is, payments that are contingent on the continued life of your client--will increase for the same premium.
When negotiations begin, even the presence of a structured settlement consultant with the defense team may be revealing. Since these consultants typically expect to be paid only if a structure is used, a consultant's appearance could be a tip that the defense is serious about settling the case.
After more than 35 years of representing injured people and their survivors, I have seen too many &pressing incidents involving these victims. The only thing sadder than a tort victim denied fair compensation is one who receives an amount that should provide care for the rest of his or her life but who loses it to bad investments or unscrupulous "friends."
While structured settlements are not appropriate in every case, I believe we have at least a moral obligation requiring that we do more than simply hand our clients a large settlement check and wish them well. The standard of care required of us in many cases today mandates a consideration of the potential benefits afforded by a structured settlement.
Written by: Thomas William Malone practices law in Atlanta.
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| September 21, 2005 |
| Factoring For Future Success: How Invoice Discounting Can Protect Your Financial Viability |
A familiar but difficult scenario unfolds. You are the owner of a manufacturing company (or distributor/importer) that is growing rapidly. Sales are up 25% over last year. Success is causing stress. You need a source for some quick cash to keep the company on track. Business is booming, but you are experiencing a cash flow crunch. A cheque expected from your largest customer has not arrived and your payroll is due tomorrow. The phone rings and your call display tells you that your key supplier is phoning you for the third time this week. You know what he wants, so you avoid speaking with him. Your banking facility and your charge cards are maxed out. What do you do?
When timing is tight and access to working capital is critical, invoice discounting (also known as factoring) is a practical alternative to traditional methods of financing. Factoring is a huge and widely accepted practice; however, its benefits and mechanisms are often misunderstood or known only to professionals in the financial services industry. Factored sales for 2001 were over $3 billion in Canada, US$116 billion in the U.S., and more than US$600 billion worldwide.
The rapid growth of invoice discounting in North America and its extensive penetration into almost every industry means that virtually all your major accounts will forward some or all of their cheques to factoring companies. Customers generally pay faster to an invoice discounter than to independent suppliers. The enhanced financing package provided by invoice discounters allows for smoother supplier relationships and offers the ability to lower purchasing costs by taking advantage of trade discounts and volume purchasing.
What is factoring?
Factoring involves purchasing business-to-business (commercial) invoices at a discount. Factors buy and the client sells invoices. Clients are advanced finds on invoices due from creditworthy customers/account debtors, and advances range from 75% to 90%.
There are two types of factoring products available -- recourse and non-recourse. Most Canadian invoice discounters are recourse factors. Recourse factoring means that the client is liable for advances made in the event that its customer doesn't pay in full. Recourse factoring is a more flexible service than non-recourse factoring and is better suited for manufacturers, importers, or distributors that need a variety of financing options. Recourse factors accept the factoring of some sales, as opposed to the "all sales" mandate of most non-recourse factors.
Non-recourse factoring means that the factor assumes the risk of the customer not paying undisputed invoices up to the credit limit/expiry dates approved. Non-recourse factors tend to charge more for their services, but provide a more comprehensive accounts receivable management system, which includes credit guarantees (similar to bad debt insurance provided by insurance companies) and collections. Clients are often required to factor all of their sales.
Why use invoice discounting?
We are living in volatile economic times and traditional lenders are reducing their exposures. A slow motion credit crunch is underway. Banks are tightening their credit standards in the face of problem loans and declining credit quality. Small- to medium-sized enterprises (SMEs) are most vulnerable to the reductions or withdrawal of operating facilities for working capital in this environment. This means that SMEs may need to find another bank to support their operations or may need to work with an invoice discounter for a short period.
Invoice discounters provide more funds or availability than traditional lenders, and a regular and predictable cash flow as and when required. Factors often provide advances by working behind the bank as a source of secondary working capital. Factors can improve banking relationships, as clients can remain in covenant and in margin. By contrast to the banks, high growth, highly leveraged clients are attractive to invoice discounters, who can supply some or all of their financing needs.
Invoice discounting facilities are higher because they are linked to sales and not to rigid balance sheet criteria. Your business and the variables affecting your normal course of business, including seasonality issues, are better understood by decision makers within factoring companies. Factors inherently offer a more favourable risk assessment. There is a reliance upon the quality of the product or service rendered and the credit quality and standing of the customer to repay advances, not the strength of the client's balance sheet. Quality of accounts receivable (A/R) is the common denominator, not equity base, liquidity and cash flow. Customer credit limits are established through pre-screening, so that clients of the invoice discounter stay away from potentially problematic accounts.
Factors have a proven history of leveraging assets, leading to accelerated sales growth and greater profits, which offset invoice discounting costs. This allows you to promote your business with confidence. Opportunities to do more business are not lost to competitors.
Terms and conditions
Invoice discounting terms and conditions vary, but generally speaking the following practices apply:
* Proposals/term sheets can be issued to potential clients in as little as two days upon receipt of the required information. Processing fees to set up a client's account vary widely from nominal to one per cent (or more) of the facility. Advances vary between 75% to 90%, less invoice discounting fees on eligible, fully earned A/R due from creditworthy customers less than 90 days from the invoice date. Export or other insurance on A/R is optional; Export Development Corporation (EDC) coverage is helpful. A factor may provide some inventory financing if it is the sole lender.
* Invoice discounting fees vary from 2% to 5% (or more) for each 30 days calculated on the gross sale value. The factor may require minimum purchase terms of up to 30 days, daily discounted fees beyond 30 days or pre-determined fees for 15-day increments. Fees are closely linked to the size of the transaction, the size and scale of the invoice discounter, ease of administration, and the risk assessment of the client and account debtors/customers. Holdbacks (the reserve amount held by the factor not advanced to the client initially) are either credited or released back to the client immediately on collection of A/R from customers or on a delayed basis (most likely 15 days).
* No minimum term contract is required. This means that a client can work on a "spot" or as needed basis. Lower rates may be available for longer-term contract commitments. Certainly there is a preference for clients that wish to be financed on an on-going basis. Advance requests typically require a copy of an invoice, proof of shipment and a copy of purchase orders, subject to discretion regarding the minimum threshold requirements, (for example, it may be that all invoices above $2,500 must have proof of shipment only). Some factors require the receipt of original invoices, which they then stamp and mail to customers.
* Notification is given to customers so that they are aware of the invoice discounter's involvement. Customers agree to send their payments directly to the invoice discounter. Non-notification financing (where the factor is invisible to the customer) is generally discouraged. Collection calls to customers can be made by the client or factor, but most factors call customers directly. The collateral required varies, but the invoice discounter always has a first charge on receivables purchased.
Though invoice discounting may not be for everyone, when financing becomes a challenge there are enough advantages to it that it is worth serious consideration.
Who qualifies for invoice discounting?
* Turnarounds with a toss history but a profitable future
* Start-ups with Little or no profit history
* Vendors with heavy customer concentrations
* Principals with marginal credit history
When is a good time to use it?
* During periods of rapid growth; transactions financed are generally $20,000 to $2,500,000
* When assets (A/R) exceed a company's current Lender's appetite to provide more financing
* When a company has a strained banking relationship due to non-compliance with leverage and liquidity ratios or margining requirements
By Michael Bogin (mbogin@tce.com), principal of North Brooklyn Capital Group, and Mark Borkowski (mercant@interlog.com), president of Mercantile Mergers & Acquisitions Corporation.
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| September 20, 2005 |
| Buying Second Trusts is Smart For The Long Run - Real Estate Notes |
For many reasons, you may wind up owning a real estate note. A note is a financial instrument by which the owner of real estate borrows money against the property.
Most times, the note is referred to as a mortgage. A homeowner can have several mortgages on one property. Sometimes these total more than the value of the property with some programs. However, in most circumstances, the note is only a portion of the value of the property. For instance, the property may be worth $200,000, but the mortgage is for $180,000.
The first mortgage is usually held by a large lender, such as a bank or investment firm. Second trusts can be held by large companies, but it's not unusual for individuals to hold a second trust on a property.
In some instances, the seller of a property will offer to hold a second trust to enable a purchaser to buy the property. Sellers often make such an offer for several reasons.
The buyer might qualify only for a smaller mortgage, so the owner-seller takes on a second mortgage so the buyer can qualify to purchase the house. For instance, the buyer might put down 5 percent in cash and take on a mortgage for 75 percent of the value of a house, and then the owner creates a note for the remaining 20 percent to make the deal work.
The owner can hold this note and receive payments over time, or the note holder could sell it and get cash upfront but at a discount.
It's like either taking $120 over the next year at $10 per month or taking $60 now. Many note holders would rather take the lower amount of cash than hold out for the larger amount over time. This impatience can work in the best interest of a bargain-hunting note buyer.
Let's say a home sells for $200,000. The buyer puts down 5 percent ($10,000), the owner provides a 20 percent second trust at $40,000, and the bank loans the buyer the rest ($150,000).
If the second trust is to be paid back over 15 years at 9 percent, the monthly payment would be $405.71. The total amount paid to the note holder would actually be $73,027.80 - quite a bit of money.
However, let's suppose the note holder gets into financial distress in year five. He has the option to sell the note for some quick cash. At this point, after 60 payments, the note is worth $31,861. To make it worth the note buyer's while, the note owner would most likely sell it at a discount.
By discounting the note, the actual return on the buyer's money is more than the original 9 percent on the face of the note.
For instance, if the buyer purchases the note for $25,000 and continues to receive the payments of $405.71 over the remaining 10 years of the note, he'll receive a return of 15.15 percent per year on the note. If the seller is really desperate and sells the note for $20,000, the return balloons up to 21.43 percent.
But it hasn't been so bad for the seller by letting the note go for just $20,000. Remember, he's received 60 payments of $405.71 ($24,342.60) and then a final purchase price of $20,000, totaling $44,342.60. The drawback is that over five years, he's received only a cumulative 10 percent return.
The new owner of the note will receive a total of $48,685.20 in payments on his $20,000 investment over the next decade - not a bad return. What's more, the investment is secured by real estate, not paper or the last quarter's performance.
So how do you purchase or sell these notes? There are plenty of places online to find those who want to buy notes, but look to the local mortgage industry, settlement companies or real estate investment club to start.
Your first contact would be with either a mortgage broker or banker who wants people with a bit of cash who are looking to buy seconds at the table when the property is being settled. Also try a Realtor who works with investors to help buyers who need creative financing.
There are plenty of ways to invest in real estate. Buying paper can be one of the cleanest alternatives out there.
Written by M. Anthony Carr who has written about real estate for more than 15 years. From the Washington Times 8/27/2004.
| September 19, 2005 |
| Shift Abroad Keeps Fueling Import-Factoring Demand |
As long as home goods manufacturing continues to shift overseas, factoring firms need not worry about a shortage of import-factoring volume. During the past few years, and more recently due to the textiles and apparel quota lift, import factoring has grown by leaps and bounds.
Total global factoring volume in 2004 was nearly $1.2 trillion, a 22 percent jump from 2004, according to global factoring network Factors Chain International. International factoring has eclipsed this growth, increasing by more than 50 percent, according to Factors Chain.
"This [growth] illustrates that exporters and importers around the world are becoming more and more familiar with the advantages to be derived from a factoring arrangement: working-capital credit-risk protection and collection service for the exporter, while the importer benefits from buying on open-account terms without the need to open letters of credit or other payment terms, which have a restrictive character," Factors Chain stated in a recent release.
Louis Barone, senior vice president and international manager with GMAC Commercial Finance, said import factoring, which represents about 15 percent of the company's total business, is driven by manufacturing in China, Japan and Taiwan. China accounts for a large share of home furnishings sourcing, while Japan and Taiwan are "more high-tech hard goods" such as consumer electronics, Barone said.
GMAC Commercial Finance's import-factoring business has grown by 20 percent "over the past few years" and will grow 15 to 20 percent per year over the "next few years," Barone said. He attributed import-factoring growth in part to the quota lift: "Everyone saw a spike earlier this year because a lot of products came in earlier than normal -- people were concerned about which categories would have [safeguard] quotas down the road."
Mike Stanley, executive vice president of Rosenthal & Rosenthal, traces the growth of import factoring back more than 20 years, as domestic manufacturing diminished. He said that with the recent quota elimination, imports have surged. "But, this [quota lift] also comes with challenges. As safeguard quotas have been implemented, [importers] have had to rush goods in to maneuver around safeguards," he added.
While CIT Commercial Services has keyed in on the main home furnishings manufacturing regions -- China, India and Turkey -- the mega-factor is looking beyond them to countries like Brazil for export factoring. "We have followed U.S. free-trade-pact regions and set up in those markets to assist U.S. exporters," said Peter Mulroy, senior vice president and international manager at CIT.
U.S. firms are now building relationships with overseas factors and banks, and in some cases, establishing satellite offices abroad.
Rosenthal & Rosenthal has been establishing relationships with various Asian financial institutions and is a member of Factors Chain International, which provides it with access to global factors. Stanley said that international relationships "predominantly come from its U.S. suppliers looking for Asian sourcing." The company is also considering setting up a correspondent office in Hong Kong or Shanghai to handle new and existing clients.
Sterling Factors opened an office in Hong Kong three years ago to "speed up documentation of letters of credit and also build relationships with other [international] financial institutions," said John Lalota, president.
Language is not the only thing that has changed in an increasingly import-driven factoring market. International factories used to need letters of credit from importers to use as collateral security to obtain capital from banks, Stanley explained. "Now, as [overseas] factories are being built up to supersize factories, they have their own financing and regional banks have their own financing," he said.
Barone said that GMAC opens letters of credit for its clients that import, but noted that this does not connote import factoring. "Import factoring is when we provide the credit guarantee [in the form of an open-account sale]," he added.
Buyers that were previously sourcing domestically are shifting abroad; they are "asking the seller [or manufacturer] to ship and not get paid 60 to 90 days after shipment," Mulroy said. And since this new structure places the burden on overseas suppliers, the importer or buyer must have credit protection to operate.
Source: Written by Michael Rudnick - HFN The Weekly Newspaper for the Home Furnishing Network - 8/15/2005
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| September 18, 2005 |
| The valuation of owner-financed residential mortgages |
A framework for the valuation of an owner-financed residential mortgage is proposed here and applied to a specific example. First, the number and size of the cash flows are projected, taking into account the possibility of prepayment. Next, an adjustment for the lack of liquidity is made. The size of the liquidity adjustment is based on similar adjustments suggested by studies on the valuation of restricted and closely held corporate equities. (Reprinted by permission of the publisher.)
In the fourth quarter of 1991, individuals owned $454 billion or 16% of the one- to four-family residential mortgages outstanding. A significant segment of these mortgages was generated through owner-financed transactions. For a variety of reasons, including estate tax and income tax purposes, these mortgages must be valued.
Finance theory indicates that the value of any asset is the present value of the cash flows generated by that asset discounted at the appropriate discount rate. Within this context, the valuation of a mortgage seems straightforward. Three issues cause this problem to be more complicated than might be expected: the potential for prepayment, the choice of the discount rate, and the adjustment for the lack of liquidity.
The first step in the valuation process is to project the size and the number of the cash flows. The promised cash flows from an owner-financed mortgage are known; however, the actual payments are not known because a borrower could choose to prepay. The second step is to choose the appropriate discount rate. This rate should reflect both the current level of return on securities with similar cash flows and the default risk of the individual borrower. Once the discount rate is chosen, the present value of the projected cash flows can be calculated.
These first two steps are similar to the process of valuing mortgages in the secondary market. Mortgages trading in the secondary market, however, are highly liquid while the owner-financed mortgages are not. In the final step, an adjustment must be made because the owner-financed mortgage's lack of liquidity reduces its value.
In this article, the proposed framework for the valuation of an owner-financed mortgage is applied to a specific example. The choices of prepayment assumptions, discount rate, and liquidity adjustment are explained within the context of that example.
EXAMPLE
In 1987, Mr. Smith sold his house to Ms. Jones. To finance the purchase of the house, Smith made a $50,000-first-mortgage loan to Jones. Five years later, Smith hires our appraisal firm to estimate the fair market value of the mortgage. The valuation date is June 1, 1992. The appraiser is given the following information:
* Origination date: March 1, 1987
* Maturity date: February 28, 2007
* Principal: $50,000
* Contract rate: 10.5%
* Monthly payment: $499.19
Cash flows and prepayment risk
Jones promises to pay the remaining 177(1) payments on the mortgage; however, she could decide to pay off the entire remaining principal prior to maturity. Her decision to prepay would affect the number and the size of the payments to be valued. The probability that prepayment will occur can be assessed on the basis of the individual circumstances of the mortgagor as well as the prepayment experience of similar mortgages.
In the case of an owner-financed mortgage, an appraiser is likely to have specific knowledge of the borrower as well as knowledge of local market conditions. This knowledge may allow an accurate estimate of the probability of prepayment. In this example, knowledge of Jones's circumstances indicates a low probability of prepayment. The cash flows are projected to be $499.19 per month over the remaining life of the loan--177 payments.
If an appraiser does not have specific knowledge concerning the individual borrower's prepayment probability, broader market experience of prepayment may be used. In Mortgage-Backed Securities: Products, Analysis, Trading,(2) William W. Bartlett cites the assumption of prepayment in 12 years as the "universal standard." This would be in line with the assumption used in the Federal Reserve Bulletin, which reports average net yields on Government National Mortgage Association (Ginnie Mae) pass-through securities, assuming prepayment in 12 years. An appraiser would be justified in expecting earlier prepayment if the market interest rate is significantly below the contract rate on the mortgage. A borrower would be more likely to refinance to obtain a lower interest rate. If market rates are above the contract rate, the borrower may still prepay but the chances are slimmer.(3)
Discount rate
The appropriate discount rate for an owner-occupied mortgage is the safe rate plus a default risk premium. The safe rate is estimated by the return on government-guaranteed, mortgage-backed securities. The default risk premium is estimated using the difference between the rate on A-rated corporate bonds and the rate on Treasury bonds.
The return on Ginnie Mae pass-through securities provides a good estimate of the safe rate for mortgage securities. Both the owner-financed mortgage and the Ginnie Mae pass-throughs are fully amortized debt, collateralized by real property. The pass-throughs have the additional advantages of a federal government guarantee and an active secondary market.
The default risk premium should reflect only differences in the risk of default; therefore, two bonds with similar payment structures are compared in order to estimate the premium. An owner-financed mortgage is an individual's liability and is not normally insured. While an individual may have a good payment record there is some probability that he or she may be unable to make future payments. In the event of default, the property would be available to satisfy the debt.
The combined safety offered by individuals with satisfactory credit histories and the collateral value of the property makes the default risk associated with the owner-financed note approximately equivalent to that of an A-rated corporate bond. Because of the government guarantee, the risk of default on the Ginnie Mae pass-throughs is similar to the default risk on U.S. Treasury securities. The Federal Reserve Bulletin for March 1992(4) reported the following yields:
* Ginnie Mae pass-through: 7.81%
* Thirty-year Treasury bond: 7.7%
* A-rated corporate bond: 8.82%
The difference between the corporate and the Treasury yields is used to estimate the default risk premium:
8.82% - 7.7% = 1.12%
This adjustment for default risk is added to the Ginnie Mae market rate (i.e., safe rate) to arrive at a risk-adjusted discount rate of
7.81 + 1.12 = 8.93%
This risk-adjusted discount rate is used to calculate the present value of the projected cash flows. The 177 monthly payments are discounted at the monthly rate of .744% (8.93%/12). The present value is $49,022.31. This present value is an estimate of the value of the mortgage assuming it has the same degree of marketability as a Ginnie Mae pass-through. Because it does not, the final step is to make an adjustment for the lack of liquidity.
Liquidity adjustment
The value of owner-financed mortgages is significantly reduced by their lack of liquidity. If information concerning recent sales of owner-financed mortgages in the local market is available, this information can be used to estimate the liquidity adjustment. Because their lack of liquidity is a result of the limited nature of the secondary market for these assets, however, such market information may be unavailable.
While no studies were found that compare the values of mortgages that will sell readily in the secondary market with those that will not, studies that compare the values of readily marketable common stock with values of stock having limited marketability are available. These studies provide information on the appropriate size of the adjustment caused by the lack of marketability. Table 1 summarizes the discounts for illiquidity cited in the literature.
Restricted stock, also known as letter stock, is restricted from immediate resale by federal security laws. Milton Gelman uses the purchases of letter stock by closed-end investment companies to estimate an appropriate discount for lack of marketability of closely held common shares in "An Economist-Financial Analyst's Approach to Valuing Stock of a Closely-Held Company."(5) In a study of four funds that specialize in restricted securities investments from 1968 through 1970, Gelman finds both a mean and median discount from market value of 33% for letter stock purchases from 89 publicly traded companies.
In "Discounts for Lack of Marketability for Closely-Held Business Interests," J. Michael Maher(6) studies the purchase of restricted common stocks by four mutual funds between 1969 and 1973. By comparing the market value of the restricted shares with the market value of unrestricted securities of the same class, Maher concludes that a proper discount for lack of marketability should be approximately 35%.
Thomas A. Solberg reviews court decisions regarding the discount applied in valuing restricted securities in "Valuing Restricted Securities: What Factors Do the Courts and the Service Look For?"(7) He notes a 17% to 44% range of discounts recognized by the courts in previous valuation cases regarding restricted securities.
A second asset with similar risk characteristics is closely held common stock. Several articles focus on the valuation of closely held common stock that represents a minority interest in the company. In "Why 25% Discount for Nonmarketability in One Valuation, 100% in Another?"(8) Robert E. Moroney examines the valuation of closely held shares with minority interests for estate and gift tax purposes. While noting that previous tax court decisions have upheld illiquidity discounts in the 50% range, Moroney feels that consideration of the dual factors of lack of marketability and minority interests dictates discounts of up to 75%.
Robert P. Lyons and Michael J. Wilczynski indicate in "Discounting Intrinsic Value"(9) that discounts should apply for lack of marketability and minority interest. They advocate a 27% to 28% discount for minority control, and a 35% to 40% discount as a result of lack of marketability. In "Discounting Minority Stock Interests in Closely-Held Corporations: When and How Much?"(10) Andrew M. Curtis notes that in estate asset conflicts between taxpayers and the Internal Revenue Service, expert witnesses have recognized minority discounts of 40% to 50%. Edmund L. Andrews observes in "Take the Money and Run"(11) that valuations for private market stock placements have traditionally been discounted 10% to 50% from comparable public companies. Clearly, a significant discount for lack of marketability is appropriate in the asset valuation process.(12)
Based on the valuation literature and knowledge of the local market, a discount for illiquidity of 35% is applied to Smith's mortgage. Applying this 35% discount for lack of marketability, the owner-financed mortgage is valued as:
$49,022.31 x (1 - .35) = $31,864.50
CONCLUSION
The valuation of an owner-financed mortgage presents some interesting problems: the probability of prepayment, the default risk, and the lack of liquidity. Using readily available market interest rates and the literature on valuation of restricted and closely held corporate common stock, a method is presented here that may be easily implemented by appraisers to value owner-financed mortgages.
1. This assumes that the June 1 payment has not yet been made; thus, 177 monthly payments remain until maturity.
2. William W. Bartlett, Mortgage-Backed Securities: Products, Analysis, Trading (New York, New York: New York Finance Institute, 1989), 154.
3. For explanations of alternative methods used to estimate prepayment rates for pools of mortgage-backed securities, see ibid.; or Frank J. Fabozzi, Bond Markets, Analysis and Strategies, 2d ed. (Prentice-Hall, Inc., 1993).
4. Federal Reserve Bulletin, v. 78, no. 3 (March 1992): A24, A35.
5. Milton Gelman, "An Economist-Financial Analyst's Approach to Valuing Stock of a Closely-Held Company," The Journal of Taxation (June 1972): 353-354.
6. Michael Maher, "Discounts for Lack of Marketability for Closely-Held Business Interests," Taxes--The Tax Magazine (September 1976): 562-571.
7. Thomas A. Solberg, "Valuing Restricted Securities: What Factors Do the Courts and the Service Look For?" The Journal of Taxation (September 1979): 150-153.
8. Robert E. Moroney, "Why 25% Discount for Nonmarketability in One Valuation, 100% in Another?" Taxes--The Tax Magazine (May 1977): 316-320.
9. Robert P. Lyons and Michael J. Wilczynski, "Discounting Intrinsic Value," Trusts and Estates (February 1989): 22-27.
10. Andrew M. Curtis, "Discounting Minority Stock Interests in Closely Held Corporations: When and How Much?" The Journal of Taxation of Estates and Trusts (Spring 1991): 26-30.
11. Edmund L. Andrews, "Take the Money and Run," Venture (March 1988): 77-78.
12. For a comprehensive review of valuation discounts for various reasons allowed in tax court cases, see Donald M. Schindel, "Various Methods Exist for Establishing a Sustainable Value for Estate Assets," Estate Planning (September/October 1990): 258-264.
J. Howard Finch, PhD, is Max Finley Assistant Professor of Finance at the University of Tennessee at Chattanooga. He received his PhD from the University of Alabama.
Patricia Rudolph, MAI, PhD, is the Board of Visitors Research Professor of Finance at the University of Alabama. She received her PhD from the University of North Carolina, Chapel Hill.
Article from: Appraisal Journal
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| September 17, 2005 |
| Structured Settlements 101: How Structured Settlements Work |
You have probably heard the term “Structured Settlement” on a television or print ad and wondered what it meant. After all, the term is not a part of our everyday lexicon.
A structured settlement is a contract under which an insurance company undertakes to make periodic payments to an injured party as part of a bodily injury claim settlement or to a surviving family member to whom a large settlement has been awarded. These are just two examples of where a structured settlement might be used. Structured settlements have become popular because they offer substantial benefits to all parties involved in the settlement agreement.
A brief review of the dictionary reveals the following definition: a structured settlement is simply a financial package that permits a settlement to be paid in regular payment installments for either a set period of time or over a lifetime. In short, a structured settlement is a package that is tailor made for the individual or payee by the payer or an interested third-party. Some structures include immediate payment to cover any special damages that may have occurred or will occur.
The system of structured settlements was first introduced in Canada in the early 1970’s and spread into the United States very quickly. Within a few years, the idea had found its way to many countries including Australia and most member states of the European Union.
Benefits of a Structured Settlement
A structured settlement annuity provides a payment stream that is tax-free over a determined period of time. Most investment options such as stocks and bonds, real estate, savings accounts, and similar vehicles simply cannot match the flexibility and security of a Structured Settlement Annuity.
Another benefit of a structured settlement annuity is that it can be designed so that payments are made over an extended period of time, even throughout the life of the payee. In the event of the recipient's death, a guaranteed portion of the settlement may be paid to the person's estate or to a named beneficiary.
Structured Settlements have become quite common and offer the additional security of regulation by both Federal and State statutes. There are also provisions in IRS and Medicare/Medicaid guidelines which take them into account.
Alternatives to Structured Settlements
It’s quite easy to see that a structured settlement can work to the advantage of all parties in a variety of circumstances. However, there are occasions when the beneficiary of a structured settlement would prefer not to have periodic payments, preferring instead a lump sum payment. Such might be the case where an individual would like an amount of money to purchase a home, perhaps to cover large medical bills or to pay off a mortgage.
This option has also proved especially popular with lottery winners. There are a number of insurance companies and others that provide this service for a fee. In such instances the insurance company or another interested third-party makes the lump sum payment with a charge for expenses and interest deducted. It is important to consider these fees and read the fine print carefully to be sure that you are not signing away the bulk of your payment.
How do the alternatives work?
The settlement contract is sold to a financial institution which then accepts the periodic payments from the payer and gives the beneficiary a lump sum. Commonly, the financial institution involved will be another major insurance company.
The insurance company charges a handling fee which will usually be calculated to take into account adjustments for interest charges and handling costs. Again, if you are considering taking this option you must bear in mind that the company buying the payments for a cash sum is in business to make money. The amount of the one-off payment will certainly be considerably less than the gross amount that would have been received over the original extended period.
Unless the amount of the lump sum is very substantial and the recipient can be sure of consistent investment income, it’s almost certainly going to be better to stick with the original arrangements. An exception might be where the recipient is a younger person in good health with a substantial expectation of gainful employment for the long term.
Again, as with any contracts be sure to read and understand the terms of the agreement you are making. Make a list of questions and ask until you understand. It is also a good idea to cast a wide net when looking for an alternative to structured settlements as fees and services; and thus your bottom line can vary greatly.
Written by Adam Short a freelance writer and creator of http://www.structuredsettlementinfo.info - a site providing the latest news and information on structured settlements.
Article Source: EzineArticles.com
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| September 16, 2005 |
| Licensing Note Brokers in California |
By: John Beck, California Attorney at Law
This article answers some of the questions about licensing note brokers in California . It indicates the gray areas that are common in a new industry. Many of the issues have not yet been litigated; so the law is simply not clear. As long as the large institutions will work with non-licensed note sellers we are able to function as note brokers. However, it is important that every one in the industry treat every party to a transaction with the utmost honesty and integrity and that we disclose all material facts to all parties. If we do not, we will be legislated out of existence and there will be no secondary market for seller carry back notes. Everyone will suffer.
In both the April and May 1996 NoteWorthy newsletters, I wrote articles on "Licensing in California." These articles stated that there are two different licensing statutes that govern the trust deed investment business in California: One for trust deed investors acting as agents and another for trust deed investors acting as principals. In California, if you are a trust deed investor acting as an agent, then you always need a real estate broker's license-whether you do one transaction or one thousand! See California Business and Professions Code Section 10131(e).
On the other hand, if you are a trust deed investor acting as a principal, then you may - or may not - be required to have a real estate broker's license. If you are a California trust deed investor acting as a principal and you acquire "for resale to the public" or actually "sale to ... the public" eight or more trust deeds during a calendar year, then you must obtain a California real estate broker's license. Otherwise, you don't need one. See California Business and Professions Code Section 10131.1
Flipping
Flipping to the Institutional Secondary Market Currently there is a controversy raging within the California trust deed investment community as to whether a California trust deed investor flipping a trust deed (i.e. buying a trust deed and then immediately reselling that trust deed to another trust deed investor at a profit) under a program similar to Metropolitan Mortgage & Securities Co., Inc.'s so-called "Certification to Investor" is acting as an agent (as opposed to a principal) and, consequently, must be licensed as a California real estate broker. As pointed out in last month's newsletter, the Metropolitan "Certification to Investor" program uses a "simultaneous double escrow" where Metropolitan does not require the trust deed investor to use any of his or her own money to close the first escrow (i.e. buying the trust deed from the owner) before closing the second escrow (i.e. selling the trust deed to Metropolitan).
As can be readily seen, there are two successive, linked transactions - hence the term "double escrow." The escrow for the first transaction closes and, then, immediately thereafter the escrow for the second transaction closes-hence the term "simultaneous" double escrow. Immediately after the closing of both escrows, Metropolitan pays the original seller-carry back trust deed owner what the trust deed investor contracted to pay that person. And Metropolitan then pays the trust deed investor the difference between what that investor contracted to pay the original seller-carry back trust deed owner and the amount that Metropolitan agreed to pay to trust deed investor for the trust deed. Hence, the trust deed investor is using Metropolitan's money - and not his or her own money-to purchase the trust deed from the seller-carryback trust deed owner. The Old Gray Fox As pointed out in last month's article, Larry A. Alamao, Attorney in Charge, Sacramento Legal Section, California Department of Real Estate (916-227-0789) has taken the position that: "From the description of the note broker program, it does not appear that a person engaged in those acts would, in fact, be buying and selling as a principal. The substance of those transactions, if not the form, is acting in an agency capacity." Basically, Mr. Alamao feels that if a trust deed investor buys and then immediately resells a trust deed using a simultaneous double escrow where that investor uses none "his [or her] own money", then that person is acting as an agent-and, consequently, always must be licensed. California statutory law does not directly address this issue.
Old Gray Fox
However, after contacting Mr. Alamao, he gave me the legal authority he says supports his position: The California appellant court case of Gray v. Fox (1984) 151 Cal.App.3d 482, 198 Cal.Rptr. 720. The facts of this case were the following: In May 1979, Dallas H. Gray III and Susan L. Gray (the Grays) listed their home with Sterpa Realty, with the listing agent being Carol Moulton. The Grays entered into a purchase agreement with a buyer from Ireland to sell their home for $120,000. In June 1979, one Stephen Hobbs (who was a licensed California real estate broker) did an appraisal of the Grays' home and expressed an interest in buying it if anything were to go wrong with the proposed sale. As the court stated: "The overseas deal did fall through, and Hobbs and Sterpa arranged for a sale of the property to Hobbs, with Hobbs to split the $7,200 commission on the sale with Sterpa. The two page 'Real Estate Purchase Contract and Receipt for Deposit' had typed in 'Seller is aware that Buyer is a licensed real estate broker.' It also stated that seller has employed Sterpa Realty Register/Steve Hobbs as Broker(s) and agrees to pay for services the sum of 6% of sales price.' Hobbs signed his name in the space provided following the words 'Real Estate Broker.'" During his negotiations with the Grays, Hobbs made a counteroffer which the Grays accepted extending the escrow period to 45 days and changing the escrow company to Interstate Escrow Company. As the court stated: "Escrow instructions number I 25764 A were prepared at the Interstate Escrow Company (Interstate) dated July 9, 1979. These instructions provided that commissions of $3,600 each were to be paid to Sterpa and Hobbs." The court went on to state further that: "One day later, July 10, escrow instructions number I 25765 A were drawn up for the same property with the Raffertys as purchasers, price to be $144,000."
As the court stated: "Hobbs set up a 'double escrow,' ..." Hobbs was attempting to buy the Grays' home for $120,000 and resell it for $144,000 - making a $24,000 profit in addition to a $3,600 real estate brokerage commission. Further the court stated: "Pursuant to the purchase contract, Hobbs was to obtain an 80 percent loan with Contempo Mortgage Corporation (Contempo). The escrow instructions provided that 'buyer' was to obtain a new loan on the subject property for at least $96,000. There was no evidence that Hobbs applied for a loan, but the Raffertys applied for a loan with Comtempo two days after their escrow opening on July 13, 1979." Further, according to the court: "The Raffertys' loan application at Contempo contained information that Moulton was the 'listing office' on the property and Hobbs was the 'selling office,' which property was still owned by the Grays at the time." The court stated: "It is clearly within the realm of reasonable inferences that the sale of the Grays' property to Hobbs was conditioned on Hobbs' being able to utilize the funds in the Hobbs-Raffertys escrow as money to close the Grays-Hobb escrow. Thus, the entire package was one transaction." Hobbs apparently intended to use none of "his own money" to close his purchase escrow.
Fraud?
What Happened Next? Hobbs was not able to put together his "double escrow" sale. As the court stated: "Hobbs did not deposit money with the Grays-Hobbs escrow by the end of the 45-day period and the Grays threatened cancellation in September." Further: "On or about September 9, the Grays received a letter at their property addressed to the Raffertys. They became concerned that Hobbs might be trying to 'cheat' them. Thereafter, Moulton was able to get Hobbs to sign cancellation papers. The Grays were under pressure to make payments related to the property they were purchasing and they accepted a cash offer of $115,000 [for their home]." On February 6, the Grays sued Hobbs seeking damages equal to the difference between $115,000 (the price the Grays ultimately were forced to sale their home for) and $144,000 (the price Hobbs had agreed to pay for the property). Hobbs did not answer the law suit and the trial court entered a default judgment against him for $5,000 in damages (being, apparently, the difference between the $120,000 price Hobbs contracted to pay for the Grays' home and the reduced $115,000 price their were able to obtained after Hobbs defaulted on the purchase contract).
The Grays then filed an application with the trial court for recovery of the $5,000 judgment against the Real Estate Education, Research and Recovery Fund under Business and Professions Code Section 10471(a) which provides in part: "When any aggrieved person obtains a final judgment ... against any person or persons licensed under this part, under grounds of fraud, misrepresentation, deceit ... arising directly out of any transaction when the judgment debtor was licensed and performed acts for which a license is required under this part ... , the aggrieved person may, ..., file a verified application in the court in which the judgment was entered for an order directing payment out of ... [the Fund] ..."
The California Department of Real Estate (DRE) filed a response denying the application contending "that Hobbs did not commit fraud, misrepresentation or deceit with respect to the Grays, and that Hobbs was not performing acts in his dealings with them for which a real estate license was required." Apparently the DRE felt that Hobbs was acting as a principal - not as an agent. Since the judgment against Hobbs was taken by default, the matter was re-litigated on July 28, 1982. On October 1, 1982, the trial court found against the DRE and ordered payment of the $5,000 from the Fund.
Trial
During the trial, the trial court made the following observation which was reproduced in footnote 5 of the appellant court opinion: "If a guy wants to buy a piece of property and go out and tell everybody: 'I'm buying this piece of property. I don't expect to make a commission on it. I'm a buyer. I'm an individual. And Mrs. Moulton, you're the broker for this transaction and you're going to get your commission. I don't want any part of it. I just want to made a good deal here for myself. I'm going to buy this house.' But the whole thing kind of smacks of something a little bid different here. You know, human nature is as it is, and he [Hobbs] saw a chance to get a commission here and make a fast sale there. A lot of big money doing on for him. Had he been successful - what did you say? $26-or-$27,000, or whatever it was - the Grays wouldn't have known the difference, nobody would have known the difference. But it didn't come to pass." The DRE disagreed with the trial court's decision and appealed The Appellant Court's Conclusion The appellant court concluded: "The facts substantiated that the substance of this transaction was to be a sale by the Grays as sellers of their property to the Raffertys as purchasers without their knowledge of the facts, and with real estate broker Hobbs acting as a conduit. Hobbs planned to facilitate the transfer of title for a fee from the Grays to the Raffertys, and it was never his intent to hold title to the property. Hobbs was in effect acting as a broker for the Grays as sellers and the Raffertys as buyers." Further: "... [The Grays] were defrauded by Hobbs acting as a licensed real estate broker in the proposed sale of their property, and ... they were damaged as a result of his conduct, thus entitling them to a recovery of $5,000 from the Fund." What Does the Old Gray Fox Teach Us? Must a trust deed investor availing himself or herself of a program like Metropolitan's "Certification to Investor" program be licensed as a real estate broker in the state of California? Mr. Alamao of the DRE says yes. Is his opinion correct?
Fiduciary Duties Complicate Matters
As I stated in last month's article: "I don't think so." It's my opinion that both the trial court and the appellant court's decisions clearly hinged upon the fact that Hobbs' was trying to play the money-making game both ways: First as a real estate broker making a $3,600 brokerage commission and, second, as an investor making a $24,000 profit. Trying to play the game of being both agent (and receiving a $3,600 commission) and principal (and receiving a $24,000 profit), he severely - and carelessly - blurred the distinction between acting as an agent and acting as a principal. After all, he stated in his purchase agreement with the Grays that he was being "employed" by them as a real estate agent and was to be paid by them "for [brokerage] services the sum of [one-half of] 6% of sales price" of the Grays' home. Was he the Grays' real estate agent - or not? He stated - in writing - that he was! The trial court and the appellant court agreed with him. As the appellant court stated: "He [Hobbs] deliberately placed himself in a position whereby he assumed the status of broker." And: "With broker status comes fiduciary duties, which include the obligation of acting with the utmost good faith and honesty toward the seller, and precludes the broker from assuming a position adverse to the seller without the seller's consent."
Clearly the typical unlicensed trust deed investor buying a deed of trust as a principal under a trust deed purchase agreement and, then, reselling that trust deed to an institutional secondary market, seller-carryback buyer under a program like Metropolitan's "Certification to Investor" program has not blurred the distinction between acting as an agent and acting as a principal. The carryback trust deed seller clearly understands that the trust deed investor is acting on his or her own behalf (i.e. as a principal) and not on behalf of, or as a representative of, the trust deed seller (i.e. as an agent of the seller). Further, the institutional investor clearly understands that the trust deed investor is acting on his or her own behalf (i.e. as a principal) and not on behalf of, or as a representative of, the institutional investor (i.e. as agent of the institutional investor). In my opinion, the Old Gray Fox clearly does not apply.
If you would like a copy of the Fox v. Gray decision, send a self-address, stamped envelope to John Beck at 1024 Regent Street, Alameda, CA 94501. Licensing in California.
Source: NoteWothyUSA.com
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| September 15, 2005 |
| Tax Planning for Personal Injury Attorneys |
Since is difficult for trial lawyers to predict when they will get paid on a case and for what amount, tax planning for trial attorneys can be complicated.
Often, an attorney’s income will be low in one year and high in another.
Receiving a fairly large amount of money in one year can push an attorney into the highest tax brackets. It can also reduce or even eliminate an attorney’s opportunity to take itemized deductions.
Trial lawyers now have the opportunity to receive their fees over a period of time instead of in a lump sum. Instead of paying tax in the year a case is settled, they can defer income and then be taxed in future years.
The ability to structure fees is one of the better financial planning tools available to anyone in any profession. Not only is it a good tax planning tool, it is a way for an attorney to make sure that money is set aside for retirement or for their children’s educations.
Unlike a traditional retirement plan, fee structures do not require attorneys to include employees in the plan and there is not a maximum dollar amount as to how much an attorney can structure.
While many attorneys look at structuring their fees to meet long term goals, there are other attorneys who defer money for only a few years. It still helps them with tax planning and gives them additional cash flow to fund operations while they wait for other cases to settle.
Clay Bigler, CSSC, and I are co-authoring a comprehensive article on how attorneys can take advantage of deferring attorney fees. We plan to have the article finished shortly.
For over a decade, there was some uncertainty in the tax laws that made some attorneys hesitant to structure their fees.
In fact, the American Jobs Creation Act, which was signed into law in October 2004, seemed unclear if deferring attorney fees would be permitted past the end of 2004.
Because of the uncertainty, our office spent most of November and December making sure that attorneys who wanted to structure fees were able to do so before the end of the year.
We are happy to learn that our efforts were unnecessary.
On December 20, 2004, the Internal Revenue Service addressed the issue of deferred compensation plans in IRS Notice 2005-1. The notice spells out that attorney fees can be structured or deferred, provided that the attorneys meet guidelines that almost any practicing trial attorney will meet.
You can read IRS Notice 2005-1 (which will be officially published in 2005-02 Internal Revenue Bulletin on January 10, 2005) at: http://www.nacua.org/documents/NonQualifiedDeferredCompensation.pdf
Many attorneys have structured their fees in the past while others were concerned that the IRS had not issued clear guidelines on the subject.
Now that the guidelines have been issued, we expect that a large number of attorneys will take advantage of the opportunity to keep “the taxman” from taking a large amount of their fees.
Attorney Fees and Employment Discrimination Cases
A situation that really could be described as “one for you, 19 for me” was in the area of employment claims.
Some claimants were not being allowed to deduct their attorney fees on employment and other non-physical injury awards and settlements.
Since money received on a non-physical injury claim is taxable income, this meant that the claimant would pay tax on the full settlement and then pay their attorney as well. Many publications such as the New York Times, pointed out situations where the combination of taxes and attorney fees were more than what the claimant received in a settlement.
The American Jobs Creation Act fixed the tax problem for claimants who receive money from employment discrimination cases. It allows for claimants to deduct attorney fees and costs for claims of unlawful discrimination and a variety of other claims.
San Francisco tax attorney, Robert W. Wood, points� out in his article "Jobs Act Attorney Fee Provision: Is It Enough?” http://www.rwwpc.com/tn111504.pdf that the Jobs Act clarifies the problem in employment cases, but does not address how attorney fees are treated on other types of claims such as punitive damages and wrongful imprisonment.
Rob and I were speakers at a convention in San Diego in 2003 and I came away convinced that he is one of the best minds in the country on this topic. His book, “Taxation of Damage Awards and Settlement Payments” is a great book and available at http://www.damageawards.org/
Summary:
American Jobs Creation Act may not have created any new jobs for trial attorneys but it did make it easier for them to hold on to any income they will receive and made it less onerous for their clients to pay them on employment and discrimination cases.
Don McNay is the President of McNay Settlement Group in Richmond Kentucky where they want trial attorneys to make lots of money. You can write to him at don@mcnay.com or read more about McNay Settlement Group at www.mcnay.com.
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| September 14, 2005 |
| Bridge Loan Lenders Fill the Gap When Speed Is an Issue |
The very essence of cash flow involves money on hand or easily accessible. Having funds readily available can be the difference between business success or failure. And to that point, it is worth noting that private lenders, those who specialize in bridge loans and other “hard money” instruments, can provide essential funds in a timely fashion. The access to financing can directly impact your chances of success in locating funding for your clients.
In today's fast-paced environment, successful business transactions are based on speed. When you need money in days, not weeks, the resource pool tends to run dry. Traditional lenders take far too long to process loan applications. The paperwork and filing alone is enough to drive you off the deep end. Private lenders operate on a somewhat different basis; due diligence and thorough appraisal of collateral still takes place, but it happens faster and systematically, in a more streamlined fashion, resulting in a quick commitment and subsequent delivery of funds.
In the case of Kennedy Funding, we have been known to make a loan commitment in 24 hours and close in just five days. Don't expect that kind of service and capability from a bank!
Additionally, the private lending industry applies more generous criteria to the loans they originate. While bridge loans can get your client past an immediate shortfall until conventional lenders enter the fray, our lending capacity actually represents a much wider and deeper potential. In addition to transactions based on land acquisition and development or real estate refinancing, loans from private lenders can be applied to a wide variety of commercial enterprises: radio and television stations, sports complexes, even amusement parks, to name just a few. The parameters are fluid, dependent most of all upon good business practices.
Some Scenarios
- An owner needs working capital for a troubled airline, but no bank considers aging jets as valuable collateral. A private lender comes through with funds to keep the airline operating.
- A buyer expresses interest in a group of half-vacant, underperforming buildings in five northeastern cities. When there are no takers in the public lending marketplace, he finds a willing hard money lender who can deliver a portion of the purchase price in record time.
- An entrepreneur seeks to build a golf course in the middle of a desolate desert area. Only a lender working with bridge loans can arrange for sufficient financing to begin the project.
- Developers are interested in transforming a dilapidated motel on the Vegas strip into a gleaming mixed-use showplace. Zoning restrictions scare off the banks, but the private lender lends the money and works with the zoning board to obtain a variance.
- A Mexican developer needs to borrow against raw land. Banks and other conventional lenders want liquid assets as collateral, but an American hard money lender generates a loan in the millions.
And when time is of the essence, no one can perform in the high-speed lane like a direct bridge loan lender.
To speed and flexibility, the direct private lender also adds creativity and versatility. A good bridge loan lender is creative in his financing and can work with third party financing, help clear a path through title issues, or negotiate loans for bankruptcies, foreclosures, workouts, and more. The dedication applied by a bridge loan lender to closing a deal is as strong as or stronger than those found throughout the financial industry.
With any loan, cost is also a crucial point. While the loan from a private lender may carry a higher rate, this may not literally be the case when all aspects are fully considered. The speed of the loan is a money-saving factor; waiting weeks or months for a traditional lender to come through — albeit at a lower rate — is usually costly. Then there are the 'conditionals' inherent in some lower rate loans: prepayment penalties, yield maintenance, equity participation, and certain marketing lures that may transform the initial lower rate into something considerably more expensive. At face value, a number rarely tells the whole story. Other factors can make the cost differential less significant. In the right circumstances, bridge loans can be competitive.
The need for speed is a good reason to approach private lenders for your clients, and the range of loan types, the professionalism, and the final costs make this an option worthy of serious consideration.
Gregg Wolfer is the co-CEO of Kennedy Funding, a direct private bridge loan lender based in Hackensack, New Jersey. The firm has been serving commercial borrowers since 1986, meeting the needs of a diverse client base that includes commercial real estate ventures and business enterprises in the U.S., and increasingly, international markets. Wolfer can be reached by calling 201-342-8500. The Web site is kennedyfunding.com.
Source: American Cash Flow Journal - September 2005
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| September 13, 2005 |
| How to Finance a Home When You're Self-Employed |
Introduction
Finding a way to purchase a home is difficult for even the most qualified of buyers, however, for people who are self-employe the search for financing is even more treacherous. The main problem is that people who own their own business, especially home businesses, don’t have a steady income each month. Some months are high and some months are low. To lenders, this fluctuation in monthly income heightens the risk that the borrower won’t be able to make their home loan payment on time every month, and that limits many lenders’ willingness to finance homes for people who only have income from a home business or a young business. While it may be difficult for the self-employed to qualify for a traditional mortgage it is not impossible, nor is it the only option.
Owner Financing
One option that the self-employed person can use to purchase a new home is to find a seller that offers owner financing. This type of situation can offer the self-employed person the easiest way to get into a house. The advantages of this financing option is that it often has lower qualifying requirements, less paperwork, and the process from qualifying to getting into the house is much faster. On the other hand, this financing option also has a few drawbacks such as: you are dealing with an individual and not a financial institution, you will probably need to involve a real estate attorney to handle the agreement and title transfer, you will probably have to pay higher interest rates, and the terms of the financing will not be as flexible as a financial institutions’.
To find a property that offers owner financing simply read through the real estate classified section of your local newspaper and look for phrases like "MOTIVATED SELLER," "OWNER FINANCING AVAILABLE," "ALL OFFERS CONSIDERED." These phrases indicate that the seller may be in a position where they need to sell their home quickly and are willing to negotiate the price, terms, and payment options. Even if it is not stated as a possibility, sellers that need money or who are facing bankruptcy or foreclosure may be willing to carry the contract with a large down payment. In any case, it doesn’t hurt to ask. Also your realtor can be an excellent resource when trying to find a property that offers owner financing as they are working to sell properties as much for the sellers, as they are to find a house for buyers.
Even if the terms are not ideal, you can view owner financing as a way to gain equity in a home until you can qualify for a more lucrative mortgage.
Assumable Loans
Another option is to find properties that offer a take-over-payment option. This situation often presents itself if the owner is having financial difficulties, they are facing bankruptcy or foreclosure, or if they are moving and have had trouble selling their home. In some cases the owner will ask for a downpayment, and in other cases no downpayment will be necessary. If the home has an FHA assumable loan then you can just take over payments without qualifying and without a lot of paperwork that is often associated with home finance. The benefit to taking over an FHA assumable loan is that it is also contains a Streamline Refinancing Option that allows the borrower to refinance easier when interest rate are lower.
Lease/Option
The lease option scenario gives people who are self-employed a way to get into a home and earn "quasi-equity" before they need to qualify for a traditional loan. In this case, the "renter" lives in the house and makes monthly "rent" payments. At the end of the lease term (1 year, 5 years, etc.) a portion of each rent payment is applied towards the downpayment if the renter decides to exercise the option to buy the house. If the renter decides not to buy the house they can walk away from the situation without any further obligations, however, they lose the "quasi-equity" that they have accumulated.
For example if a house rents for $800 per month and offers a 5 year lease with an option to buy, with 50% of the rent applied towards the downpayment, and a purchase price of $150,000. After 5 years of renting the renter will have accumulated $24,000 of "quasi-equity" that can be used as the downpayment and they will only need to finance $126,000 in order to purchase the house.
The advantages of this situation are that you can lock in a lower purchase price and have five years (depending on the lease) to make your final decision to buy or not. You also have time to get to know the house and neighborhood and to see if these things fit your needs and wants for a community. If the house is too small, too big, or need major repairs at the end of the lease period you can walk away without worrying about selling the house or paying off your home loan. You also don’t have to pay homeowner’s insurance or property taxes during the lease period because you are technically just renting the house. This can save you thousands of dollars per year.
National Home Buyers Association
This option is good if you have a new home business, or if you need time to improve your credit rating before you can officially get financing. It is basically just a lease/option program that is sponsored by an organization instead of an individual. The NHA offers to buy the home of your choice and lease it back to your for the period of one year. During this time, you can establish your credit history, increase your annual income, or improve your credit rating by paying off credit cards and making on-time payments.
To qualify for this program you have to be able to pay a commitment fee equal to 3% of the purchase price of the home, and be able to pay a monthly rent equal to 1% of the home’s purchase price.
The benefits of this program are that 50% of the rent that you pay each month is applied to the purchase price of the home after the one year lease period, you don’t have to pay homeowner’s insurance or property taxes, and you don’t have to buy at the end of the one year lease.
Example:
- Home Value $200,000
- Commitment Fee $ 6,000
- Monthly Rent $ 2,000
- Downpayment Earned After One-Year $ 12,000
Interest Only Mortgage
Another popular mortgage option is the interest only mortgage. This option allows people to buy a more expensive house for less money per month. The premise of this option is that the borrower will only pay the interest for the first 5, 10, or even 15 years, after which time the payment will increase dramatically to cover the principal amount that is left. It is assumed that the borrower in these cases will either refinance or sell the home before the end of the interest only payment period.
The advantages of this option are that borrowers can qualify to finance a more expensive home, they have smaller per month payments, it is easier to qualify for, and it allows the borrower to shop around for a better mortgage option and it gives the borrower time to either establish their business’ finances, or to strengthen their credit standing. The final benefit of this option is that the borrower can make additional payments to reduce the principal without penalties. This gives people without a consistent monthly income the chance to buy a home without worrying about making a huge mortgage payment each month. The smaller payment is easier to handle during months that have low cash flow, and during months of higher cash flow the principal can be paid down earning the borrower equity in their home.
The disadvantages of this program include: a sharp increase in payment amounts after the end of the interest only period, and the homeowner doesn’t earn any equity in their home by making the monthly payments unless they add to the amount that is expected.
Traditional Mortgage
Qualifying for a traditional mortgage when you are self-employed may be more difficult than qualifying with a regular job, but it is not impossible. To improve your chances you will want to have the best credit rating possible for both your personal finances, and for your business. To do this you should:
1. Pay off all of your credit cards but keep the accounts open.
2. Make on-time payments.
3. Correct mistakes and update your credit report.
The next step to improving your chances of getting a traditional loan when you’re self-employed is to have your income and assets well documented and ready for the financial institution’s review. This includes: contracts, financial reports (last three years), tax returns (last three years), marketing plan, projected earnings report, bank statements, copies of royalty checks or residual checks, and any other letters of credit reference.
If you still are not able to get a traditional loan you may want to consider putting more money down in order to qualify. Instead of 5% down, put 10, 15, or 20% down. The more money that you are willing to put down, the more secure a bank will feel when considering you for a home loan.
Source: FineTuning.com
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| September 12, 2005 |
| Would Accounts Receivable Factoring Be Good for My Business? |
Factoring is an alternative source of financing that involves selling your outstanding accounts receivables at a discount to a factoring company. One of the advantages is that you can get cash almost immediately, so this may be a good source of short-term financing when you need funds for growth or you are unable to obtain bank loans. But factoring is generally more expensive than other forms of financing.
How Factoring Works
Factoring is not the same as other forms of accounts receivable financing, such as taking out a loan or obtaining a revolving line of credit with a bank, with your accounts receivable pledged as security. And factoring is not the same as turning accounts over to a collection agency.
Selling Your Receivables
In a factoring transaction, your business basically sells its receivables to the factoring company at a discount. Once you factor an invoice that you have issued to a customer, you transfer your rights to collect that amount. The factoring company acts as the principal, and not as your agent. Customers are notified that their invoices have been factored, and they make their payment directly to the factoring company. You have basically transferred your right to the amount invoiced, and your responsibility for collection, to the factoring company in return for a discounted amount of immediate cash and the balance of payment, less the factoring company’s fee, once the customer pays.
Advance and Reserve Factoring
For example, in the advance and reserve type of factoring, which is the most common for small businesses, you sell your receivables to the factoring company at approximately 60 to 80% of their face value, and you receive that amount in cash up front, with the balance remaining as a reserve. The factoring company then takes over responsibility for collection. When the customers pay the invoices, the reserve is released and the factoring company deducts its fee, which can be from around 1% to over 5%, called the discount rate, and pays you the balance.
How the Discount Is Determined
The factoring company is more concerned with your customers’ ability to pay than with your own business’s credit rating. In this sense, the quality of your receivables is what counts for a factoring company, and will probably influence the amount of the discount. This discount varies considerably, and will depend on the factoring company, and probably particularly on the age of the receivables. Current invoices will yield a lower discount than older receivables, and delinquent accounts that are over 90 days past due will probably be difficult to factor.
Recourse or Non-Recourse
Factoring transactions can be either recourse or non-recourse. In a recourse transaction the company selling its receivables must repay the advance and the factor’s fees if the customer does not pay the invoice by the recourse date, which is usually 90 days after the invoice date. In a non-recourse transaction the factor assumes the risk of non-payment. Recourse and non-recourse terms refer to the risk of bankruptcy or insolvency of the customer, and do not refer to trade disputes or returned merchandise. It should also be kept in mind that in a non-recourse transaction, the credit-worthiness of the customer may be scrutinized more closely before the factor agrees to buy the receivable.
Advantages of Factoring
Factoring accounts receivable can be beneficial in various different business situations. The following are some of its comparative advantages:
- By factoring your accounts receivable you can have almost immediate access to cash.
- Factoring can improve your cash flow by providing an ongoing source of cash. If you continue factoring, new invoices will replace those that are paid. As long as your business generates sales and accounts receivable, you can factor them and receive cash.
- Factoring is a form of financing that does not necessarily depend on your business’s credit rating, since the factoring company is interested in the quality of your customer accounts. This can be particularly attractive to a new start-up business that cannot get traditional financing in the form of bank loans.
- Only your receivables are used as collateral (if the receivables are factored under recourse terms; under nonrecourse terms there is basically no collateral), so you can use other assets, such as property and equipment as collateral for borrowing.
- The relationship with the factoring company is not debtor and creditor, and there are generally no long term contracts involved, so factoring can be a flexible source of financing. But the opportunity is still there to establish a lasting relationship with the factoring company.
- Factoring eliminates the need to spend time and effort in collection activities, since the factoring company takes over these responsibilities. By effectively outsourcing these functions, your business may be able to save on overhead administrative expenses.
- With the cash you free up from receivables that may be 30, 60, or 90 days outstanding, you can take advantage of supplier discounts, or you can purchase the materials you need for a big job that may be awarded to you. If you had to wait for your customers to pay before you could purchase the materials you need, you may miss out on opportunities to expand your sales. Factoring can provide the cash needed by companies that are in periods of rapid growth.
- By factoring your receivables and showing a stronger cash position on your balance sheet, you may find it easier to obtain traditional bank financing.
- By using your own resources (your receivables) to finance your operations, you may be able to avoid taking on more debt or having to raise more equity, possibly giving up part of the ownership of your business.
- Factoring can help protect your company’s credit rating by providing cash to meet payment due dates.
Disadvantages of Factoring
Factoring has a couple important drawbacks that must be taken into consideration:
- Cost is probably the biggest disadvantage. Factoring can be an expensive form of financing. A discount rate of 1% to 5% on invoices with terms of 30 to 60 days results in a much higher annual rate than other traditional forms of financing.
- You lose control over the collections process. This may have an effect on your relationships with your customers, depending on how the factoring company handles collections.
Is Factoring Right For My Business?
There are several variables that should be weighed in your decision about whether to factor your accounts receivable.
Aspects to Consider
Your cash flow will be a primary consideration, as will the availability of other forms of financing, such as bank loans. The amount of working capital you have tied up in accounts receivable with payment terms of 30, 60 or 90 days, will influence your decision. The credit-worthiness of your customers will affect the advance rate and the discount rate that factors are willing to offer.
Your line of business will be an important consideration. Businesses that have a significant time lag between the purchase of materials and final collection from the customer may be good candidates for factoring.
The stage of development of your business will also be important. Start-up businesses that cannot obtain bank loans or other sources of financing can benefit from factoring. During periods of rapid growth, factoring may provide a needed injection of cash to generate more revenue by purchasing raw materials and supplies at a discount. It may also be advantageous when your business has been awarded a large job that will require immediate cash outlays for materials and other costs, but that will generate more income.
What Types of Businesses Can Benefit from Factoring
Factoring can be a good option for a small business that is experiencing difficulties with liquidity and needs cash to meet its obligations. In this case, factoring can help you get through these periods without incurring additional debt and without negatively impacting your credit rating. You will be using your own assets – your receivables – to finance your operation. In a highly leveraged business that already has a significant debt load, factoring may be a way of improving cash flow without incurring additional debt. In a business that has tax liens or other credit problems, factoring is an option that is not adversely affected by your credit record, since the factor is more concerned with the customer.
How To Proceed
Once you decide to factor your accounts receivable, do some research first, to find the right factoring company for you. After that comes the application process and presenting the documentation the factoring company needs.
Doing Your Homework
As in any business transaction, you should deal with a reputable company, preferably recommended by a professional advisor or business associate. Do some research on the factoring companies you are considering and compare their quoted discount rates. You should be clear about the terms and conditions of the factoring arrangement beforehand. Ask any questions you may have before signing the agreement. You may want to consider using an experienced broker, that can find the best factoring company for your business.
The Application Process and the Documentation You Will Need
The application for getting started with a factoring company is normally a relatively short process that could take just a few working days. Your receivables should be properly documented, supported by the invoices to be factored, and your product must have been delivered and accepted by the customer, or your service completed, before the factoring company will purchase the receivables.
You will need your most current accounts receivable aging report, a sample invoice, and in some cases, your most recent financial statements. The factoring company may charge you a one-time fee, once you agree to their proposal, to cover administrative costs, filing fees, and other expenses.
Source: FineTuning.com
For more information contact one of our factoring representatives at 877-836-4661.
| September 11, 2005 |
| Accounts Receivable Factoring Explained |
Accounts Receivable Financing (Factoring) Explained
A/R Funding is an excellent source of capital for businesses that are growing or experiencing a temporary cash flow squeeze.
Accounts Receivable Funding also known as factoring is the sale of invoices at a discount. A method of financing that is used by businesses to raise capital quickly and improve cash flow without going into debt.
How Does it Work?
Precisely, when a business sells a product or service to a customer, it creates an invoice. Typically, an invoice would itemize the unit sold, the price, and the terms of the sale. The invoice can either serve as a receipt if it acknowledges that payment has been received, or as a bill if payment is due. An outstanding invoice may also be called an account receivable. Instead of waiting to collect payment, a business may elect to sell the invoice to a factor and receive immediate cash advance. A factor is an individual or business that is engaged in the buying of accounts receivable.
A Typical Factoring Process
1) You deliver goods or services and create an invoice.
2) Sell the invoice to Factor per contract.
3) The Factor verifies your invoice.
4a) The Factor funds you up to 80%-90% of the invoice immediately.
4b) The balance of 10%-20% is held in a reserve account.
5) The Factor collects payments on the invoice from your customer.
6) The Factor funds the balance of the reserve account (10%-20%) less the agreed upon fee.
For the privilege of receiving immediate access to money and early payment, you will be charged a nominal factoring fee by Factor. Your customer will be notified of where to send payment. The fee for the factored invoice will be deducted after payment is received from your customer. You do not have to factor all your invoices or change your billing process except for the payment address, and in some cases, Factor will have to submit the original invoices to your customer.
Factoring fills the money gap and creates a predictable and dependable source of cash. Instead of waiting on payments from your customers for uncertain number of days, weeks, and sometimes months, funds can be made available immediately by Factor each time you invoice. You would now have available cash to meet payroll, pay rent, buy supplies, and meet other operational needs.
The Factor will wait to collect from your customer. When the invoice is paid, Factor will retain a sum equal to initial cash advance plus applicable fees. The balance is then refunded to you along with account statements. The exact factoring fee will depend on volume and time of payment.
With factoring, a business owner might be able to completely avoid loans and other financing options that could restrict independence and the ability to operate freely and efficiently.
Until recent decades, factoring was only available to large corporations that are able to meet the minimum threshold required by major Factors, many of which were wholly-owned by or subsidiaries of banks. Today, factoring is available to small and medium-sized businesses because factors and brokers that are more diverse, and requiring no minimums or maximums has entered the field.
To begin a factoring relationship, you will submit an application along with documents to support your business registration, ownership, and possibly sales volume. Afterwards, you will sign an agreement that may include UCC filing statements, IRS information release forms, and other documents. In most cases, no term commitment is required and your credit limit will be directly related to sales. The process can take anywhere from 3 - 10 days to establish an account. After which, funding is often immediate, usually within 24 - 48 hours of submitting an invoice. It does not particularly matter in what State you are located.
Factoring has evolved into a very fine financing technique for companies that are experiencing rapid growth or have other cash flow needs but may not qualify or want conventional funding.
There are countless reasons why businesses factor. For example: you may need a continuous level of cash to give you the ability to operate in a timely and efficient manner; you may want an unlimited credit line that is directly related to sales; you may want an alternative to borrowing without encumbering valuable assets; you may want to extend terms to your customers to make it easy for them to pay and encourage them to buy more; you may want immediate access to your money rather than waiting on your customers to pay and so on.
Perfect credit is not required to establish a factoring account. The single most important requirement to qualify for factoring is that you must be a registered business and have accounts receivable due by credit-worthy customers. It is the Factor's responsibility to verify your customer's credit worthiness.
You can qualify whether you are a start-up or an already established and profitable business with credit problems and even if you already have a loan or line of credit.
Because factoring sources are very diverse, several approaches may be used. However, there are two major types of factoring - Recourse and non-recourse. Recourse factoring requires a personal re-purchase guarantee by the seller, who is ultimately responsible for unpaid, disputed, and fraudulent invoices. With non-recourse factoring, the Factor assumes total risks provided the invoice is not disputed. Regardless of what type of factoring, all agreement requires principal's guarantee against committing fraud.
Operationally, there is also factoring with notification and non-notification. Factoring with notification is where a seller's customer is notified by the factor and verifies the invoice. With non-notification factoring, the seller's customer is not notified and may not be aware of the factoring relationship.
After the agreement is signed, a UCC-1 lien against all accounts receivable is filed. It is a blanket lien, and it is similar to a lien on a house, which is against the entire home and not just parts of it. Accounts receivable is simply looked at as one of the assets of a business.
Generally, most factors will gladly provide references and testimonials from satisfied clients. However, they do so sparingly only to serious prospects and with the consent of their clients, so as not to violate confidentiality agreement.
The following are some of the prevailing misconceptions about factoring:
Misconception #1: Factoring is only suitable for large corporations or businesses that are in extremely bad financial condition.
Fact: Although, it is true that factoring used to be the exclusive domain of corporate giants. The fact is, by share numbers alone, more small businesses than big corporations are factoring today. Almost any business can receive funding through factoring and the rates are very competitive. Factoring is also not just
for companies experiencing cash shortages. Most astute business managers use it in long-term planning and in conjunction with other revenue generation methods. It is increasingly becoming part of businesses overall Financial Plans.
Misconception #2: Customers may hold a negative view of your company if you factor, and may seek alternative vendors.
Fact: Being able to qualify for outside funding should speak bundles to your confidence and the confidence financiers have in your company and your customers. Business owners more than anyone understands the difficulty nowadays in securing outside
funding. To have access to funds when you need it should put your customers at ease because you will be better equipped to meet their needs at any time even on short notice. Therefore, they would prefer to continue working with you rather than seek another vendor to start a new relationship with. Moreover, approval to
factor is usually based more on the credit-worthiness of your customers than your personal credit.
Misconception #3: Factors offend and alienate customers with collection calls.
Fact: A factor's goal is to enable you to do increasing and continuing business. Therefore, it is in a factor's interest to help you succeed. It's folly to think that factors would intetionally offend and harass your customers with collection calls. The other facts are that without direct pressure factors more often improve and enhance the collection process to the amazement of clients. This is so because most businesses realize that their ability to secure more accounts can be directly related to their credit reports and references. The report factors may provide to Commercial Credit Bureaus may impact the ability of your customers to do business. Therefore, in order to have and maintain good credit rating, they will pay on time.
Yes, I would not deny the fact that factors do and sometimes call customers, but only as a reminder, rather than to harass a customer. Factors are more likely to successfully resolve payment issues in ways that would satisfy the client than the client would on their own.
Misconception #4: Factoring is prohibitively expensive and would absorb all profit margins and put you out of business.
Fact: Last but not least, that factoring is too expensive is often a generalized response given when a prospect does not yet have complete details. The cost of factoring is relatively favored compared with other financing. It can vary greatly and depend on many conditions, not unlike bank loans.
Factoring is simply another form of financing that businesses have. Factor's funding should not be weighed against a bank loan because funds received through factoring is not considered a loan legally or in practice. The fee is not considered as interest, it is a purchase discount.
Attempting to multiply and annualize the discount rate may be well intentioned, but it is misleading.
If you borrow $100,000 from a bank at 12%, you could make monthly payments of $1,000 and in 12 months would have paid $12,000. Yet, you would still owe $100,000. If you factored $100,000 each month at 5% discount, in 12 months your fees would be $60,000. However, you would have received $1,200,000 (12 x 100,000) and the fees would still be $60,000.
What factoring does is like converting your invoice terms to COD (cash-on-delivery). For being able to receive substantial upfront payment, you allow a discount. The real bottom line is that with better cash flow you can grow your business rapidly and exponentially. In theory, your profit should increase, not decrease. For example, take the case of a T-Shirt design and distribution company that does about $8,350 in sales monthly or $100,200.00 a year without the benefit of factored revenue. However, with cash advance to buy supplies and meet expenses, revenue could possibly double.
Even with increased expenses and cost of factoring as a result of additional volume, you would get a much higher percent of profit overall. Net profit increased from $4,008 or 4% to $27,054 or 13.5%. This is still a significant increase. The core question is, can you do more business with better cash flow? Fixed cost and overhead would not necessarily increase in proportion to sales. You may increase staff, but because your sales double does not mean you have to double overhead such as -- office space, utilities, or labor.
Most businesses would prosper with better cash flow. However, it takes more than just money to run a successful business. It would be irresponsible of us to make claims of how profitable you will be. How much profit you can make would depend on a number of factors. It would require knowledge of your business, your
skills, abilities, and so on, which is out of our control. Numbers used here are for illustration purposes only. We make no guarantees that you will achieve the same results.
Now that you have complete information about factoring, we hope that you are better equipped to make an informed decision. However, we are not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, you should seek the services of a competent
professional person.
Please contact us at 877-836-4661 for further information.
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| September 10, 2005 |
| The Cash Flow Crunch - Industry Trend or Event |
Can you pay an unexpected bill and still meet expenses?
YOU MIGHT BE PREPARED FOR THE monthly mortgage payment or Uncle Sam's April 15 tax deadline, but businesses tend to gobble up cash at other, inconvenient moments (for instance, the quarterly estimated tax payment date of January 15). While a specific expense might come as a surprise, you shouldn't be caught so short that you can't repair equipment or pay your assistants. In other words, you should expect (to pay for) the unexpected.
Financial Input "The need for individual cash reserves is three to six months" says Dan Candura, a certified financial planner with American Express Financial Services in Braintree, Mass. "For business you need more--six months' minimum is better. Everything isn't normal all the time, and in times of trouble, cash is important.
"Businesses need to establish a line of credit before the need arises" Candura continues, "so it's there for downturns. If you wait until after the need arises, it's difficult because of time frames--for example, no time to choose between lenders or get past quarterly information together. To eliminate surprises, small businesses need quarterly reviews to determine where they're going and [to] spot trends in their cash flow.
One place to look for a line of credit is a business financing Web site such as LiveCapital (livecapital.com), which offers comparison shopping for secure term loans, equipment leases, and other resources from some five dozen financial institutions. "Many small-business owners d6n't start to build business credit [early enough]; they're under the radar," says LiveCapital vice president Anthony Ruebner--who adds that, while each lender has its own definition of small business, there are "a tremendous number of [loans] transacted below $100,000."
Planning Advice The U.S. Small - Business Administration (www.sba.gov) provides ample assistance to help Americans run their businesses. Invaluable help is available from the Service Corps of Retired Executives (www.score.org), whose more than 12,400 volunteers provide free one-on-one counseling.
The SCORE advisors we contacted cite two common reasons for a small company's failure to meet payroll or other obligations--the firm is not yet profitable and it fails to recognize, at an early stage, that a shortfall of funds is likely.
In addition to enough cash on hand to cover a minimum of two months' operation, it's best to set aside a reserve for unplanned expenses such as equipment breakdowns. Careful records--including annual cash flow statements that delineate cash on hand, expenses, and income--and a detailed business plan can help you avoid digging yourself into a high-interest hole with credit cards or other borrowing.
Legal Matters According to attorney Bob Pinzur of Pinzur & Hartstein Ltd. in Long Grove, III., the majority of homebased businesses prefer to structure employment agreements with independent contractors, so "there's no sense in having a [formal] payroll. That type of business should set up as a limited liability; company or a corporation."
Pinzur, who conducts seminars on payroll-related topics, strongly favors sheltering the entrepreneur from liability. While employees in some states may be terminated for any reason, other states use different guidelines. It's advisable to talk with an attorney before hiring your first employee.
"Though this varies by state, employers should retain records for up to one year after employment is terminated. Don't hire anyone for an indefinite term. It's not a good idea from the employer's perspective to sign a contract," says Pinzur.
If a home-based employer can't meet payroll, the first recourse is to try to schedule an acceptable payment plan with the employee. If you're sued for payment for work performed, seek legal assistance right away. Though state laws vary, small-claims court recoveries for wage claims may range from $500 to $2,500, and employers may be held responsible for workers' legal fees.
By contrast, independent contractors pay their own social security, Medicare, and taxes. All you need to do, assuming you pay them more than $600 annually, is issue a Form 1099 and file payment information with the Internal Revenue Service. Pinzur says to be certain that an independent contractor is an American citizen, then make sure you meet other IRS guidelines. If you dictate the work-place, work product, and effort, the IRS might perceive your arrangement as an employer/employee relationship.
Written by Barbara Axelson.
Source: lumiverse.com
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| September 09, 2005 |
| Reasonable Replacement Notes - Mortgage Notes |
It's the note seller's worst nightmare. You need cash and want to sell your seller-financed note, but you can't find the original. There may be a photocopy, but the real note is nowhere to be found. It is lost, stolen, or destroyed. Now what do you do? The best option is for you or us to contact the note payor and ask the payor to sign a new note, assuming the payor was the original signer on the note. Even though this is the best available option, it is not always possible because the payor has no obligation whatsoever to cooperate. Many times the payor will refuse to cooperate and you may have to undertake a lengthy court action which could result in you being required to post a sizable bond to protect the payor.
However, if the payor proves to be agreeable and will sign a new note, you have the best chance of completing a reasonable transaction. A cooperative payor is often an indicator of a smooth note sale. Even though creating a new replacement note offers basic solutions, it also comes with a number of unavoidable problems. You must be most concerned with the fact that a replacement note may not give you the same legal or financial protection as the real note.
Someone else may actually have possession of the real note without your knowledge. A lost or stolen note may fall into unscrupulous hands and the illegitimate possessor may later be able to claim rights to the real note. The simple fact of possession is a crucial factor. You should also be aware that by signing a replacement note the payor assumes a risk. If the real note appears at a later time, the possessor may be able to force the payor to pay the real note. Duplicate notes could mean "double trouble" for the payor. A knowledgeable payor, recognizing the risk and vulnerability by signing a replacement note, may require a bond, or at the very least, an indemnification, from you before signing a replacement note.
How do you construct a replacement note? You need three documents to cover the major risks. First is the replacement note, and second and third are affidavits from you and the payor, each separately affirming certain facts.
The replacement note should look identical to the original in all respects but two, and those are: (1) the date beside the new signature of the payor should be the date of actual signing and not the old date of the original note; and (2) language should appear on the note stating something like: "This note supersedes and replaces the original note which has been lost, stolen, or destroyed." To be fair to the payor, you should always include this notice on the face of the replacement note, which is a warning to you and others that there is a potential problem.
Your affidavit should describe all the circumstances surrounding the absence of the real note. Your affidavit should also affirm that the replacement note is identical to the real note, and describe in detail your due and diligent search for the real note. The affidavit should also include your warranty that the real note has not been sold or otherwise transferred or assigned. We will require you to indemnify us and hold us harmless from any claims, and promise that if the real note is ever found, you will immediately endorse it and deliver it to us.
We also need the payor's affidavit, which should state that all of the terms of the real note have been and presently are in full force and effect and have not been changed. Also, the payor should verify the exact mathematical calculation of the remaining balance due, the interest-paid-to-date, and the next payment due date. The payor should also confirm that there are no claims against you, and that the payor has no claims, defenses, rights, or offsets against the note. The payor should state that he or she understands that we are relying on the statements made in the affidavit. Finally, the payor should state positively in the affidavit that the payor has had no demands about the real note from any other person, or communication with any other person concerning rights to the real note, and that the payor has no knowledge that anyone other than you has ever had possession of the real note.
Because circumstances may vary, we will work with you or your attorney to draft the required affidavits. These affidavits must include a description of the security document, its recording numbers, and the legal description of the property securing the note. We may, at our discretion, record these affidavits in the real estate records if the recorder will accept them.
But you must understand that a replacement note is not as reliable as an original note. A replacement note is sometimes worth less money because of the risks that go with it. Even so, we may decide to accept the risks of a replacement note and pay a normal price. If the risks seem too great, however, we may offer you less money for the replacement note than we would for the real note. The major risk is that the real note will unexpectedly appear at a later time and cause trouble. Possession of the real note by an unforeseen person is a powerful position that could cause us to lose some or all of our money. Important legal rights go with the real note that may not go with the replacement note. Consequently, our possession of the replacement note leaves us without the legal strength and advantages that we would ordinarily expect if we had the original note.
Written by Lorelei Stevens, President of Wall Street Brokers, Inc.
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| September 08, 2005 |
| Factor your accounts receivables - Medical Factoring |
As the frequency of medical malpractice claims increase, so do outrageous jury verdicts. While the likelihood of having a jury verdict in excess of your malpractice policy limits is very low, it is still a possibility that puts your personal assets, and potentially your practice's accounts receivables (A/R) at risk. By factoring your office's A/R, you can completely asset protect the A/R and turn the topic into a very nice income tax reduction plan/supplemental benefit plan for key physicians.
After talking with several personal injury (PI) attorneys that specialize in medical malpractice cases, I've come to the conclusion that a medical office's A/R is technically at risk in every malpractice case. The A/R is basically the last possible asset a PI attorney will look at to satisfy a judgment, but since the A/R is technically at risk, why not protect it if, when doing so, a plan can also reduce your income taxes and increase funding for a supplemental benefit plan?
What is factoring?
Very simply, factoring is selling an A/R at a discount. The concept of factoring has been around as long as A/R itself has been around. Most of the time factoring is used when a manufacturing company has a large A/R on the books that would represent the entire profits for the company for the year. That particular A/R might not get paid prior to year end from a client that has no money. That means the manufacturing company will have no profit for the year unless they can figure out a way to collect the A/R.
To send a client to collections and hope to get paid on a large debt prior to year's end is unrealistic. Physicians know too well how long it takes to collect from patients that have no money (sometimes it takes years to collect). What's the alternative to waiting to go through the collection process? Factoring. There are companies out there that specialize in purchasing other company's A/R at a discount, due to the fact that the purchasing company has confidence that 100 percent of the debt will be collected in a timely fashion.
Factoring is good for the seller because they get money today in hand, and good for the purchaser who can afford to wait to collect 100 percent of the debt that was purchased at a discount. Discounts on A/R range from 10-40 percent.
Let's look at an example for a physician. A physician office has $1,000,000 of "real" A/R (not the fluff A/R that comes from what is billed). A factoring company contracts with the medical office to purchase the $1,000,000 for $800,000 and will cut a check to the medical office today for that $800,000. The factoring company runs the risk that the million dollars will not be collected by the medical office, but when and if the $1,000,000 is collected, the factoring company makes a nice profit.
Asset Protection
While a medical office can borrow against their A/R to create a supplemental retirement plan for key physician(s), A/R leveraging also helps asset protect the A/R by putting another creditor in front of any potential patient that might go after the A/R in a lawsuit.
A/R factoring goes one step further in that the medical office is actually contracting to sell the A/R so there is absolutely nothing for a creditor to go after. Since the medical office does not own the A/R, the creditor (patient) can not make a claim against that A/R. There is no better way to asset protect your office's A/R then by factoring.
If I just stopped here you might be wondering that, if you sold your A/R at a discount, you may have asset protected the A/R – but you also have a guarantee that you lost money since you now won't take home 100 percent of what you normally collected. There is one company in the marketplace I am aware of that will factor your office's A/R and through a marketing incentive will contribute 88 percent of that factored amount into a supplemental benefit plan for key physician(s).
Income Tax Reduction
The best way to illustrate how A/R factoring works to reduce taxes and fund a supplemental benefit plan is through an example.
Dr. Smith (age 45) earns $800,000 a year as an orthopedic surgeon in his company, Dr. Smith P.C. He is tired of being limited by his 401k/profit sharing plan as a tax deductible vehicle and is not interested in a defined benefit plan or 412i plan because of the amount of money he would have to kick in for the staff to allow him to put away more money in a tax deductible manner. Dr. Smith hears of A/R factoring and decides that he would like to reduce his income $100,000 a year if he could put that into a favorable tax planning vehicle.
Dr. Smith P.C. contracts with a factoring company to sell $500,000 of his A/R at a 20 percent discount ($400,000). Dr. Smith then takes home income of $700,000 (pre-tax) for the year.
The factoring company contributes 88 percent of the factored amount ($100,000 x .88 = $88,000) into an investment (life insurance). The 88 percent represents 89 percent of the total premium going into the life policy.
Dr. Smith on a post tax basis will become an investor in that same life insurance policy where Dr. Smith will put in 11 percent of the premium ($10,876) and now co-owns the policy with the factoring company.
By contract Dr. Smith will have access to all the cash value in the policy via policy loans (tax free income) and the factoring company when Dr. Smith dies will get the majority of the death benefit.
If we assume Dr. Smith factored $500,000 of his A/R for 10 years at a 20 percent discount, a 7.9 percent return in the stock market pre-tax and 7.9 percent in the life policy, with post tax investing, the available funds at age 66-85 would be $95,294 a year after tax from a brokerage account. By contrast, the A/R Factoring’s Life Policy would yield $243,871 in income tax free via life policy loans. A/R factoring as illustrated is 155 percent better then post tax investing.
It is very difficult for one doctor out of five or more to get an income tax reduction plan approved. I submit that a fellow partner should welcome the opportunity to have a partner implement the A/R factoring plan. Why? Because A/R is owned from a creditor standpoint by the medical office and if one physician wants to asset protect $500,000 or more of that A/R via the factoring plan, the partners should welcome that with open arms.
What does A/R Factoring accomplish? It protects your medical office’s largest asset - its A/R, reduces the income taxes of key physician(s), creates a supplemental benefit plan that does not require funding from for other employees and functions 155 percent better then post tax investing.
Written by Roccy DeFrancesco, Esq., the President of FMG, L.L.C. in New Buffalo, MI, and is author of The Doctor’s Wealth Preservation Guide.
Source: Physician News
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| September 07, 2005 |
| The Lawsuit Loan |
What Is a "Lawsuit Loan"?
The term "lawsuit loan" is usually used in reference to a form of pre-settlement lawsuit funding which is not actually a loan, but is instead an advance fee, "investment" or form of venture capital. While actual loans or lines of credit may be available to finance lawsuits, those options are usually reserved to lawyers and law firms. The plaintiff in a personal injury case who seeks to obtain a cash advance against the verdict or settlement in a lawsuit will not ordinarily be offered a loan, but will instead be offered "no recourse lawsuit funding".
The advantage of this form of lawsuit financing is that it carries no risk to the plaintiff - if the lawsuit settles for less than the amount of the cash advance, or if the defendant ultimately prevails and there is no recovery at all, the plaintiff has no obligation to the lawsuit funding company beyond the plaintiff's own share of any recovery. At the same time, the costs of a "lawsuit loan" can be considerable, as they are structured to avoid usury laws, and thus they are generally best viewed as a last resort for financing litigation.
Can My Lawyer Lend Me Money?
Due to concerns about creating a conflict of interest between a lawyer and a client, while a lawyer can advance the costs of litigation, a lawyer cannot lend money to a client. The concern is that if a client owes a lawyer money, the lawyer will have an interest in recovering that money which may be inconsistent with the best interest of the client. However, a lawyer may be able to refer a client to a lender who can offer a loan to help the client pay expenses during the pendency of a lawsuit, or to a reputable lawsuit financing company.
Sources of Lawsuit Financing
If a plaintiff in an injury case does not wish to obtain no-recourse lawsuit funding, due to the high cost of such funding, the plaintiff may wish to consider other forms of loans. For example, if the plaintiff has home equity, it may make sense to obtain a mortgage or home equity loan to deal with certain expenses which arise prior to the settlement of a lawsuit. It may be possible for a plaintiff to obtain a personal loan or line of credit. It may be possible to borrow funds from friends or family. In some cases, it may be cheaper to simply max out credit cards than to obtain a no-recourse "lawsuit loan" from a litigation financing company.
Is a Lawsuit Loan Right For You?
Some clients have no choice but to obtain lawsuit financing, even at a high cost. Sometimes there is no other source of capital, and the client must have funds to pay medical bills, obtain health care, to pay the rent or mortgage, or even to buy food. When a personal injury plaintiff is in dire financial straits, it may be appropriate to obtain a "lawsuit loan". However, it is a good idea to involve your attorney in this process, both in terms of finding a lawsuit funding company which will offer the best possible terms, and in having your contract with that company reviewed before you sign it.
Written by Aaron Larson
Source: ExpertLaw.com
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| September 06, 2005 |
| Cash in on the American Investor's Quest |
With the continuing evolution of the cash flow industry, new processes, markets, and opportunities are emerging.� One of the more exciting opportunities involves the availability of funding to purchase notes. There is in excess of $3 Trillion in IRA funds in the United States today.� Most is invested in the more conventional investment types, such as CDs, mutual funds, stocks and bonds.� The exciting news for members of the Cash Flow industry is that these retirement funds are all available to be invested through you in your notes or investment pools.� The good news for investors considering this strategy is that it can be done without cashing in their IRA account, and can be done penalty-free, tax-deferred, and sometimes even tax-free!
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A long-standing Internal Revenue Service ruling allows all Americans to invest their IRA funds, or 401(k) funds rolled into an IRA, in a wide variety of non-traditional investment types.� With this type of IRA, called a Self-Directed IRA, individuals can invest in mortgages, private notes, structured settlements, factoring, and limited partnerships ? just to name a few.� Because these are IRS-permitted investments, made within a qualified retirement plan, rolling current retirement funds into a Self-Directed IRA to do this type of investing is penalty-free.� Additionally, the taxes due on the growth of the investments are deferred until distribution begins at retirement.� If a Self-Directed Roth IRA is involved, the earnings are tax-free when distributed at retirement.
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In order for your investors to take advantage of this opportunity, they must work with a qualified special asset custodian. Unlike most financial institutions offering IRAs, true Self-Directed IRA custodians allow clients to select from virtually any type of investment.� Such investments as private notes, factoring, commercial paper, real estate, annuities, structured settlements, car paper and commercial leases, are possible choices for clients of firms that are truly Self-Directed.� While clients can still include traditional investments such as stocks and mutual funds within their Self-Directed IRA, they also have the freedom to diversify their portfolio by adding a non-traditional asset like a private note or piece of real estate.� Such institutions serve as a vital source of funds to those selling notes and those managing investment pools to purchase notes by assisting individuals, including "angel" investors, to invest their retirement funds in these types of assets.� In many cases, these investors have large sums of money accumulated in their retirement accounts, which they can now put to work in non-traditional investments through the services of Self-Directed IRA institutions.
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The timing is excellent now for you, as a member of the Cash Flow industry, to take advantage of this little-known retirement planning tool, and the possibilities opened up by it. Daily headlines in the Wall Street Journal discuss economic uncertainties caused by mutual fund mismanagement, corporate accounting scandals and so on.� As a result, more and more Americans are pulling out of traditional investments and are aggressively seeking non-traditional assets, like your private notes, as a primary or ancillary investment for their IRAs due to their potential for a higher return.
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Your challenge as a member of the Cash Flow industry is to take a proactive role in educating and informing the investors and professionals you work with about the benefits of Self-Directed IRAs.� By becoming knowledgeable in this area of specialized IRA investing, the professionals you work with (e.g., CPAs, attorneys, and financial planners) will help their clients earn higher returns on investments, enabling themselves to increase their professional prestige and grow their client base as a result. Your investors will have the potential of a much higher return for their retirement account investments.� You will not only strengthen the relationship you have cultivated with current investors by offering them an opportunity to earn more money without any additional out-of-pocket cash, but you will also have the opportunity to increase your investor pool by introducing this unique concept to new potential investors.
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Find out more about the opportunities Self-Directed IRAs offer you and your investors, and how you can build your business and grow your profits using this unique retirement planning tool.
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Written by Michael P. Scott, the vice president of PENSCO Trust Company, a self-directed IRA custodian specializing in alternative assets. For more information, contact PENSCO Trust Company at 866-818-4472 or via e-mail: penscotrust@mindspring.com.
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| September 05, 2005 |
| Saving Taxes through Factoring |
Do you believe there are corporate tax benefits to financing the working capital requirements of a business? Those benefits exist, and this article introduces a taxable income strategy that financial professionals can use to promote their financial services.
First, let’s summarize the 2005 corporate tax rates (banks have different tax rates). The federal corporate tax rates range from 15 percent to 39 percent of the taxable income with several tax brackets. The state corporate taxes rates range from 1 percent to 12 percent of the taxable income, depending on where the corporation resides (six states have no corporate income taxes). With only this information, you can appreciate the following:
Taxes on corporate income are significant . This impact on corporate earnings can be seen as targets of opportunity for financial professionals, particularly factoring services.
Taxes on corporate taxable income are dependent on which state the corporation resides in . Many states that collect corporate taxes have flat tax rates and the rest have tax brackets, more opportunity for financial professionals.
Corporate tax rates do not always increase with taxable income , e.g., federal corporate tax brackets favor larger corporations.
Taxable income
Over Not over Tax rate
$ 0 $ 50,000 15 percent
50,000 75,000 25 percent
75,000 100,000 34 percent
100,000 335,000 39 percent
335,000 10 million 34 percent
10 million 15 million 35 percent
5 million` 18,333,333 38 percent
18,333,333 35 percent
It is important to note that corporations that have taxable income of $100,000 to $335,000 are in the 39 percent tax bracket. These corporations generally are great targets of opportunity for financial professionals. However, most financial professionals seek to provide their financial services for businesses whose revenue is $30 million or less.
Financing has a negative impact on the taxable income of a corporation because of the interest for loans and the discount fee for factoring services. On the other hand, because of the lower taxable income of either of these instruments, there are fewer taxes due to the federal and state revenue services. The amount of income tax savings depends on the reduction in taxable income. It is obvious that any reduction in taxable income would recover some of the interest or the discount fee.
Let’s look at a business that is in the 15 percent federal income tax bracket and pays 6 percent state income taxes — a composite 21 percent tax bracket. Now, let’s also suppose the business has a $1 million loan at 8 percent APR with a term of one year. The question is: How much lower are the taxes due to the federal and state revenue services? The interest paid during the year is $43,861.15. The taxable income is reduced by $43,861.15, and at the 21 percent composite tax bracket, $9,210.84 less in taxes are due to the revenue services. That means the business had a net interest of only $34,650.31 for the $1million loan — an effective 6.34 percent APR.
A business in the same 21 percent composite tax bracket that sells $1 million in accounts receivable in a year at a 4 percent discount would reduce the taxable income by $40,000. The tax savings is $8,400, an effective discount fee of 3.16 percent.
Financial professionals using this technique to sell financial services to business prospects will increase your productivity in obtaining financing applications. Start by finding out the state corporate tax structure for your state. Then use the taxable income strategy for each of the business prospects that pay corporate income taxes.
Most financial officers of corporations are already aware of and use the leverage that taxes have on debt so they can grow the business. When those same financial officers are presented with a new debt or factoring instrument, they often forget about the leverage that taxes play on a growing business. Savvy financial professionals can use the taxable income strategy in their presentations to business executives and be rewarded more frequently.
About the Author: For many years Joe Winegardner has been assisting financial professionals by providing marketing assistance, training, books, special reports, and profitability analysis, explaining how factoring increases assets in a business without adding any liabilities. His company, 3W Internet Corporation, has been hosting business profitability analysis services for over 10 years including the Invoice Profitability Calculator, and now the Advanced Consultant Training Videos. The Web site is www.3wi.com. Please call 215-736-1107 or visit the Web site at your convenience.
Source: American Cash Flow Journal - September 2005
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September 04, 2005 |
34 Ways to Improve a note - Real Estate Notes |
MANY YEARS AGO when I began selling and investing in real estate, I became acquainted with "PAPER." As an agent or investor, I would have an occasion to sell a Trust Deed Note or Uniform Real Estate Contract to put a deal together. I had heard "paper" discussed briefly in several of the seminars I had attended. Most of what I knew about paper was that for some strange reason someone out there in the world wanted to buy it.
To me, paper was something that I or another investor created to help make a "high leverage" deal. It was an easy idea for me to create a note on the property I was buying or on one of my other properties as part of the down payment. If the seller needed more cash, we could track down someone to buy the note.
The Excitement of Paper
I always wondered why someone would want to buy a note and remember thinking that if they had any sense they would invest in real estate instead. As I attended a myriad of other seminars and conventions, it seemed like everyone had a little bit of good to say about paper. I became intrigued with the subject. I was still in the dark until I attended a convention in another state where a Broker and paper investor from my city was also in attendance. It struck me then that whether it was seminars, conventions or exchange meetings that I attended - he was always there.
I knew he was no dummy when it came to education or experience, so "why did he invest in paper?" One of the speakers spoke on real estate paper techniques that excited me, especially the prospect of buying real estate at tremendous discounts using paper. As I walked out with a dazed but excited look on my face, the Broker I referred to smiled and said "Now you see why I buy paper".
Through books, tapes, seminars and especially practical experience, I fed my desires to learn all I could about an exciting, extremely profitable form of investment. In this article I'm going to share some of these ideas with you. You'll see why paper is becoming one of the most profitable and desirable forms of investment.
There are basically three steps:
Step 1 - Buy a note (100% financing can be used).
Step 2 - Fix it up or improve it in some way.
Step 3 - Sell, trade or refinance the note.
Let's look at some of the ways to fix up or improve a note. Each of these techniques can provide a tremendous profit to you.
Category A - Early Payoff
1. Early Payoff
Many times a note is paid off in full in advance of the time that it is scheduled to. The average life of a 30 year loan tends to be 7 to 10 years.
2. Early Payoff with a Discount
Offering a small to large discount will many times entice a person to pay a note off early. Example, buy a $10,000.00 note for $6,000.00 and have the payor pay it off for $7,500.00.
3. Early Payoff Refinance (Them)
If the payor doesn't have the cash, show them how they can finance the property and even lower their payments by taking advantage of the discount that you are offering them.
4. Early Payoff Refinance (Investor)
If the payor of the note lacks the ability to finance the property, you or another investor could finance the property by co-signing for the payor or by taking title, financing and then re-selling to the payor on a wrap.
5. Early Payoff Discount Underlying
You may be able to negotiate a discount on underlying loans as an enticement for an early payoff on your note.
6. Early Payoff Over-finance
By financing more than the amount needed to pay off your note at a discount, the payor may be able to pocket some cash.
7. Early Payoff Over-finance - Invest the Difference
The payor could finance more than the amount needed to pay your note off at a discount and the difference can be invested in some paper. The net result to the payor is a discount on his note and a lower net payment as well as the ownership of some good paper. The result to you would be a profit on your note as well as a commission on the sale of another note to the payor.
8. Partial Payoff Partial Subordination
For a partial payoff on the note the investor could agree to subordinate to new financing. The investor's yield (rate of return) on the cash investment he has in the note would increase dramatically.
9. Partial Payoff Lower Interest
In exchange for a partial payoff the interest rate and payment could be lowered. The cash investment in the note would have a very good yield.
Category B - Restructure Terms
1. Lower Interest Raise Payment
The payor raises his payment in exchange for a lower interest rate. The investor's yield increases substantially and the payor saves a great deal of interest charges.
2. Lower Interest Graduate Payment
In exchange for a payment that increases each year, the rate is lowered. The payor saves interest and the investor increases his yield and cash flow.
3. Graduate Payment - Eliminate Balloon
For a gradual yearly increase in the payment, the investor will eliminate a balloon payment, which will also increase his yield.
4. Graduate Payment - Shorten Amortization
The payor may agree to a gradual yearly increase in the payment just for the difference it would make in the length of the loan and the amount interest it would save.
5. Raised Payment - Pop Balloon
A balloon payment could be eliminated in exchange for a raise in the monthly payment.
6. Raise Payment - Balloon Extension
In exchange for a raise in the payment, the balloon payment could be extended for a longer period of time.
7. Wrap Your Loan
The payor may be in need of cash or may be behind in payments and you can loan the money in exchange for increasing the rate slightly on the entire note.
8. Bad Note - Fix Terms or Clauses
There is a great deal of potential in changing bad terms or clauses of a note. Many undesirable notes can become very desirable with minor modification. Most of the time it is a win-win situation for all involved. If a note has a problem, don't look at it as a negative point. Could you buy the note and change the clause? Be sure to negotiate before the purchase.
Category C - Financing / Collateralizing
1. Collateralize - Financial Institution
Banks and other financial institutions will loan against paper. They may loan more than the cost of the note and at a lower interest rate. That means 100% financing and a positive cash flow.
2. Collateralize - Investor
Another source of financing is with private investors. One on one transactions and syndications are used to fund paper.
3. Collateralize - Partial Interests
Several investors can be sold partial interests in a note. This can amount to 100% financing of the cost of the note and an interest in the note left over for you.
4. Collateralize - Seller
If the note seller doesn't need all cash, you can give him part cash and a note secured by his own note or by another note or property. This way you can give him a higher price and still get the yield that you need.
Category D - Trading (Collateralizing)
1. Trade - Real Estate
By buying notes at a discount and then trading them or using them as collateral at their full face value, you can effectively buy real estate at very deep discounts (20 to 45% below market value).
2. Trade - Personal Property
You can also trade paper at face value for all kinds of personal property such as cars, boats, etc.
3. Trade - Face Value for Discounted
It is also possible to trade good paper at face value for less desirable paper at a discounted value. Expertise in dealing with notes, collection procedures and solving problems can turn that note into a more desirable note.
4. Overtrading - Bank
Using the spread in the interest rates to make you a profit and solve a problem for your banker is what is involved in this technique. The banker makes you a loan secured by paper that you own or are acquiring and in exchange you buy some of his repossessed merchandise (which ends up free to you).
Category E - Underlying Loans
1. Wrap Underlying - Reinstate
If your loan of an underlying loan is behind in payments, that can be the opportunity to advance some money at a high rate of yield. It can occur by "wrapping" the underlying loan or loans at a higher rate of interest.
2. Wrap Underlying - Loan Money
If the payor is in need of cash, you can loan them money and use that as an opportunity to wrap the underlying loans and increase your yield.
3. Buy Underlying - Bank
The most ideal note for you to try and buy is the one that lies beneath any note that you already own. Even banks will occasionally sell notes at a discount. It is always worth asking about.
4. Buy Underlying - Private
Always contact any private note holders that own a note that is on a property that you have a note on.
5. Refinance Underlying - Discount
Negotiate a discount with underlying loans and then finance the property. You can then sell it back to the payor on a wrap-around. Possibly at better terms than he already had.
6. Refinance Underlying - 100%
In refinancing the underlying loan or loans, you may be able to finance out the cost of your note also, so that you have all of your cash out of the property and still have a profit coming in from the note (the wrap).
You might also finance the note and underlying loans for more than the amount of your cost on the note. It could be possible to walk away with cash and even share some with the payor or lessen his terms in some way.
8. Refinance Underlying - Lower Rate
Many times it is possible to refinance one of the underlying loans at a lower interest rate and better terms than presently exists, especially in the case of second loans. Profits in cash flow or cash could be shared with the payor.
9. Refinance Underlying - Partial Pay - Lower Interest
In refinancing underlying loans, you might be able to get a lower interest rate and also some of your cost of the note back.
The chart that follows is what I call the P.A.M. chart, which stands for Paper Analysis Matrix. When I buy or an considering buying a note, I analyze it using the chart and what possible techniques are available to improve the note.
P.A.M. CHART
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EARLY PAYOFF EARLY PAYOFF WITH A DISCOUNT |
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EARLY PAYOFF REFINANCE (THEM) |
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EARLY PAYOFF REFINANCE (INVESTOR) |
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EARLY PAYOFF DISCOUNT UNDERLYING |
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EARLY PAYOFF OVER-FINANCE |
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EARLY PAYOFF OVER-FINANCE - INVEST THE DIFFERENCE |
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PARTIAL PAYOFF PARTIAL SUBORDINATION |
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PARTIAL PAYOFF LOWER INTEREST |
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LOWER INTEREST RAISE PAYMENT |
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LOWER INTEREST GRADUATE PAYMENT |
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GRADUATE PAYMENT - ELIMINATE BALLOON |
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GRADUATE PAYMENT - SHORTEN AMORTIZATION |
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RAISED PAYMENT - POP BALLOON |
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RAISE PAYMENT - BALLOON EXTENSION |
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WRAP YOUR LOAN |
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UGLY DUCKLING TURNS TO A SWAN |
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COLLATERALIZE - FINANCIAL INSTITUTION |
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COLLATERALIZE - INVESTOR |
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COLLATERALIZE - PARTIAL INTERESTS |
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COLLATERALIZE - SELLER |
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TRADE - REAL ESTATE |
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TRADE - PERSONAL PROPERTY |
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TRADE - FACE VALUE FOR DISCOUNTED |
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OVERTRADING - BANK |
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WRAP UNDERLYING - REINSTATE |
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WRAP UNDERLYING - LOAN MONEY |
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BUY UNDERLYING - BANK |
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BUY UNDERLYING - PRIVATE |
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REFINANCE UNDERLYING - DISCOUNT |
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REFINANCE UNDERLYING - 100% |
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REFINANCE UNDERLYING - OVER-FINANCE |
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REFINANCE UNDERLYING - LOWER RATE |
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REFINANCE UNDERLYING - PARTIAL PAY - LOWER INTEREST |
Get Involved These have been a few of the ways to make profits with notes from the standpoint of owning them or controlling them. A brief synopsis may not give you the full idea of how to execute a technique. The purpose of the article is to give you the opportunity to get involved in the profits of paper. Paper can be as profitable or more profitable than real estate investment and is the perfect compliment to any real estate investor's portfolio. In future articles we will explore some of these techniques more fully. If there are any in particular that you would like to see explained more
fully, then feel free to drop me a line and let me know which ones.
Written by John D. Behle, one of the premier educators and practitioners in the field of "Real Estate Paper". John has an extensive background in consulting and coaching. In addition to the original "The Paper Game" book published in 1982, he is the author of 7 other books, several home study courses and over 200 nationally published magazine and newsletter articles on paper investment. You can visit him on the web at www.papergame.com.
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| September 03, 2005 |
| Lawsuit Financing: An Exciting New Niche In The Cash Flow Industry (Part Three) |
This is the third part of a series of articles on the specific field of Lawsuit Financing.
In this part we will cover how to get the information needed to start the process of securing Pre-Settlement Lawsuit funding for your client. We will also go into detail about how long it takes to go from initial contact, to the time the client has the money in the bank.
What Information Do I Need To Submit A Client, And How Do You Get It?
One of the beauties about this niche is how easy it is for you to submit a case for funding. There are no complicated formula or discounts to figure out. It’s truly a niche that only requires your people skills, and the ability to gather basic information from the plaintiff. In fact, you can complete the intake form just from having a friendly conversation with the client!
Those of you who have read my articles in the past know I am a great believer in asking questions. What better way to build rapport with a potential client while doing your initial “intake” then by letting them tell you about their case? By showing interest in their situation, you will not only gather the information you need to submit their case to a us but you become their friend and confidant. Most plaintiffs who come to us for Pre-Settlement funding are experiencing extreme financial hardship and want and need somebody to talk with. Always keep in mind this is about them and not about you.
You Don’t Need A Calculator To Complete The Simple Client Referral Form
In this niche there is a simple 2 page form we use to gather information to submit to the funding sources, called the “Client Referral Form.” (I will be happy to supply this form to you. Just send me an email or call me.) Remember, the initial information you need is basic and can usually be gathered just by having a conversation with the plaintiff. (This critical information is listed on the first page of the Client Referral Form. Since that is all we need from you to get started, we just cut your work in half!)
Here are a few key pieces of information we need on the Client Referral Form:
· Your contact information so we know who to get in touch with for more information, and most importantly to you, so we know who to send the commission check to later on. Make sure you include the date you are submitting the form as well as all of the different ways we can reach you. Although the date is important, more important is the date and time stamp either from an email or a fax. In the past we have had the same case show up from multiple brokers. So send in your case as soon as you can. The only fair way for us to decide who the broker of record is, is the first one who sends a Client Referral Form in to us.
· The Claimant’s contact information. (We use the terms “client, claimant or plaintiff” interchangeably when referring to the person who was injured and has filed the suit. We use the term “client” when it is the attorney who is looking for funding. There will be more on attorney funding in a later article.)
· The date of the incident, the amount of money requested, and the anticipated settlement amount. The anticipated settlement amount is usually a rough number the client was given by their attorney when they first filed the suit. It usually is an average of what other cases similar to theirs have settled for. (It may or may not surprise you that this number is usually over stated. It doesn’t surprise us at all!)
Why do we need this information? We need to know the date of the incident to learn how old the case is to get a feel for how much of the “discovery” the fact finding, and evaluation the case has gone through, and to try to guess how much longer the case will take to get to a settlement or a trial. We also have to determine if the amount of the anticipated settlement will support the amount requested and the potential fees. (The amount advanced for Pre-Settlement Funding is typically between 5% and 20% of what the funding source feels the case will settle for. For larger cases over $1 Million on appeal, the advance can be up to 30% of the actual award at that time.)
So what do you think we need next?
If you guessed the Attorney’s contact information, you are right! Not only will we need the law firm’s name, but we will also need the name of the attorney handling the case. Most law firms have a number of attorneys who work there, so we need to know who to ask for to get information on a particular case for a particular client. Since the attorneys themselves are in and out of court and meeting with clients and other attorneys, very often it is quicker and easier to get the information we need from the attorney’s legal assistant. Although it is not critical, it is nice to know the name of the person who usually answers the phone.
Some other information we will need that is critical for us to do our follow up intake is who is the “Attorney of Record” on the case? This is the lawyer who first filed the suit. They may or may not be the attorney who is now handling the case. Therefore, we need to know if there is “Co Council, another attorney working on the case as well.
Why would there be more than one law firm on any one case? Very often we see this when there is a “class action” suit. A class action suit is when a lot of people have been injured or damaged by another’s negligence. Instead of having hundreds, or thousands or even millions of lawsuits against the same defendant being tried all over the country, these suits are all grouped together and handled as one big case with the plaintiffs splitting the settlement according to some plan worked out by all the parties. An example of this would be the lawsuits that resulted from the oil spill created by the grounding of the Exxon Valdez. (Although these suits can take years to settle, because of the large number of clients and the large dollar amounts involved, we just love to find good class action suits! There is a great deal of money to be made from just one of these.)
Another situation where we see more than one law firm involved is where the attorney who originally filed the suit finds that as they get further along in the case, they need to bring in somebody with greater expertise. Some attorneys are great negotiators, and others are great in front of a jury. (Although this was not a lawsuit but a criminal trial, in the OJ Simpson case, everybody remembers the flamboyant Johnnie Cochran who was the Co Council and handled most of the case once it got to trial. However, Robert Shapiro, no relation, was the attorney of record.)
Finally, we will need a little bit of information about the Incident. Just a couple of sentences to tell us what happened. In some complicated cases we may need a one or two page summary, but most of the time just a paragraph will do fine. It is helpful but necessary for us to know at this point whether the defendant was cited, has accepted responsibility, or is counter-suing.
We will take it from here!
We will contact the funding source to see if there is initial interest in the case. If there is, we will do a follow up with the plaintiff, and then gather the rest of the vital information we need from the attorney(s). We will also find out in this particular case, what supporting documentation the funding source needs to make a decision, and gather that as well. We do all the hard parts and you still earn a sizable commission!
How Long Does It Take For The Client To Get Their Money?
Funding can happen in as little as 7 days. The amount of time it actually takes to fund a Pre-Settlement Lawsuit case is usually the result of delays caused by the client or attorney not being responsive, not the funding source. Remember, your client – the plaintiff – is usually in financial hardship and is therefore extremely motivated to help you get the information you need. They are usually prompt at calling their attorney and asking the attorney to cooperate with providing the information needed.
Here is an ideal time line for funding:
Day 1: You make contact with the client and fill out the first part of the Client Referral Form. You fax it or email it to us. We review the information together. We then get in contact with the client to introduce ourselves, get more information, go over the pricing structure and time line, and coach them on what to say to their attorney to speed things along. (There will be more on this in the next article.)
Day 1 or Day 2: We get in contact with the attorney, and send them the Client Referral Form to be completed.
Day 2 or Day 3: The attorney returns the completed Client Referral Form, and other necessary supporting documents. We put together the package and send it off to the funding source.
Day 3 or Day 4: The funding source talks with the attorney and the client as part of their due diligence. The due diligence process is completed and the contract is faxed out to the client and/or the attorney. A hard copy is overnight mailed as well. There will be a letter of protection and/or a lien placed on the case with associated paperwork being mailed and signed.
Day 4 or Day 5: The client and the attorney sign off and return the contract, and other related paperwork.
Day 5 or Day 6: Funds are overnight mailed to the client.
Just so you know, I have had a transaction fund in as little as 4 working days!
When you are asked how long it will take to fund a case, you can say, "Between 7 - 14 days, depending on how prompt your attorney is in filling out the simple form we send." It's very helpful to have the plaintiff call their attorney and let them know they are going to receive a phone call from us.
Richard Shapiro, CFS, DCFS, is a Master Broker, a member of the Million Dollar Club and a former visiting instructor for the Pino Training Organization. Richard is the owner of Condor International Financial Services, 3305 North Swan Road, Suite 109-148, Tucson, AZ 85712. He can be reached by phone at, (520) 529-4960, or through fax at (520) 299-3450. His E-mail address is, Condor@CondorFunding.com, and his website is www.CondorFunding.com.
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| September 02, 2005 |
| Lawsuit Financing: An Exciting New Niche In The Cash Flow Industry (Part Two) |
This is the second part of a series of articles on the specific field of Lawsuit Financing.
In this part we will get into identifying your market for Pre-Settlement Funding clients, characteristics of and requirements for clients, and the “nitty-gritty” of what Pre-settlement Lawsuit Funding is and is not.
Who Are Your Clients?
Most often your clients are the plaintiffs in the lawsuit. They are the injured parties seeking compensation most often in the form of MONEY. If they are not trying to get money out of the defendant (the defendant is the one who is being sued because the plaintiff thinks they are responsible for the plaintiff’s injuries) then we are not interested in funding them. More often than not, we will be dealing with Personal Injury (PI) cases. The majority of these will be automobile accidents with an expected settlement in excess of $50K and funding requests between $5-10K. But do not limit yourself to marketing to this field. As you can see in the chart below, there are many more types of lawsuits that can be funded.
Submit a client if the client:
· Has been injured in an auto accident
· Is involved in a medical malpractice case
· Is a plaintiff in a wrongful death case
· Is a plaintiff in a commercial or civil litigation case
· Had a serious slip and fall accident
· Is a plaintiff who needs money to pay for expert witnesses or case costs
· Has been injured on the job
· Has been discriminated against
· Was in a boating accident
· Is involved in a commercial maritime injury claim
· Has relatives who are victims of nursing home abuse
· Is a part of a class action claim
· Small action claims
· Workers’ compensation claims
· Has a product liability claim
· Settled cases waiting payoffs
· Cases awaiting appeals
· Is expecting a minimum settlement of $20,000
The client must be represented by an attorney, and need money prior to settlement due to financial hardship.
Usually, the plaintiff's financial hardship is the result of being injured and not being able to work. If they are not working they are not making any money. If they are not making any money they cannot pay their bills. These bills could be everyday living expenses, or may be the direct result of the injury such as medical and rehabilitation costs. It may be the cost of replacing the car that was damaged. Very often we see people using this money to stop foreclosure on their homes, to stop eviction proceedings or to prevent their car from being repossessed.
On the other side of the table there is the defendant who is usually represented by an insurance company, or is an entity of large net worth. We are not interested in funding them. After all they have the money the plaintiff - our potential client - is trying to get!
Who Else Are Your Clients?
Although we will be focusing most of our marketing towards plaintiffs, remember pre-settlement cash is available to attorneys as well. Law offices are like any other businesses. They experience cash crunches as part of their growing pains. For example, on a simple case an attorney may have $1-2,000 in out of pocket costs. That same attorney may have 100-200 open cases. Simple arithmetic tells me that is a whole lot of money, especially when you consider that most law firms have more than one attorney. Money is made available for attorneys for things like, expert witness research, expert witness testimony, and attorneys’ fees.
What Exactly is Pre-settlement Lawsuit Funding?
It's easy to mistake or confuse Pre-settlement Lawsuit Financing for something it isn't. Not that I am a contrarian, but let me explain this by first stating what it is not.
Pre-Settlement Lawsuit Financing is NOT:
- A FULL PAYOUT
Usually the funded amount is limited to no more than 10%-20% of what the funding source thinks the case will settle for.
- A LOAN
There is no interest charged on the advance given to the plaintiff, only fees. There are no daily, weekly, monthly, or yearly payments being made by the plaintiff. The plaintiff is only required to pay back the money advanced and fees accrued if and only if they win their case. In other words, if their case doesn't settle, they do not owe the amount funded or the fees. This is the risk the funding source takes.
This is also known as a "non-recourse" transaction. Non-recourse means the funding source can not expect the plaintiff to "make good" on the amount advanced, should the case fail to settle.
- A SETTLEMENT
The plaintiff must still try to win their case in the courts, the same as if they were not using pre-settlement financing services. The plaintiff must still try to collect from the defendant.
Typically, (if there is such a thing as typical in this business) financing is not available before the case is at least 6 months old. Why? During the first 6 months of a suit, the “discovery” is taking place. Discovery is lawyer-speak for collecting all the information related to the case. This often includes medical treatments and evaluations that can take weeks or months to complete. If a case is particularly complicated, it could take months researching all the other cases that relate to this case as well.
NOTE: The major exception to this 6-month time frame is if there is clearly no doubt as to who is at fault and how much damage was done. An example of this would be if somebody was legally stopped at a traffic light and they were hit by a car that was out of control driven by somebody who was drunk at the time. This is especially true if the plaintiff needs medical treatment immediately for which they do not have insurance coverage, or the money to pay for the medical services.
- BUYING PAYMENTS
I often hear about people getting workers' compensation payments that they want to sell. This is not something you can finance. However, if the payments they are collecting are the result of a “Structured Settlement,” that is something with which you can help them.
So What Is It?
Pre-settlement Lawsuit Financing is:
A TIME ADVANTAGE
Pre-settlement Lawsuit Financing levels the playing field. Without it, the advantage of time is on the side of the defense. After all, they are not the one who is damaged. The longer they hold onto their money the happier they are. The more financially desperate the plaintiff, the more likely they are to settle their case prematurely and for less money.
MONEY PAID IN ADVANCE OF A SETTLEMENT
Money is available to both plaintiffs and their attorneys to ease their financial hardship. Remember, every case is evaluated on an individual basis and funds are made available accordingly.
NO RISK
To the plaintiff that is. These are non-recourse transactions. If the plaintiff does not win their case, they do not owe any money. Period! The money that was advanced is not owed. Any fees that may have accrued are not owed. Zilch! Nada! Nothing!
AN ADDITIONAL OBLIGATION ON THE CASE
The money financed is secured with either a lien or a letter of protection with the attorney, and with signed contracts with the client. This obligation is "behind" (or after) the attorney’s lien, and if there are any, the medical liens. In other words, the funding source is second or third in line to be paid.
Clearly, the funding sources take a huge risk in funding a case. Understanding the risk they take will help you feel confident in marketing pre-settlement lawsuit financing as a viable alternative to the financial hardship many plaintiffs face. This is a service that helps people when they need it the most!
In the next part, we will talk about how to get the information needed to start the process of securing Pre-settlement Lawsuit funding for your client. We will also talk about costs to the client and the commissions you can earn. We will go into detail about how long it takes to go from initial contact, to the time the client has the money in the bank, to when (and this is the best part) you receive your commission check.
Richard Shapiro, CFS, DCFS, is a Master Broker, a member of the Million Dollar Club and a former visiting instructor for the Pino Training Organization. Richard is the owner of Condor International Financial Services, 3305 North Swan Road, Suite 109-148, Tucson, AZ 85712. He can be reached by phone at, (520) 529-4960, or through fax at (520) 299-3450. His E-mail address is, Condor@CondorFunding.com, and his website is www.CondorFunding.com.
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| September 01, 2005 |
| Lawsuit Financing: An Exciting New Niche In The Cash Flow Industry (Part 1 of 3) |
This is the first part of a three part series of articles on the specific field of Lawsuit Financing.
Lawsuit Financing covers three major areas:
• Pre-Settlement Funding (funding for a case before it settles)
• Appellate Funding (funding for a case after a judgment has been awarded, but is not final because it is being appealed)
• Structured Settlement Funding (funding after the case has settled)
Why Did I Choose Pre-Settlement Lawsuit Financing?
I was first introduced to Pre-Settlement Lawsuit Financing back in 1999. I was curious
about it. I did a little research and decided to keep my mind open to it as another niche to work in the future when I felt comfortable with the referrals coming in from my factoring business. Interestingly enough, the first attorney I spoke with about Pre-Settlement Lawsuit Financing sent me three clients in the next 5 months!
Pre-Settlement Lawsuit Financing continued to intrigue me. After all, there is no shortage of lawsuits being generated in this country! After the Cash Flow Convention in Chicago in May 2002, I decided to make this unique niche the focus for my business. I wrote a number of articles for the American Cash Flow Journal, and in October of 2002, I started my first Mentoring Groups.
Why Focus Your Cash Flow Business On Lawsuit Financing?
How about because:
· You can earn residual income from a single contact
· There is no shortage of folks who need this type of financing
· It's interesting and full of variety
· There is little competition
Once you establish a relationship with a personal injury (PI) attorney, you are almost
assured income on a monthly basis.
Let's "follow the breadcrumbs trail" to see why..
A good PI attorney will have between 100-150 active cases at any one time. Approximately 25-30% of those cases might benefit from having Pre-Settlement Lawsuit Financing available. Of those 25-50 plaintiffs, 25-30% will actually qualify for funding. Which means if you have one PI attorney sending you cases regularly you will see approximately 6-12 cases funded a year.
A typical case will receive funding of $2,000 - 5,000. On average, you will receive 10-15% of the gross profit to the funding source. That adds up to you receiving between $2,400-12,000 each year from one contact. If you have 10 contacts, you could earn between $24,000-$120,000 per year.
Let me ask you this question: How many PI attorneys are there in your area? Just for kicks, go ahead and take out your telephone directory. Flip through to the attorney section and count how many are listed under the sub heading "Personal Injury." Go ahead, I'll wait…
So how many were there? A dozen? Over a hundred? Over two hundred? The point is, no matter how big or small your town is, there are plenty of attorneys available for you to establish a fruitful business relationship with.
These attorneys are the “bread and butter” of your business. You can also fund class action, breech of contract, product liability, medical malpractice, and wrongful death cases. In these types of cases, the plaintiffs may be asking for hundreds of thousands, if not millions, from the defendants. Finding on these cases can be in excess of $100,000.
You Become An Expert
It doesn't take long to establish yourself in your community as a resource. Eventually, you will have cases involving class action, wrongful death, product liability, and breach of contract coming your way. These cases may involve funding for expert witnesses, research, attorneys’ fees, and plaintiff requests, which total multiples of tens of thousands of dollars. All of which is available through Pre-Settlement Lawsuit Financing.
As a secondary source of income, I'm also going to show you how to market for Structured Settlements. Structured Settlements are very often the final result of a suit. Handling Structured Settlements involves a bit of expertise and patience on your part, but the commissions can be substantial.
No Competition
When was the last time you heard an advertisement for Pre-Settlement Lawsuit Financing on the radio or on TV? When you look in that section of your local newspaper where you see lots of ads proclaiming, “We Buy Mortgages!” do you ever see an ad offering to fund a lawsuit? In the phone directory, you will find page after page of listings for lawyers. Do you find any listings for Pre-Settlement Lawsuit Financing?
In case you haven’t gotten the picture yet, what I am trying to tell you is there is an
opportunity here if you want to pursue it. There is little-to-no competition, which means you won't be bumping up against competitors for the business you've worked diligently to find. You are likely to be the only game in town.
So How Big Is The Market?
By all indicators, the Pre-Settlement Lawsuit Financing market will experience significant growth over the next five-to-ten years. In 2002, more than 3.3 million people were injured in automobile accidents alone. Combine that with other forms of personal injury, commercial litigation, and insurance loss disputes, and the settlement market quickly exceeds $160 billion! Just in case you've never seen a number that big, it looks like this: 160,000,000,000.
What do you think? Is that enough potential opportunity for you?!
The market potential for Pre-Settlement Lawsuit Financing is tremendous. In the U.S. today, some $40.37 billion (another one of those numbers with 10 zeros in it) in legal disputes are settled each year by private employers with individual employees, contractors, and other businesses. Insurance companies are involved in more than $100 billion of annual legal resolutions involving personal injuries, individual medical liabilities, physician malpractice, and workers' compensation. Research estimates that the total annual volume of qualified cases is in excess of $160 billion.
The overall market forecast for Pre-Settlement Lawsuit Financing is expected to be around 10% of the market potential, or roughly $16 billion in case settlements. This figure is likely to increase as new financing products and services become more widely accepted over time. Pre-settlement Lawsuit Financing is expected to gain a wide national following throughout the legal services industry.
The legal community is rapidly embracing Pre-Settlement Lawsuit Financing cash
advances as a sound and highly ethical service that benefits plaintiffs and their attorneys, with defense attorneys being the obvious few detractors.
Cash can also be made available for expert-witness fees and attorney fees, as well as
appellate case funding. Qualified attorneys who have pending receivables and need working capital to cover that occasional “cash flow crunch” can use Pre-Settlement Lawsuit Financing to perk up their cash flow.
Do You Need To Be A Lawyer To Succeed In This Business?
Absolutely not! Sure, you will need to become familiar with some of the language that is peculiar to this profession. There is “law speak” just as there is a special language used in every profession. If you are not a plumber, you are not familiar with the basic tenant of plumbing, which is “SRDH.” Stuff Runs Down Hill. (Kinda like stuff happens, only different.)
You will NOT be poring over files of court documents. There are simple forms you'll use
to gather information. It is the responsibility of the funding source to figure out if a case is worthy of being funded. This is often referred to as "doing their due diligence."
Note: Pre-Settlement Lawsuit Financing Isn't Available In All States, But Don't Let That Stop You. At the time of this writing , Pre-Settlement Lawsuit Financing is not available in Louisiana, Maine, and Ohio. But geography isn't a limitation in marketing your business. Whether you live in these states or not, you can easily market outside of your local area. For example, I currently have cases that I am working on from Florida, Illinois, California and South Carolina just to mention a few. All from my home office in Arizona. This is possible, thanks to the Internet and cheap long distance rates.
In the next part, we will get into how you market for Pre-Settlement Funding clients, how and when you get paid, and the “nitty gritty” of working cases.
Richard Shapiro, CFS, DCFS, is a Master Broker, a member of the Million Dollar Club and a former visiting instructor for the Pino Training Organization. Richard is the owner of Condor International Financial Services, 3305 North Swan Road, Suite 109-148, Tucson, AZ 85712. He can be reached by phone at, (520) 529-4960, or through fax at (520) 299-3450. His E-mail address is, Condor@CondorFunding.com, and his website is www.CondorFunding.com.
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