October 2005 Archives

What are the alternatives to viatical settlements?
The fact that viatical settlements are relatively new implies that, before they were available, people had other strategies for accessing money in their final years.

Assuming that you have been diagnosed with a terminal disease and want to find a way to generate more money, be it to cover your medical bills or simply to enhance your quality of life in some subjective way, viatical settlements are not your only option. And although they may be uniquely well-suited to meet the needs of some, they are not the best option for all people diagnosed with a terminal illness (or for all investors, for that matter).

Accelerated Death Benefits (ADBs) are provision of many life insurance policies which allow the insured to receive some of his or her death benefits right away, if they meet the eligibility requirements (such as having a terminal illness). The beneficiaries still receive a death benefit, albeit reduced by the amount of the advance. As the viatical industry grows, more and more life insurance policies are making the option of accelerated death benefits available in response. They may be automatically included in a policy, or they may be purchased as a rider. Sometimes, you can even add accelerated death benefits to a policy after you are diagnosed with an illness.

Another possibility is taking out a regular loan from a bank. Assets such as art, jewelry or other valuables can be sold, or used as collateral in securing a loan. If you own a home, for another example, you may be able to get loan against that. He can set up a pseudo-viatical situation with a friend or family member--borrowing money in exchange for naming them the beneficiary of the policy. Also, whole life insurance builds cash value over time, which the policy holder may be able to use.

Viatical settlements, while extremely useful for some people, are indeed not the only alternative.

Additional Questions
In this section, answers are given to some key questions about these investments. This list of questions is hardly exhaustive, but should give you a more full sense of some of the issues to keep in mind if you decide to read more about the viatical industry.

Can I change my mind?

If the investor changes his mind about the investment, he is not legally obligated to keep the policy—but if he gives it up, he has no claim to benefit from the policy. And, an individual investor will find that the company that sold him the policy will seldom take it back.

If the viator changes his mind, he may be able to get his policy back, depending on the whether his state regulates the viatical industry. In states where it is regulated, the viator can change his mind within fifteen days, even if he has already received payment. Needless to say, he is obligated to refund the payment in full.

I could definitely use some money right now, but I would also like to leave something to the beneficiaries of my policy after my death. Can I sell part of my policy?

Yes.

I’m covered by a group life insurance policy. Can I still viate?

The only person with a legal right to sell the policy is its owner—and if you are covered by a group policy, you are not, technically, the owner. However, if you can secure the consent of the group you can probably still sell your policy.

What are "living benefits"?

"Living benefits" is a general term which refers to both proceeds from a viatical settlement as well as accelerated death benefits.

What is a "life settlement"?

The term "life settlement" is often used interchangeably with "viatical settlement", but it refers specifically to the sale of a life insurance policy by a person who is elderly but otherwise in good health. These have actually been extremely popular among senior citizens, and now comprise about 80% of the viatical and life settlement industry taken as a whole, according to the Viatical and Life Settlement Association of America.

How long does this process take?

From the viator's perspective, not very long. After signing all the paperwork, the insurance company will need a day or two to make the requisite changes in the named beneficiary of the policy, so the purchaser should send the money (via the escrow account) within two or three days. From the start of the application process to the receipt of payment, the whole process generally takes 4-8 weeks. From the investor's perspective, the time it takes to receive the returns on the investment is entirely contingent on the lifespan of the person.

What are some of the factors in assessing the value of my insurance policy?

An investor will decide how much of a policy's value to pay a viator up front based on a number of factors beyond simply the face value of the policy. The credit rating of the insurance company, interest rates, whether there are any outstanding claims on the policy, how long the patient has held the policy and the patient's prognosis all come into play.

I heard about something called "clean sheeting." What is that?

"Clean sheeting" has been a major problem in the viatical industry. It is a practice in which terminally ill patients conceal or lie about their medical condition in order to get a life insurance policy, which they then can viate. Unscrupulous brokers are often accomplices in this practice.

Life insurance companies can protect themselves against being defrauded in this way by the use of "contestable clauses," which gives them the right to call into question the validity of a life insurance policy they have issued in the past two years. The reason that how long the patient has held the policy can be a factor in its purchase price is because relatively new policies may be contested.

Another term often used in conjunction with "clean sheeting" is "wet ink policies." This is a policy which is viated very soon after it is issued (i.e., before the ink gets a chance to dry). As it is not that common to receive a terminal diagnosis immediately after purchasing life insurance, a wet ink policy often has been clean sheeted.

What if my health improves after I viate?

Assuming you disclosed everything at the time of the settlement, you are don't need to do anything.

Viatical settlements have many proponents and many critics, on the part of viators and of investors. However, the industry has established itself as important and burgeoning. People who think they might be a good candidate to participate in a viatical settlement, as a viator as an investor, should certainly seek more information about the industry. However, they should proceed with caution and with the assistance of informed professionals.

Source: Viatical-Web.org

Is factoring a type of loan?

No. Even though account factoring is commonly referred to as "factoring loans", it is a financial practice involving Sovereign Funding Group, you and your customers, but no bank.
To further explain account factoring, a factor like Sovereign Funding Group purchases your accounts receivable invoices and advances your company immediate cash. A traditional bank loan uses all of your company's assets as collateral and, generally requires personal guarantees. Account receivables factoring relies on the credit worthiness of your customers, not your balance sheet or history. Banks are regulated heavily; large finance companies generally are public and driven by pressures in the financial markets. When times are tough, banks and finance companies limit lending. A small business, too new to have a track record, with a weak balance sheet, with a history of financial problems, in turnaround mode or undergoing big changes, often cannot find a willing lender at any price. That is why factoring is the right solution for small
to mid sized businesses.

Does a bank loan make more sense for my small business than account factoring?

Probably Not. Banks often have restrictive lending requirements relating to cash flow, profitability, equity, and years in business, which limit them from making loans to many small to mid sized businesses. Factoring companies are not in the lending business and there is really no such thing as "factoring loans." The decision to purchase invoices is influenced primarily by the quality of your customer base and their financial stability, not the financial fundamentals of your company.

Do I have to jump through the same hoops for account receivables factoring as with bank financing?

No. All Sovereign Funding Group needs to produce a proposal is a completed pre-approval form, summary accounts receivable aging, summary accounts payable aging and some other basic financial information.

Do I have to be an established business operating a minimum number of years to start an account factoring relationship with Sovereign Funding Group?

No. Sovereign Funding Group prides itself on working with companies in all stages of business, including small to mid-size companies with limited histories. Even pure start-ups are usually not a problem for Sovereign Funding Group. If your company has good invoices and creditworthy customers, Sovereign Funding Group will happily speak with you about an account receivables factoring relationship.

Are my receivables held as collateral while my company is factoring?

Yes. Sovereign Funding Group requires a first position on all accounts receivable while you are factoring with us.

Does Sovereign Funding Group require additional collateral when my company is factoring?

No. Within our traditional account factoring programs, a first position on accounts receivable is all that Sovereign Funding Group requires while you are factoring. In some situations, Sovereign Funding Group may take an available security interest in other company's assets.

Please contacting Sovereign Funding Group at 877-836-4661 for more information.

When you´re starting or growing a business, cash is often in short supply. One way to spend less is to lease essential office equipment instead of buying it. Unlike renting, which is much too expensive to consider as a long-term alternative, leasing computers, fax machines or furniture offers a number of critical advantages:

1. Leasing improves your cash flow. The main advantage of leasing is that it frees up cash. Equipment leases rarely require down payments, though you may have to set aside some cash for a refundable security deposit. By contrast, loans to finance the purchase of equipment typically require down payments of up to 25 percent or more.

2. Leases are easier to finance than purchases. Before extending a capital equipment loan, banks will usually want to see two to three years of financial records -- which most new companies do not have.
Leasing companies, on the other hand, usually require only six months to a year of credit history before approving a furniture or office equipment lease.

3. Leasing makes it easier to keep pace with technology. Leasing is especially attractive if your business relies upon cutting-edge technology such as the latest computers, communications devices or other equipment. A series of short-term leases will cost you less than buying new equipment every year or two. Some office equipment leases even have yearly computer upgrades built into them -- eliminating that difficult decision of whether you can afford to upgrade or not.

4. Leasing allows you to afford more. While you might not be able to afford to purchase those pricey ergonomic chairs your employees are asking for, you may be able to lease them. Better furniture and equipment can create a more professional image and boost morale and productivity.

5. Leasing has balance sheet benefits. You may be able to exclude some leased assets and related obligations from your balance sheet. Such moves might improve financial indicators such as your firm´s debt-to-equity ratio or earnings-to-fixed-assets ratio. Bear in mind, however, that accounting rules do require your balance sheet to report assets leased under certain types of agreements.

If you do decide to lease equipment, keep the term short -- two years is ideal. Try to negotiate a "modern equipment substitution clause" that lets you update or exchange your equipment so you don´t end up paying for obsolete technology. And insist upon a cancellation clause that lets you pay a fee to cancel the lease. Note the cost of any cancellation penalty.

Finally, if you think you might want to purchase the equipment after the term of the lease has ended, look for a lessor that offers an option to buy.

Source: AllBusiness.com

For the purpose of this article, personal injury litigation can be broken into two general categories: negligence cases and intentional acts or "torts." (The word "tort" is a fancy word, which refers to a legal cause of action -- the wrongful act of another person which entitled an injured party to seek damages through the courts.)

Negligence
Causes of action arise from "negligence" when the person who causes the harm does not intend the injury, but is careless with the safety of other people. Most litigation arising out of motor vehicle accidents charges a driver with being "negligent." To win a "negligence" case, an injured person must show that the defendant owed him a duty to exercise reasonable care, that the defendant violated that duty, that his injuries resulted from the breach of duty, and that the injuries were a reasonably foreseeable result of the violation. In the context of an automobile accident, the driver of a car owes other drivers the duty to drive safely and to keep his car under control at all times. It is foreseeable that mistakes made while driving can result in accidents which may cause serious injuries to other people. Thus, a person injured in a car accident is in a good position to argue that the driver who caused the accident was legally "negligent" and thus should pay compensation for the injuries caused by the accident.

Common negligence actions include automobile accidents, "slip and fall" accidents resulting from improper design or maintenance, and medical malpractice actions.

Intentional Torts
An intentional tort arises when a person intends to commit the wrongful act which results in injury. Usually, it does not matter if the injury is intended, or if the injury suffered is far more severe than was intended.

From a legal perspective, it can be difficult to obtain compensation from a person who commits an intentional tort, as most insurance policies do not cover intentional wrongful acts. However, sometimes injuries result from the acts of more than one party, or multiple causes of action may arise from the same act. For example, a daycare center has a duty to provide adequate supervision of its premises to make sure that the children are safe from harm, including keeping them safe the foreseeable wrongful acts of third parties. If a person molests a child, that is considered to be an intentional act. However, if the daycare center allows strangers to access the premises, or does not adequately screen or supervise its employees, and a child is molested as a result of the daycare center's lack of care, the daycare center's conduct may support a legal cause of action for negligence.

Common intentional torts include assault and battery, child abuse, and defamation of character. Most criminal acts will support a lawsuit based upon the intentional wrongful conduct of the criminal.

Workplace Injuries
Sometimes, people are injured at work. Most of the time, the only legal action they can bring against their employer or co-workers is a claim for "workers' compensation." A person who is injured at work may also have a claim against a "third party," such as the manufacturer of unsafe machinery, the owner of the premises where the injury occurs (if different from his employer), or against another company, whose employee causes the injury. For example, if a person is injured at work when accidentally hit by a forklift driven by a fellow employee, he will usually only be able to recover "workers' compensation" benefits. However, if the forklift is being driven by a delivery person for a different company, the injured person may be able to recover additional money damages against the driver and his employer.

If you are injured at work, you should consider having your case evaluated by an attorney to make sure that you are receiving all of the workers' compensation benefits that you are entitled to obtain, and to see if you have a claim against a third party for the injuries you suffered. If you wish to hire a personal injury lawyer, you may find this article on "How To Hire A Personal Injury Lawyer" to be helpful.

Written by Aaron Larson.

Source: ExpertLaw.com.

For investors that are still wary of investing in the stock market but frustrated by returns from low interest rates, life settlements are an interesting alternative. They are life policies are that purchased from people expected to die soon who want to access the cash in their policies before their demise. Buyers purchase policies at a discount to the sum assured and take over paying policy premiums. The returns are dependent on when the insured dies -- the profit is the final value of the policy, less the price paid for the policy and the premiums paid.

The concept is similar to the traded endowment policy (TEP) market except that, with TEPs, the term of the investment is known but the final value is not. With life settlements, the term of the investment is unknown but the final value is.

Life settlements used to generally be known as viatical settlements. Viatical comes from the Latin 'viatcum' meaning provision for the journey -- Roman soldiers were given their viaticum before going into battle, which was most likely their final journey. Actual viatical settlements can trace their history to 18th century London when individuals would hawk their own life policies by standing on boxes in City streets and allowing passersby to make their own assessments of how long the person might live before bidding for the life insurance. Financial auctioneers Foster & Cranfield began auctioning life assurance policies in London at this time. But viaticals fell out of fashion and did not resurface again until the 1990s, this time in the US, when AIDS victims started selling their life policies to fund new and expensive treatments.

These investments only returned to the UK in the last couple of years. A distinction is now made between viaticals, which are policies bought from terminally ill people of any age, and traded life policies (TLPs), which are policies bought from elderly people in ill health. TLPs are seen as a safer investment than viaticals as a supposedly terminally ill person could have been misdiagnosed or advances in medical treatment could mean that a condition formerly considered fatal may no longer be so -- meaning that the purchaser of the life settlement would have to continue paying premiums for much longer than expected, reducing the gains from the investment, perhaps entirely. But by buying a policy from an elderly person (usually considered from age 78 or 80), the risk is not a medical one but an actuarial one -- and we all die eventually.

Also, policies are now less likely to be bought individually; instead, policies often are pooled into funds, in which investors purchase shares. This reduces risk to individual investors and also makes the investment feel less sinister -- you are not waiting for one particular person to die in order for your investment to be realised. features funds available to UK investors.

Growth of the market

From its early days in the US, the life settlement market has grown from $50m in 1990 to $2.5bn worldwide in 2003. The US is still the main market for these investments as well as the main source of life policies. US research consultants Conning and Co estimates that Ameri-cans over the age of 65 hold approximately $467bn in life cover and of that $167bn is potentially available to the TLP market. Additionally, Surrenda-link, the investment manager for the first London-listed TLI (traded life investment) fund, Alternative Asset Opportunities, says that more than $1,000bn in life insurance either lapses or is surrendered annually and of that, $135bn is eligible for the secondary market.

The US is the main source of life settlements as Americans typically carry much higher life cover than people in other countries -- the average American life insurance policy is for $1.4m. Americans also usually purchase whole of life policies. In the UK, term assurance has been more common, which obviously would carry more risk to investors as they would not only have the usual worry that the claim would be realised too late for the investment to be profitable (as in whole of life) but in addition that the policy would expire before the claim arose, in which case they would lose all of their investment.

The UK and Europe are unlikely to become sources of life settlements as there has been a rise in the number of critical illness and PHI (permanent health insurance) policies, which pay out if the insured develops a terminal illness or is unable to work because of serious illness. And many new life insurance policies in the UK now include terminal illness cover, which pays out the full amount if death is expected within a year. However, this type of cover has not developed in the US, where life policies are still used as a catch-all, often bought not just to provide life cover but also to fulfil a similar purpose to critical illness and PHI cover.

Not only are life policies more plentiful in the US, they are also more attractive. While the life settlement market is not regulated in every US state, insurance companies are heavily regulated. With life insurance policies, there is a contestability period, usually two years, during which time the life office must check that all of the information supplied by the insured is correct. After this period, the life office cannot contest the life cover by claiming that the insured misrepresented his or her medical situation -- even if the insured did -- and the policy must be paid out on a claim arising. But in the UK, life offices can contest that the insured knew he or she had a disease or failed to declare something at any time -- there is not the certainty that the policy will pay out and in a timely manner.

Scandal and risk

Most funds that hold life settlements now make sure that they only purchase US policies that are past the contestability period in order to secure the investment. In the past, there were issues with people taking out life cover and supplying incorrect medical information in order to boost the value of the policy -- known as clean-sheeting. Another scam, called wet ink or wet paper, saw people taking out life insurance with the specific intention of quickly selling it.

But not all of the problems with life settlements have stemmed from people selling their own life insurance. Mutual Benefits Corporation (MBC), a US life settlements broker, has been accused, by both the SEC and securities regulators in several US states, of engaging unlicensed sales agents, misrepresenting investment returns and misleading investors about the life expectancies of its clients. MBC had been a supplier of TLPs to some funds offered to UK investors but those funds quickly distanced themselves at the first sign of scandal.

MBC also fell foul of securities regulators in Florida, where the company was based, because it was treating life settlements as insurance products rather than securities. The policies are either treated as insurance or as securities depending on the state in which a purchaser of life settlements is headquartered; the regulation of the securities industry is considered to be more onerous than that on the insurance industry. (MBC has now been shut down by the regulators).

Most funds now have stringent standards for the companies that supply them with life policies. Some will only deal with brokers that are located in states that treat life settlements as securities so that they are more heavily regulated. And the Viatical and Life Settlement Association of America (VLSAA) has done much to protect buyers of life policies from fraud and many funds will only source policies from buyers that comply with the VLSAA's anti-fraud plan. Now, companies that buy policies usually require two independent medical assessments of the insured (rather than just relying on the insured's own doctor's evaluation) and the more conservative life expectancy will be used as the basis for the purchase price and expected investment returns.

And it is really the prediction of how long the insured will live that is the main risk of this type of investment. By only buying policies that are past the contestability period from elderly individuals, requiring independent medical assessments, and basing investment returns on the most conservative life expectancy, funds have tried to take as much risk as possible out of the investment.

Regulation and taxation

Whether life settlements are regulated by the FSA is a confusing area to many because while they are insurance products in the hands of the original owner, once they have been sold to a third party, they are investments. When asked if life settlements fell under its jurisdiction, the FSA itself appeared unsure. However Bridford Personal & Corporate Planning, which provides direct investment in life settlements through SGAT III (see Table), approached the FSA about the regulatory status of life settlements and in November 2003 the FSA agreed that they are indeed regulated on the basis that they are contracts sold as investment products.

However, life settlements are only regulated by the FSA in that the advice given by the IFAs and providers selling them is regulated. Therefore investors would have recourse to the Financial Ombudsman Service and the Financial Services Compensation Scheme, but only if the product was mis-sold. Investors having problems with a fund itself would still be out of luck if the fund were based in an unregulated offshore location, as many TLI funds are (many are based in the Cayman Islands). And as the insurance policies are coming from outside the UK, they too are not FSA regulated.

Recognising that not everyone is comfortable investing in offshore funds, Surrenda-link launched the first London Stock Exchange-listed TLI fund in March 2004 as already mentioned. So Surrenda-link and the fund itself are authorised and regulated by the FSA.

Most funds are not listed but the Select High Security Fund from Shepherd's also listed on the Cayman Islands Stock Exchange in November 2004. Shepherd's gained approval from the Inland Revenue (under S.841 of the UK Income and Corporation Taxes Act) to offer the fund through SIPPs and Alternative Asset Opportunities, another listed fund, would also be eligible for inclusion in SIPPs. All life settlements are permitted investments for SSASs.

The tax implications for those investors that do not hold life settlements in SIPPs or SSASs are straightforward. Although the payout from a life insurance policy is tax free for the beneficiaries of the original owner of the policy, once the policy is sold to a third party it is treated as an investment for tax purposes. And like most investments, any gains from investing either directly in life settlements or in a fund are subject to capital gains tax. If the money is from an offshore fund or from a policy outside of the UK, the gains are still liable for CGT, even if the money has not been repatriated. CGT is charged (above the personal CGT allowance of AGBP8,200 for the 2004/5 tax year) at 10% for individuals that are in the starting rate tax band, at 20% for those paying basic rate tax and at 40% for those in the higher rate tax band.

Types of funds

Most life settlement funds will invest in a range of life settlements with staggered life expectancies to produce a stream of income. Some funds are closed but most just have a recommended investment period (usually of five or six years) and may charge exit penalties if the investor wants to leave the fund earlier.

Funds will require minimum investments of AGBP5,000 to AGBP50,000 and charge management fees of 0.3% to 1.5% (some also charge performance fees if annual returns go above a set percentage). Expected returns generally range from 8% to 12%, but up to 15%. Most of the funds listed in Table 1 launched this year (SGAT III, Alternative Asset Opportunities, Assured Fund) so actual returns cannot be quoted, but Centurion's Defined Return Fund has performed slightly above the expected returns in each of the classes.

There are several different types of funds: standard growth, guaranteed and income. Standard growth funds are the most straightforward -- they buy policies, people invest in the funds and when the policies pay out (or when the fund closes), investors get their share. Guaranteed funds are similar except that they are underwritten by a third party and guarantee an annual return within a period after the anticipated maturity date (usually one year), but the investor sacrifices some returns to pay for the guarantee. Income funds pay income, usually of about 6% pa, by using a proportion of the investment to purchase a fixed annuity and the rest of the investment is put into a growth fund.

Investing in a fund usually means that the investor is not responsible for paying the premiums on the life settlement: a fund will have a premium reserve to ensure that it can pay the premiums on the policies held. If the reserve is mismanaged and the premiums not paid, the policies would lapse, making them -- and the investors' shares in the fund -- worthless. To avoid this, funds will have anywhere from six months to two years' worth of premiums, held by escrow agents that specialise in TLPs.

Most funds also reduce risk to individual investors by hedging the currency risk. As most life policies are bought in the US and the final payout will therefore be in US dollars, there is a risk to UK investors that the investment may not pay out as much as expected due to currency fluctuations.

Some investors see the currency risk as just another variable in the investment, which could actually increase the value of the investment if the dollar rises against sterling, (which it was certainly not doing at the time of going to press, namely mid-December)

Another safety feature that many funds employ is using reinsurance as a stop-loss. The reinsurance, offered by the Lloyd's insurance market, guarantees payment of an assured sum if the life policies held do not pay out within 24 months of the predicted life expectancy.

So if a life expectancy prediction was inaccurate and the claim has not bee paid 24 months past the prediction, the reinsurer will pay out. This guarantees that even if life expectancy predictions are way off, investments still have an end date and cannot go on indefinitely, requiring premium payments to keep the investment active.

Future of the market

The market for life settlements has grown dramatically and is predicted to rise to at least $10bn by 2005. )

But the industry still seems to be going through growing pains as it works out its own standards and regulators decide how these products should be treated. And in the UK at least, life settlements still do not seem to be on the radar for many investors and their advisers.

However, the number of options open to UK investors is growing and the launch of a LSE-listed fund (Surrenda-link's Alternative Asset Opportunities TLI fund) is sure to make life settlements more familiar to the investing public.

And with equities still not performing well, interest rates still relatively low and the property market slowing down, investments in another asset class, which is completely uncorrelated with others and produces potential returns of 8% to 12% annually, are worth a look.

Article from Money Management 01/01/05 as seen on Preferred Asset Management.

So you are thinking about getting cash for your structured settlement. Then there are some questions that you need answers to before cashing your structured settlement annuity. First, find out how long the broker has been in the structured settlement industry. Given the level of difficulty in the industry, the broker should have a solid background. Also make certain you are getting the wholesale price for the annuity.

You should also consider checking to see if there are any lawsuits being filed against their company - contact your local Department of Consumer Affairs or the broker’s home office. Set up a meeting with the broker, ask him / her questions and get a feel for how knowledgeable they are. Trust your gut feeling! Steer clear of those who offer much more money or can get it faster than others. If it sounds too good to be true, then it is.

How Long will it take to get the Structured Settlement Money
If you have been told that you can get your money within a few days – do not commit! In fact, it may take several months or longer depending on the following:
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1. A Court Order is required. It is now required by all states for a court order to be issued. If there is no court order, a tax equal to forty percent must be paid on the total amount of payments being sold. Do not fret, this is a good thing – it makes selling your settlement a little safer.
2. The Insurance Company – This includes both the issuer and the owner of the annuity. These things do not happen overnight. It takes time when dealing with companies.
3. What kind of payments do you have (quarterly, semi, annual, or are they a lump sum)? Different funding companies have their own requirements and it’s critical for your broker to know these requirements. Do your homework on the broker you choose - you will get your money faster and with a lot less hassle.
4. Check your Insurance Companies Rating? Make sure the Insurance Company has an A+ rating! Ultimately you will get a higher profit margin when your settlement is sold to larger financial companies. If a company has a lower rating then they may have to sell off settlements at a lower profit margin resulting in a lower price to you.
5. In addition to the above you will need the necessary documentation such as copies of the following:

The annuity,
the settlement agreement and release,
photo ID,
recent check and
application.

These are some of the things to consider. For now it gives you a good idea of what’s required.

What will Cashing Out Cost Me?
Most likely you are going to be some what disappointed in the amount you receive. Total up all the remaining payments and know that cashing out will offer you much less than that. They based the structured settlement on a certain amount of money put into an annuity and then that principal amount, plus interest paid out, equaled the settlement amount. Consider other options before taking this one.

What is a structured settlement?
A structured settlement is an agreement in settlement of a lawsuit involving specific payments made over a period of time. Physical injury and workers compensation claims are awarded an annuity or payments made over a period of time. Peruse our site to make the best decision possible about your structured settlement.
Why Were Structured Settlements Created?
Historically, damages paid because of an injury lawsuit came in the form of a single lump sum. This kind of payment, especially in catastrophic injury cases, often placed the injury victim (or family) in a difficult financial position: With the victim focused on adapting to a new lifestyle, there often was not the time to manage large sums of money.

That can lead to serious trouble. A person who loses funds intended to cover a lifetime of medical care runs the risk of losing medical care and independence. They also risk winding up on public assistance

That's why, in 1982, a bipartisan coalition of legislators in Congress came together to pass legislation that amended the federal tax code. Their action, The Periodic Payment Settlement Act of 1982 (Public Law 97-473), formally recognized and encouraged the use of structured settlements in physical injury cases.

Scenario: You were injured in an accident a few years ago that left you in the care of a hospital for a few months. After leaving the hospital you endured an excruciating year and half of physical therapy. You hired legal counsel to handle your case and sued the person - or insurance company responsible for the accident. Your lawyer assures you that you will be awarded a substantial compensation for your injuries. Your legal counsel and their insurance company work out a structured settlement with a payout that will last for several years. Even though your compensation is substantial, you will only receive a portion up front to cover medical expenses. The money paid is going to be dispersed as an annuity, or payments made over a period of time. As you can imagine, the periodic payments are not sufficient compensation for your needs now.

Great news! Now you have a choice to access your annuity funds today. If you are considering the option of selling your structured settlement you will need to arm yourself some general information about annuities, structured settlements, how to sell them, and the general pitfalls you need to watch for. Browse our comprehensive site to better educate yourself on your structured settlement.

Deciding to Sell a Structured Settlement
Now that you have decided to sell your structured settlement you will need to take some things into consideration. Ask yourself “Is there going to be a tax consequence?" As of January 23, 2002 a new law that governs such sales, does not impose any tax liability for selling a structured settlement.
Another consideration when selling your structured settlement is selling only a portion. Sell a portion that will meet your current needs, and leave the rest in an annuity so that you will still receive some sort of monthly income. A financial emergency or other unexpected expense may come up requiring you to access and sell a structured settlement. Just keep in mind that the settlement was meant to be dispersed over time and selling the structured settlement may result in financial problems down the road. It is believed that less than 10% of cash settlements actually make it past the first five years after receipt.

Most small business sales are financed, at least in part, by the sellers themselves. Offering seller financing puts the seller in a stronger position to get a better price and a faster sale.

Buyers nearly always need seller financing. Their advisors strongly recommend it. Seller financing acts like a bond for performance to assure that the seller will live up to the promises made to the buyer during the sales process. Seller financing is seen by most buyers as an indication that the seller has faith in the future of the business.

Buyers can expect, however, that sellers who offer seller financing must also act a lot like a bank! A buyer can expect to be asked to secure the loan and sign a personal guaranty.

What is Seller Financing?

Sellers of small businesses usually allow the buyer to pay some of the purchase price of the business in the form of a promissory note. This is what is known as seller financing.

Seller financing is particularly common when the business is large enough to make a cash sale difficult for the buyer (over $100,000), but too small for the mid-market venture capitalists (under $5 million). Seller financing is also common when the business, for any number of reasons, does not appeal to traditional lenders.

A rule of thumb is that sellers will typically finance from 1/3 to 2/3 of the sale price. Many do more than that. It all depends on the situation. Each transaction is unique. The interest rate of the seller note is typically at or below bank prime rates. The term of the seller note is usually similar to that of a bank.

For a service business which sells for $500,000, for example, the transaction might be structured as $150,000 down from the buyer and $350,000 in seller financing. The seller note might run for five to seven years and carry an interest rate of 8% to 10%. Monthly payments are the norm and usually start 30 days from the date of sale unless the payment schedule must be modified to allow for the seasonality of the business revenues. The seller note would also usually have a longer term if real estate were being financed.

When a seller offers seller financing, the price the buyer can afford to pay goes up as the amount of the down payment required by the seller goes down.

Why Would A Seller Offer Financing?

Sellers are nearly always reluctant to offer seller financing. Like all of us, they fear the unknown. Despite the advantages of playing bank, it is an uncomfortable role for them. They usually come around to seller financing only after some effort has been made to persuade them.

A seller's first encounter on this issue might be with the business broker. In many cases, but not all, the business broker will bring up the issue. Most business brokers agree that sellers need to offer seller financing, but not all are willing to discuss the issue at the beginning of the listing. When the buyer is unknown, the seller's fear of seller financing is greatest. Some brokers prefer to wait until the buyer prospect is known before suggesting the amount and terms of seller financing.

Offering seller financing up-front, however, can attract buyers and speed up the business sale. This is the major issue that usually persuades a seller to offer some type of financing.

Seller financing is seen by buyer prospects as comforting proof that the seller is not afraid of the future of the business. Buyers are more likely to believe a seller's optimistic view of the business' future when seller financing is offered. Some buyers can't or won't look at businesses for sale unless seller financing is a possibility. The more buyer prospects that look at a business, the better the chance a seller has to get an acceptable offer. A seller can also get a better price for a business that has financing in place. As in nearly all buying situations, buyers are often focused on achieving a purchase on terms that allow them to buy with as little 'cash in' as possible, even if the long-run costs are higher.

Seller financing can also lead to a speedier sale. If the seller plays bank, then the deal gets done more quickly. Applying for a bank loan takes a long time for some buyers, and the rejection rate for new acquisition loans is very high - sometimes as much as 80%! Banks also move much slower than sellers, even when they do approve a loan. A seller is more much likely to grant a loan request, approve a transaction, and close it as fast as the attorney can get the agreements prepared. Banks take anywhere from thirty to 120 days to approve and close a loan. There is also the possibility that the bankers will give the buyer negative feedback about the business, so that the buyer backs out.

A seller may also see tax advantages and profitability in seller financing, but these alone are not usually compelling reasons to offer seller financing. Capital gains from a small business sale can be reported in installments if seller financing is in place. This stretches out the capital gains tax into future years. Charging interest is also profitable. Sellers, however, are usually not as worried about tax liabilities as they should be until after the sale has taken place. They also usually believe they can get better interest rates from investments than from seller notes.

Why Should A Buyer Ask For Seller Financing?

Buying a business without seller financing is like buying a home without a home owner's warranty. The seller note is a bond for performance. This is the major reason a buyer ought to ask for seller financing.

Beyond that, sellers have a strong motive to maintain the business goodwill if they have a remaining stake in its future ability to pay back the seller note. Without such an interest, sellers may choose to question the new owner's skills and integrity. After a sale takes place, the seller and buyer frequently disagree about the future of the business. This disagreement is a natural outgrowth of their different positions and can become serious. If a seller note is in place, the seller has a motive to temper any irritation caused by the buyer with forbearance.

Even with a non-compete agreement in place with the seller, the fact that the business owes the seller a major amount of money may change the nature of the seller's attitude. Instead of being indifferent or quarrelsome, a seller who is still owed money is more likely to be solicitous and genuinely helpful.

How Is Seller Financing Usually Secured?

Seller financing can be as creative as sellers and buyers want to make it. Most sellers, however, like to add security provisions in as many forms as possible. This can encompass personal guarantees as well as specific collateral, stock pledges, life and disability insurance policies and even restrictions on how the business is run.

The most common requirement is for a personal guaranty by the buyer and the buyer's spouse. Sellers expect this. If a buyer objects, sellers immediately question their seriousness. A personal guaranty is not a specific lien on any particular buyer asset, but is the guaranty that the buyer is placing all assets at risk as needed to satisfy the loan. If the seller note payments are not made, the seller has to proceed with the long process of formal foreclosure. But, to satisfy the foreclosure, the seller will have access to all buyer assets. The spouse's signature is required to prevent the transfer of assets to the spouse's name to dilute the buyer's net worth.

Specific collateral is the other common source of security. If no bank financing is involved, the seller wants a first mortgage on any real estate and first security agreements on all personal property involved in the sale. Sometimes, the seller will require that the buyer offer additional security in the form of additional mortgages and security agreements on real and personal property that the buyer owns. If a bank is involved, the seller must usually settle for second place in the line of secured creditors behind the bank.

A third type of security is the 'stock pledge.' The buyer is required to form a corporation and give the seller the rights to 'vote the stock' in case of seller note default. This allows the seller a speedier solution than foreclosure. If the terms of the seller note are not met, the seller can vote to require that payments be made and can even vote to replace management of the business. This threat is usually enough to guarantee seller note payments are not missed.

Life and disability insurance policies on key members of the buyer's new management team are less frequently used methods of adding security to a seller-financed transaction. Term life insurance is available at rates which are relatively low, so this is most common. Disability insurance is used less often because it is more expensive. The seller will typically want the business to pay for these policies up to the amount of the seller note. These policies stay in effect until the seller note is paid.

Restrictions on how the business is run are sometimes added. These restrictions can be in the form of requiring that the new owner preserve certain account or employment relationships, that certain operating ratios of the business are maintained, that the new owner's pay is limited, or that other important operating benchmarks are met until the seller note is paid. Most sellers won't use this form of adding to their own security as a creditor. They usually readily identify with buyer objections to any controls placed on the new business owner.

How Can Both Buyer and Seller Benefit?

If you are a buyer or seller and this all seems a bit intimidating to you, take heart! It's just as intimidating for the other party! Don't lose site of the fact that this is just a normal transaction between two parties who must each benefit if a deal is to be struck.

Buyers are just looking for a fair chance to buy a job and a reasonable return on investment. They usually have modest goals about what they need to earn for the job they are buying. They are usually fair about how they define what they need to receive as a return on investment for the business risks they are assuming.

Sellers are mostly just ordinary people who once bought or started a business and now want to sell it. They want to get the most they can, but they have learned to be practical. They are usually persuaded by fairness and reasonableness. If not that, then they are at least eventually persuaded by the reality of what's possible.

If you are a buyer, seller financing can offer you better terms and a friendlier lender. You will be able to buy the business quicker because you won't have to wait a month for the bank's loan committee to meet. There are no loan processing or guarantee fees and, usually, no invasive lender controls or audits.

If you are a seller, I would advise an early commitment to seller financing. It will save you a lot of time. You'll get a better price because you'll see more buyer prospects. There are many more buyers who can afford to take a chance when the admission price is reasonable.

Seller financing, properly understood and employed, can really benefit both buyer and seller.

Written by Glen Cooper, CBA

Source: BizBuySell.com

October is a month of tricks and treats. And since success in business is so often contingent on how well an entrepreneur can think outside the box and the extra tricks he can pull from his sleeve, what better time to discuss some new perspectives on commercial financing?

We’ve all heard the old adages: “It takes money to make money.” But at a time when the economy is by most accounts booming, it’s also becoming harder and harder for a small- to mid-sized business to secure the funding it needs to prosper.

After the Internet bubble burst, many venture capitalists — the very people who had built a reputation on taking risks — clammed up and became increasingly wary about the types of deals they would involve themselves in. As for banks, well, they remain as conservative as ever with a stringent set of criteria as to whom they’ll lend to and why.

Across America, businesses are hungry for new solutions to their cash problems. It’s our mission as members of the financial services sector to develop and evolve specific strategies to satisfy this hunger. For the financial professional, doing business in 2005 presents new challenges and, at the same time, offers profound opportunities. Today, the savvy financial professional uses every resource available to seal the deal and serve his client; and all of us can benefit from having an extra tool in our belt.

Asset-based financing is just such a tool.

Asset-based lending (ABL) offers a flexible and customized approach to financing commercial enterprises. The term is a broad characterization that can refer to any number of specific financing solutions with one important variable in common - hey are all secured by one or more tangible assets.

In its purest form, a mortgage is a type of asset-based loan. But more typically, ABL refers to loans secured by assets such as accounts receivable, inventory, capital equipment, notes, or even intellectual property. The goal is to maximize borrowing capacity while utilizing concrete, valued assets as collateral. In an ABL arrangement, the borrower retains ownership of the assets, forfeiting them only in the case of default. In effect, he is borrowing against his asset base on a recourse basis. This differs in practice from factoring, where the receivables are actually bought by the lender at a discounted price and on a non-recourse basis.

Asset-based lending is increasingly becoming mainstream. The asset-based financial services industry has burgeoned in recent years, and small businesses have fueled much of its growth. Over the past several years, competition has brought down the notoriously high interest rates historically associated with ABL and has made secured financing a much more attractive prospect for an ever-growing population of entrepreneurs. Businesses that don’t meet all the criteria they needed for a traditional bank loan rely on ABL for its quick turnaround and ability to solve short-term cash needs.

By borrowing against current and fixed assets, management is able to generate cash sooner than if it had to wait for inventory to become accounts receivable and for accounts receivable to become cash. For businesses that can’t get traditional financing, ABL serves as a financial life raft to help navigate through the cash-dry periods between projects and billing cycles.

During the life of the loan, the collateral supporting a secured credit facility will be monitored, which is beneficial to both the borrower and lender. In this way, the lender can make available the largest possible loan supportable by the collateral. This monitoring typically consists of field examination audits and accounts receivable verifications.

As in virtually all lending relationships, the borrower is responsible for the lender's out-of-pocket costs, which could include legal fees, audit fees, and appraisal fees, if necessary.

By its very nature, ABL is designed to give entrepreneurs access to working capital by using creative resources. For the lender, asset-based financing tends to be extremely lucrative, and with the lender relying on the value of the underlying collateral, a loan's credit risk is greatly minimized. Today, asset-based lenders include commercial finance companies and the secured lending departments of banks, which in recent years have significantly expanded their activities.

So, as October comes to an end and Halloween approaches, try using a new set of tricks to offer your clients a real treat! No costume required.

Written by: Howard Chernin is senior vice president of Quantum Corporate Funding, Ltd., a nationwide asset-based lender and factor located in New York City. He is a member of the National Association of Mortgage Brokers, the Commercial Finance Association, the Construction Financial Management Association, and the International Factoring Association. He resides with his family in New Jersey, where he serves on the Board of the YJCC. For more information, call 800-352-2535, e-mail hchernin@quantumfunding.com, or visit www.quantumfunding.com.

Source: American Cash Flow Journal (October 2005)

Remember the hard sell you got when you bought that insurance policy 20 years ago? Well, times have changed. It's quite possible the agent who sold you that policy now represents investors who want to buy it. They'll pay you a lot more than you could get from surrendering it to the insurance company, though the sum will be much less than the death benefit.

These transactions, called life settlements, may appeal to you if your life insurance needs have changed and you don't need the policy anymore. Or perhaps you don't think it's worth the escalating premiums, the result of low interest rates. But before you grab the money from an eager buyer, get some good advice from a financial planner, an estate attorney, or even your doctor.

Here's how the life settlements business works. Some firms like Coventry First LLC are bankrolled by hedge funds, pension funds, and in some cases large insurers like AIG (AIG ). The settlement firms buy the policies from individuals on behalf of investors. The settlement company then acts on behalf of the investors, who become the owners and beneficiaries, and pays the premium until the insured dies. The firm collects the death benefit and pays its investors anywhere from 9% to 12% annual return. Other firms buy and repackage the policies for sale to a third party.

WAIT TO SELL
These deals probably sound a little familiar. They're similar to viatical programs of the 1990s where the terminally ill, many of them AIDS patients, sold their policies to investors to pay medical bills. Life settlement companies, however, target a different market -- people at least 65 years old with some health conditions and life expectancies of 2 to 12 years. To qualify for a buyout, their policies must have death benefits of $250,000 or more.

Should you sell your policy? We asked fee-only life insurance advisor Peter Katt, principal of Katt & Co. in Mattawan, Mich., to analyze the numbers for a 72-year-old client who is considering selling his $1 million universal life policy. The life settlement company would pay $275,000, vs. the $100,000 surrender value that the insurance company would give. Sounds good -- but not as good as holding on without paying the premiums. Katt says you can use up nearly all the cash value to keep the policy in force -- and then sell it for an estimated $475,000 about five years out. Why so much more? The insured life expectancy is five years less, and that means the policy purchased can get paid off sooner. "The longer you wait to sell, the more money the life settlement firm will offer," says Katt, who analyzes these offers for about $1,500.

Selling life insurance policies has extremely high transaction costs. According to a recent report by Deloitte Consulting and the University of Connecticut, seniors who sold their policies to a life settlement firm got just 20% of the face value, while the intrinsic value of the policy is about 64% of the face value. Still, $200,000 for a policy with a $1 million death benefit may sound good if you think the policy has no value other than to you or your beneficiaries. "If a sophisticated investor is willing to pay you for your policy, you gotta believe it's worth a lot more than you know," says Byron Udell, chief executive officer of AccuQuote, an online insurance broker. The high fees, says Alan Brueger, CEO of Coventry First, help to cover the future premiums which average 60% of the face value of the policy.

Don't count on the life settlements firm to give you all the info you need to make an informed decision. "Marketing materials only compare the settlement offer and cash value but never what the estate value is if the policy were held to maturity," says John Skar, senior vice-president and chief actuary of Massachusetts Mutual Life Insurance, one of the insurers that funded the Deloitte study. If you're selling because you need the money, Skar recommends unloading other assets first or even asking your beneficiaries to pay the premiums.

Before you sell, you want to be reasonably sure that you won't need another life insurance policy. If you get remarried or go into a new business, life insurance may be necessary. Your old policy will be active and that may limit your ability to buy more insurance.

Then there are tax issues. Death benefits go to your beneficiaries tax-free, which is one of the attractions of life insurance. Selling the policy will result in a tax bill if the settlement amount exceeds your cost basis.

If you choose to sell your policy, shop for the best price. Udell tries to get four bids. On a $1 million policy, he received offers from $175,000 to $250,000. What accounts for wide variation is different actuarial assumptions and the commissions the settlement companies pay their agents. In short, be as skeptical when you sell your life insurance policy as when you buy it.

Source: BusinessWeek Online

When Significant Capital Needs Precede Customer Payments on Government Contracts

The Good News: Your Company has landed a new Government contract, one that will result in a significant increase in revenues.

The Challenge: In order to fulfill this contract, you must immediately commit to additional people (payroll), training, materials, and related costs. This commitment must be made in advance of receiving payments from your customer (the US Government). Unfortunately, the amount of capital needed to cover your commitments exceeds the balance available on your existing line of credit or your credit card. It also exceeds the amount of cash that could be made available by delaying payments to selected vendors. The nature of this contract might justify issuing new equity or debt, but raising capital generally is an expensive, complex task that ultimately may take too long to meet your short-term contract specific capital requirements.

“While poor management is cited most frequently as the reason businesses fail, inadequate or ill-timed financing is a close second. Whether you are starting a business or expanding one, sufficient ready capital is essential. However, it is not enough to simply have sufficient financing; knowledge and planning are required to manage it well. These qualities ensure that entrepreneurs avoid common mistakes like securing the wrong type of financing, miscalculating the amount required, or underestimating the cost of borrowing money.” http://www.sba.gov/financing/basics/basics.html.

Solution – Planning!:

In order to minimize the risk of your company having to scramble to raise enough capital to ramp up for future major contracts, your internal business development forecasting process should identify and signal situations early to senior management. This will allow for a pro-active review of any significant operational, personnel, and financial impacts. Specific terms may be negotiated into the customer’s agreement to dampen these impacts. Such terms may include extended delivery dates, partial payment upon order placement, or progress payments based upon specific performance criteria.

Existing Bank or Lender - If your company has an existing line of credit or borrowing arrangement with a bank or other lender, try to negotiate an increase with them. A responsive lender may provide all of the short-term capital needed until the Government agency begins payment. You should be aware that trade-offs of a significantly higher level of credit might involve committing to a new long term deal, additional loan covenants, greater reporting requirements, and/or higher interest rates. In addition, your credit agreement may constrain your ability to take on other types of debt or lease obligations. In any event, it is best to discuss the situation as far in advance as possible and have a full financing/business plan and presentation available. Remember, LENDERS HATE SURPRISES.

If your company does not have an accommodating lender, the following alternatives should be considered:

Factoring – This is the sale of your invoices, accounts receivable, to a bank or finance company (the “Factor”), as opposed to using them as borrowing collateral. The Factor will advance a percentage, usually between 75% and 90%, of the invoice amount to the customer; the balance is refundable upon receipt of payment, less interest and transaction costs. Some Factors may also provide weekly or mid-month, funding of unbilled accounts receivable, mobilization financing for new contracts, and/or “term loans” for multi-year contracts. The Factor will, through the Federal Assignment of Claims provisions, notify the Federal Government agency customer that the invoice has been financed and is payable directly to them. There are several advantages to factoring; most of the A/R bookkeeping, customer credit worthiness, collections, and credit risk become a shared responsibility with the Factor, and the initial approval process can usually be a matter of days.

In addition, because the primary credit criteria is based on your government customer, the federal, state, or municipality, a Factor will generally provide financing for start-ups, 8a, minority, Native American, disabled veteran, woman owned contractors, or other companies that may have a questionable credit history. Although sometimes more costly, it is a viable alternative to traditional bank financing because of its increased flexibility. In addition, many Factors will provide a “financial support” letter, submitted with the proposal, to the Government agency insuring that their institution’s financial strength is behind the client.

Contract Financing/Purchase Order Financing - You may be able to negotiate financing based upon your Federal Government customer Purchase Order(s). Some lenders provide Purchase Order financing based upon the credit worthiness of your customer (in this case the US Federal Government). PO financing is easiest when your products or services are well established. If your products are new, services are non-standard and/or unproven, PO financing is more difficult to obtain. The effectiveness of contract/PO financing in a pre-revenue ramp up situation will be determined by how soon your company can invoice the customer.

Commercial Financing-Asset Based Lending - This is a common type of financing provided by most banks and commercial financial companies. The primary asset used in this type of lending is your company’s accounts receivable, although inventory, fixed assets, and in some instances, intellectual properties may be used to collateralize additional long term financing requirements. With asset based lending your, as well as your customers’ credit worthiness will determine the percentage of the receivables that will be advanced, usually between 75% and 90%. Inventory and fixed assets advance rates are most often significantly lower because these are less liquid assets. This financing is almost always provided on a revolving or an on-going basis, thus the term “revolving credit.”

Leasing and/or Sale and Leaseback - These financing alternatives can be used to generate capital from fixed assets that are to be obtained or currently owned by your company, such as computers, equipment, furniture and fixtures, vehicles, and real estate. Banks, financing companies, dealers, and manufacturers provide these more specialized services. Your company’s credit standing and the quality of the assets involved will determine the amount of cash that can be raised and the terms under which it is provided. The specifics of the agreement will determine if these leases have to be reported on your company’s balance sheet or if they can be treated as “off balance sheet” items.

SBA Loan – The SBA offers numerous loan programs to assist small businesses. It is important to note, however, that the SBA is primarily a guarantor of loans made by private and other institutions.

The Basic 7(a) Loan Guaranty serves as the SBA’s primary business loan program to help qualified small businesses obtain financing when they might not be eligible for business loans through normal lending channels. It is also the agency’s most flexible business loan program, since financing under this program can be guaranteed for a variety of general business purposes. Loan proceeds can be used for most sound business purposes including working capital, machinery and equipment, furniture and fixtures, land and building (including purchase, renovation and new construction), leasehold improvements, and debt refinancing (under special conditions). Loan maturity is up to 10 years for working capital and generally up to 25 years for fixed assets. http://www.sba.gov/financing/sbaloan/snapshot.html.

SBIR and Grants: SBIR (Small Business Innovation Research) is a federal government program administered by 10 federal agencies for the purpose of helping to provide early-stage Research and Development funding to small technology companies (or individual entrepreneurs who form a company). Solicitations are released periodically from each of the agencies and present technical topics of R&D, which the agency is interested in funding. Companies are invited to compete for funding by submitting proposals answering the technical topic needs of the agency's solicitation. Each agency has various needs and flavors of the SBIR program and you can learn more about them by visiting their sites. Here are the addresses for the SBA, DOD, and NIH: http://www.sba.gov/sbir, http://www.acq.osd.mil/sadbu/sbir, http://grants.nih.gov/grants/funding/sbir.htm.

None of the alternatives mentioned above are mutually exclusive. In many cases, combinations can be very effective. However, there are significant legal and operational differences in these financing arrangements. The terms of some borrowing agreements may limit your ability to take on additional debt and they should be entered into only as part of a coherent financing strategy. Do not be alarmed when the lender asks for your personal guaranty. Personal guarantees are virtually standard for all but the most credit worthy and/or public companies.

Written by Richard W. Lewis of Commerce Funding Corporation

As an ACFA consultant, you have already assisted your clients in solving their cash flow issues. Now you can take your relationship to the next level by helping them sell more of their product.

A vendor-leasing program will always increase both unit sales and transaction size for your client. In a vendor-leasing program, a leasing company forms a relationship with a vendor (your client) to help him market his product. For that assistance, the vendor agrees to offer a leasing option through that leasing company on every product he sells. A leasing program is as simple as providing your client with the tools to offer a lease payment alternative with every proposal.

Most major leasing companies actively pursue vendors. However, some of these leasing companies require $15,000,000 or $25,000,000 in yearly volume before they will discuss a vendor-leasing program. Clients that have yearly volume in the $4,000,000 to $15,000,000 range are not in the niche interest to larger leasing companies. This arena can be an excellent opportunity for the cash flow consultant to deepen their relationship with a client by introducing that client to a smaller leasing firm that is willing to develop a vendor-leasing program with that client.

You know that your client sells computer hardware and software. If your client makes both cash and lease sales, a vendor-leasing program may work for him. First, you must determine what percentage of his sales are in leasing. If it is more than $1,000,000 a year, you need to determine what kind of leases he is doing. At this point your client may be doing what is known as “one off leases” with several leasing companies or could be using a primary leasing source. With that volume, he could be a prospect for a customized vendor-leasing program.

Here are some examples of successful vendor-lease programs from a leading leasing company:

Equipment Distributor

$8 million annual supplier of high-end automated systems

Sells 30 systems per year
Provides installation, service and support to systems
Began offering a lease/rental program for clients with a stable monthly payment for the systems and service.
Average lease transaction size is $135,000
Commission to vendor — none needed!
Referral fee to cash flow consultant — $500 per transaction
Telephony Interconnect Company

$20 million annual supplier of telephone systems and services

Sells 250 systems per year
Provides installation, maintenance, and support services
Began providing a lease payment quote with every proposal, saw a 23 percent increase in unit sales and an 11 percent increase in transaction size due to offering leasing as a convenience to their buyers.
Average lease transaction size $65,000
Commission to vendor — $700 per transaction
Referral fee to cash flow consultant — $300 per transaction
Automotive Repair Equipment Manufacturer

$200 million annual sales

400 lease transaction per year
Average lease transaction $18,000
Commission to vendor — $180 per transaction
Referral Fee to cash flow consultant $200 per transaction
Now, here are the questions you should ask to pre-qualify your prospect:

Does your current leasing company(s) offer you any marketing materials or marketing partnership programs to help you stimulate sales?
Has your current leasing company(s) developed a “service concept” to help you close more deals quickly?
Would you be willing to speak with a leasing company that can offer you “outside the box” funding solutions, approval of tough deals, and timely funding?
Two nos and a yes are the only responses you need to realize this could be a great prospect for a customized vendor-leasing program.

If your client qualifies, simply contact a leasing company that is willing to set up a program for your client. You can expect to receive an ongoing commission/referral stream from each transaction that closes.

In the leasing business it is not unusual to see a 20 percent increase in sales revenue following the implementation of a well-managed vendor-leasing program. As your client’s sales increase, so will their needs for the other financial services you offer.

Source: American Cash Flow Journal

Author's Information: Dan Volungis is territory manager for Leasing Partners Capital. He can be reach by phone at 877-525-5550, by fax at 877-525-5551, and by e-mail at dvolungis @leasingpartnerscapital.com. The company’s Web site is www.leasingpartnerscapital.com.

Before You Sign on the Dotted Line - Know This

Knowledge is power. The Equipment Leasing Association recommends businesses ask the following 10 questions before signing a lease. These questions take into account the "before, during and after" stages of a lease.

Before

1. How am I planning to use this equipment?
2. Does the leasing representative understand my business and how this transaction helps me to do business?

During

3. What is the total lease payment and are there any other costs that I could incur before the lease ends?
4. What happens if I want to change this lease or end the lease early?
5. How am I responsible if the equipment is damaged or destroyed?
6. What are my obligations for the equipment (such as insurance, taxes and maintenance) during the lease?
7. Can I upgrade the equipment or add equipment under this lease?

After

8. What are my options at the end of the lease?
9. What are the procedures I must follow if I choose to return the equipment?
10. Are there any extra costs at the end of the lease?

"Be your own beneficiary" is the catch-phrase heading a life-settlement firm's Web site.

Life-settlement refers to the purchase of "unneeded" life insurance policies. Among the many symbols that will express the 21st century human condition, "be your own beneficiary" may become the defining statement for aging baby boomers (myself included), who started our run with "do your own thing."

Social commentary aside, this article will examine whether life-settlements are likely to be of value to you.

A recommendation that you sell your life insurance policy may not be as rare as you may think, if the past year is any evidence. In short, there seems to be something of a full-court-press on to convince affluent policyowners to wise up and "be your own beneficiary."

The reason behind this is that life-settlement firms claim their net return is 12% to 15%, and they are paying insurance salesmen and others willing to solicit such purchases 10% to 15% of the purchase price as a commission. Add to this the possible repeal of the estate tax making more policies available for purchase, and there may be more agents buying policies than selling them.

Life-Settlement Profile

There are three necessary characteristics that an insured person needs to have for a life-settlement firm to consider purchasing their life insurance policy:

• They need to be over the age of 65;

• They need to have a life expectancy of between two to 13 years; and

• They need to have had a significant decline in health since the policy was purchased, so that the policy underwriting rating is considerably better than the insured's current health.

If you don't fit this profile, it is simply a waste of time to go through the analysis with any solicitor.

Life-settlement firms and proponents always refer to the sale of life insurance policies that are "no longer needed." However, "needed" is not a particularly useful definition; many individuals have life insurance they don't need but that they "want."

"Needed" life insurance fulfills a risk management function such as having others financially dependent on an insured, as would be the case with a primary family income earner raising children.

"Needed" life insurance also is associated with estate planning-for example, a family wants their business retained but there aren't adequate resources to pay estate taxes without life insurance funding.

"Wanted" life insurance is an asset that can perform its objective more effectively than alternatives, but doesn't have a risk management element. Often life insurance policies move from the needed to the wanted category as children become independent or a family business is sold. (I have made the case in previous articles that permanent life insurance is an excellent tax-deferred saving and investing asset, as well as an intergenerational wealth-transfer asset because of its unique income tax characteristics. See my AAII Journal columns, Passing on Your Wealth: Gift Planning and the Use of Life Insurance, August 1996, and Using Variable Life Insurance as an Investment Alternative, July 2000.)

But whether life insurance is "needed" or "wanted" misses the point in the context of life-settlements that, by definition, only involve insureds who are in much worse health than when they bought their life insurance policies. The only reason that the life insurance secondary market exists is because certain life insurance policies have become much more valuable due to the insured's poor health-and those particular policies are anything but "unneeded."

Life-settlement firms readily point out that life-settlements almost always involve affluent policyholders who can continue paying life insurance premiums. And it is to this group that my valuation comments apply.

For those individuals who sell their policies because of their inability to continue paying premiums, selling their policy may be a rational choice.

The Transaction

To illustrate how these transactions work, here are the steps and factors involved in the purchase of a life insurance policy. In this example, the policyholder is over the age of 65, with a life expectancy of two to 13 years, and falls in a policy underwriting category (i.e., preferred, standard, etc.) that is much better than current health would warrant.

The transaction steps are:

• A detailed health history is obtained from the insured's doctors by the life-settlement firm and sent to reviewers to assign a life expectancy.

• Detailed information about the insurance policy structure and pricing is obtained by the life-settlement firm and analyzed.

• The policyholder's insurance company is required to have certain minimum financial strength ratings.

• Based on the life expectancy and policy pricing and structure, a purchase price is calculated by the life-settlement firm so that it can earn a return of 12% to 15%.

• Commissions of 10% to 15% of the purchase price are paid to the insurance salesman or other soliciting agent.

• The life-settlement firm, based on its life insurance pricing expertise, establishes the most cost-efficient premium structure based on the insured's life expectancy.

• When the policy is sold, the seller must pay taxes on the gain, although how the gain is treated is currently open to dispute. If a policy's cost basis is $650,000, the cash value is $750,000 and the life-settlement purchase price is $1,000,000, one possible tax result is the recognition of $350,000 as ordinary income (the difference between the sales proceeds and cost basis). However, some tax experts claim that only the difference between the cost basis and cash value, or $100,000 in this example, is ordinary income and the balance of $250,000 is capital gain. I don't believe the IRS has ruled on this yet so the capital gain treatment is not certain.

• When the insured dies, the life-settlement firm must recognize the life insurance proceeds less its cost basis as ordinary income.

• The insured appoints several agents to keep the life-settlement informed of their life and death status on a regular schedule.

Policy sellers beware: Make note of the very important fact that life-settlement firms do not independently evaluate possible purchases to determine which ones will and will not benefit policyowners. Life-settlement firms are pursuing their own financial interests, and have extensive pricing expertise to do so - an advantage that individual policyholders can't match.

Valuing an Offer

How would you go about determining the value of a life-settlement offer? The financial analysis is complex, but we'll present an example here based on the following facts:

• The policy that is to be sold is a $5,000,000 level death benefit universal life policy with a required premium of $175,000 through the 10th policy year, after which premiums are flexible.

• The policy was issued "standard non-smoker" in October 1998 to a 72-year-old male.

• As of October 2001, the policyholder was determined to have a remaining life expectancy of five years.

• The policy's cost basis was $525,000 with no surrender value due to surrender charges.

• The life-settlement firm paid $1,448,500 for this policy in October 2001. The seller netted out either $1,079,100 or $1,263,900, depending on whether ordinary income or capital gains apply. For this example, we'll assume that capital gains is the correct way to pay taxes and the net proceeds are $1,263,900 to the policy seller- although a conservative interpretation would be about $200,000 less.

Using these assumptions, here are the steps you would use to analyze a life-settlement:

• Calculate the aftertax value of the sales proceeds using both the ordinary income ($1,079,100) and the capital gain ($1,263,900) alternatives.

• For a period extending to twice the insured's life expectancy (to be conservative), calculate the death benefit's present value each year using a reasonable discount factor. (Since the measuring point is the October 2001 life-settlement purchase offer, future death benefits need to be discounted back to that date.) For example, a $5,000,000 death benefit that is paid out in five years, discounted at 5%, has a present value (October 2001) of $3,917,631.

• For a period extending to twice the insured's life expectancy, calculate the expected premium payments' present value for each year. The expected premium for the first five years after the sale of the policy is $175,000; the present value, discounted at 5%, is $795,541. This represents the cost to the policyowner if the policy is retained.

• Subtract the present value of the expected premiums from the present value of the death benefits, and compare that figure to the net sale proceeds. Using our example for the fifth year (2006): $3,917,631 - $795,541 = $3,122,090; this figure is then compared with the net sales proceeds, which in the example is either $1,079,100 or $1,263,900. In other words, the net present value if the policy had been retained and the insured dies in five years is $3,122,090, compared with net proceeds of either $1,079,100 or $1,263,900-a clear advantage for retaining a policy.

Table 1 shows this analysis for other years of life expectancy. In certain circumstances, you would also make special adjustments that are relevant to a particular case. For example, if the life-settlement firm has taken a large policy loan as part of the purchase proceeds with the attendant loan interest costs, then if the policy were retained by the policyowner they wouldn't take the loan and this needs to be accounted for in the analysis.

Table 1. Valuing A Life Settlement Offer: An Example

I reviewed two other life-settlement policy purchases and the financial analysis came out very close to this one. This study confirms the investment return of 12% to 15% that the life-settlement firms claim they try to achieve. Based on this case study, the pretax return should be around 18% and the aftertax return about 12%-measured at a life expectancy of five years. Because life expectancy refers to approximately half dying before and half after the specified time, in the aggregate life-settlements firm should achieve the investment return they plan for. But each individual insured will have different financial results depending on which side of the average they fall, which is why it is important to evaluate the financial prospects so each potential policy seller can assess the advantages and disadvantages according to their own view. In general, you can expect the crossover point to be about twice life expectancy. Based on this case study (and probably generally true) there is about a 10% probability that the insured will be alive when retention of their policy becomes less valuable than having sold it. Put another way, there is a 90% probability that having retained the policy is more beneficial.

Conclusions

If you are considering the sale of a life insurance policy, make sure at the very least that you consider the following:

• Have an independent financial analysis done before selling a policy. The life-settlement firm isn't in the business to determine what is in the best interests of prospective sellers.

• If selling appears to be in your best interests, obtain several purchase offers. Don't rely on only one life-settlement firm offer.

Written by Peter Klatt.

Structured Settlements have a 20-year history as a claim settlement tool for personal injury, workers' compensation, and employment cases. As most claim professionals know, structured settlements offer tax-free money to claimants and keep them from dissipating income. The after-tax rate of return for a structured settlement is far greater than claimants can achieve with other types of secure investments.

Something that many claim professionals overlook is the tremendous advantage of obtaining a medically underwritten structured settlement. Allowing life insurance companies that market structured settlements to provide a rated age, based on the life expectancy of the claimant, can enhance the rate of return on a life annuity dramatically.

What Affects Life Expectancy?

Everything we do affects our life expectancy. How we live, what we eat, and most importantly illnesses, health problems, or injuries we may have, or have had in the past. Insurance companies take all these elements into consideration in order to determine an estimate of how long a prospective client will live. In structured settlements, a shorter life expectancy means a higher rate of return.

Should medical information only be submitted on severely injured people?

A common perception among claim professionals and many structured settlement consultants is not to submit medical information for underwriting unless the claimant is severely injured. A person does not have to be quadriplegic, however, in order to benefit from or have a high rated age. Some of the highest rated ages we see are in smokers or people with chronic health problems, such as high blood pressure or diabetes. Someone's rated age can be elevated for even less obvious things like physiological disorders, drinking problems, or chronic pain.

An often-used analogy is that the underwriting on a medically rated annuity is the opposite of how insurance companies rate people for life insurance. Whereas a person would have to pay extra for life insurance if he smoked, were overweight, or had high blood pressure, he gets a better rate for his structured settlement annuity because of these health risks.

Possible Saving Settlements

A 20-year-old quadriplegic is not expected to have the average life expectancy of a healthy, able person of age group; rather, her life expectancy may actually be closer to that of someone in her early 50s. An annuity paying $100 a month for the rest of her life for a 20-year-old woman would cost $175,943. With a rated age of 51, however, the same annuity would cost $146,374, and the woman would still receive $100 a month, a savings of $30,000, or roughly 17 percent.

This type of savings can allow a company to settle within a reserve when it might not have been possible previously.

A 50-year-old man who is healthy and a nonsmoker might have a premium of $149,000 for a life annuity. If that man is a smoker and has a rated age of 55, the cost drops to $138,979. This is a savings of more than $10,000, or 9 percent, for a risk factor that many people overlook when preparing a case for settlement.

All structured settlement consultants have the ability to gather medical information and submit that information to life insurance carriers to obtain rated ages. Some structured settlement companies have brought in medical directors to prepare the medical information for presentation to the life insurance carriers.

The medical director will comb through the medical records and put together a report that will give the insurers a full picture of the claimants medical history. By making it easier for carriers to see complete medical history, it has been found that life insurance companies are more inclined to give better rated ages to those submissions that come from medical directors. In fact, an internal study has shown that life companies, on average, increase their rated ages by 11.4 percent when the medical information comes from a medical director, as opposed to a submission without a report from a medical director.

Claim professionals who understand and use medically underwritten structured settlement annuities have at their disposal a variety of ways to save money on settling a claim. Structured settlement consultants who use medical directors can work with life insurance carriers to get the best rated ages and rates possible.

Written by: Don McNay is president of McNay Settlement Group in Richmond, Ken. and Angela Luhys is office manager and medical director for McNay Settlement Group.

If cash is king, then the invoice is at least a prince.

Many companies sell their unpaid invoices to customers as a way to get fast cash. The transaction, known as "factoring,'' is often the only way for startups to get off the ground or for bigger businesses to smooth out the peaks and valleys of cash flow. It allows them to make payroll, for instance, while waiting for a big payment from a customer.

But what was once a straightforward transaction for subpar borrowers has evolved in recent years into a hotly competitive market with ever-more-sophisticated deals that should not be attempted by amateurs.

And while fat margins have drawn new players in recent years, the number of factoring deals is falling, making the market even more competitive.

In 2003, factoring deals dropped 11% to $2.5 billion from $2.8 billion in 2002, according to the latest statistics in the ABF Journal, which covers the asset-based lending industry.

That's largely because the newcomers arrived just as many of the industry's traditional borrowers, such as apparel and textile businesses, have moved offshore, taking their accounts receivable with them.

how it's done

Typically, a factor buys a company's accounts receivable at a discount. So, for instance, if a clothing manufacturer has sold $1 million in sweaters to a department store but hasn't yet received payment from the store, the manufacturer can sell that invoice to a factor for $800,000 upfront.

Then the factor takes the payment from the department store. The clothing manufacturer gets the rest after the factor is paid, minus a fee that is generally 3% to 5% of the invoice.

client could still be on hook

But some lenders who call themselves "factors'' aren't really purchasing the receivables outright. Instead, they are buying them "with recourse.'' That means that if some of the invoices go bad, the company borrowing from the factor is still on the hook for those losses.

The invoices that are unpaid for 70 days, for instance, may be deducted from the original loan amount, says Bill Reimnitz, senior business development manager for the Chicago office of Riviera Finance, which offers mostly non-recourse financing.

"The (borrower) isn't protected at all in those deals,'' he says.

Mr. Reimnitz, who has been with Riviera since 1992, declines to name any of his customers, for fear that competitors will swoop in with misleading deals that might appear to shave a fraction off the cost. "Yes, it's that competitive,'' he says.

The only way to compete, he says, is with service. Just the day before, Mr. Reimnitz funded a new trucking deal. It was tiny-just $10,000 on the first two invoices ever written by the trucking company, a scale that will barely yield a profit. "But in about 30 days, I expect they'll be doing about $25,000 in invoices, and growing very quickly once they have cash flow,'' he says.

Moreover, he adds, about a third of Riviera's business comes from customer referrals-another reason to lend to small borrowers that others might not bother with.

risk factors

For a higher fee, some factors will handle all the back-office work of accounts receivable for their clients, similar to how a small business might outsource payroll.

"Small business people wear 12 hats,'' says Debra Wilson, senior vice-president of Vertex Financial, a factor and asset-based lender in Dallas. "They never get around to pursuing their past-due receivables.'' About three-quarters of her clients include that work in their transactions with Vertex.

But becoming a factor is not for the faint of heart. The risks include fraud on the part of borrowers who might generate phony invoices, or the Internal Revenue Service seizing invoices of a company for nonpayment of taxes, even if the factor "owns'' them.

"Many banks got in for a few years, and got back out,'' says Vertex's Ms. Wilson, who often speaks at conferences on monitoring accounts, and helped write a manual used by the industry.

In 2000, Bank of America opened a finance-factoring office in downtown Chicago. Today, that office is gone. "I can confirm that we do not do factoring,'' a Bank of America spokeswoman says.

Factoring has become so sophisticated that some factors sell the receivables they purchase into a secondary market, much as a secondary market developed for mortgages.

"Factoring takes a lot of energy to do correctly,'' says David Zarski of law firm Schuyler Roche & Zwirner P.C. of Chicago. "It takes constant monitoring. People see the yields from these things and they think, `I could do that, too.' They don't understand that there's a lot of risk.''

It's like the shakeout in subprime auto lending a few years ago, he says. When too many players jump into the market, they get burned.

Source: ChicagoBusiness.com

When you sold your home, you were happy to help the buyer out by taking back a second mortgage for the last bit of purchase price: $10,000 at eight percent, which was more than the going mortgage rate last winter. Everyone was happy. Monthly payments of around $84 were set to amortize the loan in 20 years. And the buyer has been making the payment faithfully.

So now you've decided that you'd rather have the money, and you're ready to sell that mortgage. But no one seems willing to give you $10,000 for that nice investment.

A Note About Notes

For starters, it's important to understand the time value of money, which is neatly summed up in the question:

Would you rather have $1 today, or $1 a year from now?

That one's easy.

Even if you keep your money in a stodgy bank account, you can probably expect to earn at least 5 percent with it. So if you got the money today, you could turn it into $1.05 by a year from now. That means next year's dollar is worth only 95 cents today–actually a bit less, because 95 cents wouldn't earn quite that full 5 cents in interest.

That explains the first reason why no one will give you $10,000 today, for the right to collect that debt when the last bit of repayment is scheduled for 20 years from now. The calculations are a bit complex, but there's a formula for figuring the present value of a stream of income over that period of time – depending, of course, on what rate of interest is involved.

Investor Expectations

Which brings us to the second reason for your discount. It lies in the expectations of the investor who offers to buy your loan. Your motivation for lending the money was probably to get the house sold, and 8 percent interest sounded better than you could get in a savings account.

But the investor who lays out cash today expects a higher return than that, to compensate for the risks involved and the inevitable losses when some mortgages turn sour.

Sizing up the Competition

Your mortgage note is in competition with other possible investments. To take only the most extreme - and safest - example, even Treasury notes these days yield more than six percent, free from state income taxes, at absolutely no risk. And of course with increased risk all sorts of other investments beckon - with higher returns.

Why then would anyone buy your note, laying out cash today and taking on the risk of default in the future, for the full face value?

No one will.

The amount you will be offered depends on the investor's own guidelines for anticipated return.

If an investor requires at least, say, 15 percent before he or she will be motivated to buy your note, then calculators, computer programs, or algebraic formulas will be used to determine the price you're offered.

What’s your discount?

But one simple way for a rough estimate is to consider the question: how much of a loan would $84 a month repay, amortized on a 20-year term, at 15 percent interest?

The answer is somewhere around $7,000.

And there's your discount.

Source: NoteWorld.com

It was bad enough to hear that her husband, Douglas, was dying from the effects of dementia and Parkinson's disease.

But Barbara Frasier also had worry about keeping the home and investments she and her husband had accumulated over the years.

"We're not rich people," the 70-year-old former Huntington, L.I., resident and mother of four said. She's now living in Pennsylvania.

Frasier took action, hiring Long Island financial planner J.J. Burns. He advised the couple to change Douglas' will to transfer part of their estate into Douglas' name alone to avoid future taxes, which would have been imposed on his widow.

Now three years after her husband's death, "I have my income, I have my home, I'm doing fine," Frasier said.

The devastating news of terminal illness can throw a family into a tailspin. Financial matters are often the last thing anyone wants to confront.

But addressing money issues is critical. According to the Financial Planning Association, every sick person or their loved ones has to ask themselves: How will the medical bills be paid? Should you continue to work? What about estate plans and investment strategies?

"You have to consider, will there be money left for the surviving spouse," said Eileen Zenker, assistant director of social work at New York University Medical Center.

Steps you need to take

It isn't easy for anyone to confront such matters, but when the tough news of terminal illness arrives, experts, such as J. J. Burns, recommend the following guidelines:

Learn about the benefits you are entitled to. Gather all important materials from your employer. You want a copy of your employer's entire medical benefits package. But be careful about how you try to gain access to this information. Don't ask for it directly, or you could lose your job.

"The danger is your employer starts looking at you differently," Burns said.

Plan ahead so you are never without valuable insurance benefits. You never want to face a period of time when you are not covered.

Consider COBRA. Under this federal rule, a person who leaves his workplace is entitled to continue group coverage for up to 18 months. But you will have to pay for this service.

Apply for Social Security disability insurance early on. Get the proper documentation from your doctor.

"The key to terminal illness planning is to never be without the insurance and benefits you are rightly entitled to," Burns said.

Review your life insurance policy. You may actually be entitled to purchase more disability or life insurance, because some companies allow you to increase coverage without showing evidence of insurability, Burns said.

A dying person might be able to tap the cash value in his or her life insurance. Consider a viatical settlement. That is the sale of a life insurance policy by a terminally ill patient to a private investment company.

This kind of living benefit pays an immediate cash payout that can then be used for anything from paying bills to fulfilling last wishes.

Identify future expenses. During this tough time, there are people you and your family will be dependent on, including social workers, therapists, psychologists, nurse aides, meal preparation workers and hospice care.

Budget not only the disease costs and daily expenses, but the special wishes of the dying person, the Financial Planning Association recommends.

"The biggest problem many families face is they think because they have insurance, it will cover post hospital care. Indeed we find that is not the case," Zenker said.

Draft or update estate planning documents. Now is the time to focus on who will take care of your financial affairs before and after you die.

You will need the following essential documents, if you don't already have them: A power of attorney lets a person you choose make legal and financial decisions on your behalf.

A living will describes what life-saving medical treatment you want - or do not want. A health care proxy gives a person you designate the power to make medical decisions if you are unable to do so.

Draft a will, or if you have one already, consider changing it. "There isn't a time when we have not completely updated or changed the will" of a dying person, Burns said. "If you know who is going to die first, there are methods of saving on taxes," Burns said.

Depending on the size of your estate you may wish to transfer assets to avoid or reduce estate taxes as well as income taxes, he said.

Source: Phllis Furman for the NY Daily News

Paradigm shifts don’t occur overnight. Yet, somewhere along the line, there comes a convergence of factors that makes significant change inevitable. With regard to the secondary market for life insurance, this “tipping point” may already be in the rear-view mirror.

In the past few years, the secondary market for life insurance has exploded onto the financial planning scene. Clearly, the market’s basic premise — the consumer’s right to sell unwanted or unneeded life insurance — has been validated by the U.S. market’s spectacular growth, which is expected to exceed $45 billion in face value by 2007. More importantly, the market and its associated products, such as life settlements, are attracting significant attention from professionals outside of the life insurance industry.

Consider the estate planning community. A recent article titled “The
Benefit of a Secondary Market for Life Insurance,” in the Real Property, Probate & Trust Journal of the American Bar Association concludes that the secondary market for life insurance is both pro-competitive and pro-consumer. By allowing companies to compete for unwanted or unneeded policies, the secondary market has generated greater consumer choice, a wider range of products and favorable valuations for consumers. But the implications don’t end there. The article goes on to suggest that the market will enhance the perceived value of life insurance, leading to an expansion of the industry as a whole. It concludes by suggesting that lawmakers design regulations to “encourage participation and investment in this secondary market.”

Such regulation is indeed happening. A number of states are in the process of pass-ing provisions that protect the consumer’sright to know about the opportunities available in the secondary market. It’s likely thatCalifornia will be moving forward with legislation in the coming year. These moves aresending a clear message to financial advisorsthat secondary market offerings are nowwithin the limits of their fiduciary responsibility. “What is the liability of the trustee...who allows a thinly funded policy tolapse if the policy had a value in the aftermarket?” asks Jon J. Gallo, JD, co-chairmanof the Life Insurance Committee of the RealProperty, Probate & Trust Law Section of the American Bar Association.

It’s a question that Paul F. Kirsch posed in the March 2003 issue of California Broker Magazine in his article, “Will History Repeat Itself?” He noted that a failure to disclose the material benefits of life settlements to clients could open the door to a new wave of con-
sumer-based litigation. The implications ofthese new responsibilities are a major factordriving advisors to demand to be educated about secondary market transactions.

The other factor is the sheer magnitude ofthe opportunity. In the U.S. alone, there ismore than $100 billion of life insurance ineffect where the market value exceeds surrender value. On a more immediate level, thesecondary market presents a rare opportunity to bring new and significant value toclients. Considering that life settlements invariably lead to additional transactionsincluding annuities, new life insurance, or investments, it’s a tremendous new business opportunity for producers.

Not surprisingly, the situation has attract ed the attention of the capital markets. High-quality institutional capital is pouring into the secondary market — the importance of which cannot be overstated. Notonly does institutional backing provide a secure funding source for secondary market transactions, it also provides the highest degree of consumer protection with regard toprivacy and confidentiality, as well as a solidfoundation on which the industry can grow.

So, it should come as no surprise that advisors throughout the financial services industry are demanding the tools and information they need to educate their clients about thesecondary market opportunities. The interestextends to other professional arenas including wire houses, tax attorneys, trust officers,
accountants, financial planners, and registered investment advisors.

This raises what is perhaps the most important signal of the market’s arrival: carriers are now responding to producer demands with information about life settlements,along with the tools to educate clients.

But, simple economics provide the mosttangible account of the market’s momentum. Does thismean that life settlements andother secondary market transactions will be popping up onevery street corner? Of course not. For the majority of policyowners, maintaining their policy will continue to be thebest course. But the mere presence of the market gives themthe means to evaluate what the policy is worth in empirical terms. This is likely the most important implication of the secondary market. Life insurance is now more than a toolfor risk-management. It has become an asset with significant value that should be appraised and considered along side one’s real estate, businesses, or equities. In cases where the policy is no longer performing up to expectations, the market provides newoptions. Options that arebringing long-term benefits toevery sector of the life insurance industry.

Clearly, it’s a time for enormous excitement. But it’s alsoa time for action — for advisors to embrace the opportunities and responsibilities presented by the secondary market. Life insurance is now more flexible, more powerful, and more valuable for consumers and the professionals who servethem. Insurance is indeed being redefined.
The tipping point has come and gone. And things will never be the same.

Constance Buerger is president/COO of Coventry First. For more information, call(877) 836-8300.

One of the biggest problems real estate investors face when structuring transactions involving seller financing is the seller's concern for security and assurance that they will be repaid. Let’s take a look at a typical example:

You find a potential rental home that you want to purchase from a motivated seller with an attractive long-term, fixed-rate existing first mortgage already in place with a balance of $100,000. You plan to buy the home, rent it out, and hold it for long-term appreciation. The home is worth around $150,000, and the seller is eager to sell for the discounted price of $120,000.

You offer to put down $5,000 in cash and to get a deed from the seller by taking title “subject to” their existing first lien mortgage balance of $100,000, and then have the seller agree to take back a second lien mortgage note for the remaining $15,000.

The eager seller is okay with the sales price; okay with your proposed down payment; and okay in allowing you to make the payments on their first lien mortgage for them. But the seller is reluctant because you are not assuming their existing loan.

They recognize that the existing $100,000 bank loan is still in their names and that their credit is still at risk on that loan, and they realize that the $15,000 second lien they would take back seems risky to them if for some reason you don’t perform.

Create peace of mind for the seller with a "wrap"

You recall hearing about a financing instrument called a “wrap.” Wraps (wraparound mortgages) are security instruments in which the seller who agrees to finance the sale of their property will encircle their existing financing by “wrapping” around the existing debt they owe with their own financing provided to the buyer.

You go back to the reluctant seller and “tweak” your offer as follows:

- $120,000 purchase price

- $5,000 cash down payment

- $115,000 to be held by seller as a wraparound mortgage

You explain to the seller that you will make them monthly installment payments on a $115,000 promissory note secured by a purchase money wraparound mortgage that will encircle their existing $100,000 bank first lien mortgage.

The seller will collect the payments from you on the $115,000 wraparound note and then in turn make the payments they are still obligated to pay on their existing $100,000 bank debt while retaining the difference. With this new proposal the sellers realize that they are in far better control of the financing and in protecting their equity.

If you do not make the payments on this wraparound mortgage, they will know instantly that you are in default to them while continuing to protect their credit and obligation on the underlying bank first lien mortgage.

Another reason to use a wrap when selling

Recently a customer we dealt with sold a restaurant property for $225,000 to a buyer who put down $60,000 in cash. The buyer formally assumed an existing 8% private loan with payments of $825 per month on a $115,000 first lien mortgage balance. The sellers agreed to finance the $50,000 still due by holding a purchase money second lien mortgage and note.

The way they structured this sale and financing could have been “tweaked” for the benefit of the seller using a wrap around mortgage. To illustrate what they did:

- Sales price $225,000

- Cash down payment $60,000

- Private first mortgage assumed $115,000

- Seller financed second lien mortgage $50,000

These second lien mortgage note holders came to us seeking to sell and convert their $50,000 second lien mortgage and note into a cash lump sum. Unfortunately, because of the type of collateral that was involved (a high turnover type restaurant business and property), and the second lien position of the mortgage note, the discounted cash value of their second lien was greatly affected.

A better way to structure the sale

It would have been far better for them to have sold the commercial restaurant property and financed it using a wraparound mortgage (or similar instrument) as follows:

- Sales price $225,000

- Down payment $60,000

- Balance finance $165,000 financed at 10% with wraparound mortgage

By financing the sale using a wraparound mortgage there are several profitable “spreads” the sellers could have created while producing a far more marketable and saleable note in the event they ever wished to sell their paper.

The $50,000 equity spread that exists within the wraparound mortgage note owed of $165,000 that encircles the existing $115,000 in debt still outstanding on the underlying private first lien mortgage note

The 2% interest rate spread between the 10% that would be owed to the property sellers on the $165,000 wraparound mortgage note they will collect and the 8% still owed on the underlying private mortgage note.

The monthly positive payment spread on the installment payments that would come in on the $165,000 wraparound mortgage note and the payments still to be made out on the underlying $115,000 private mortgage note

While it’s technically true in this example that a wraparound mortgage is a second lien mortgage subordinate to the underlying first lien mortgage debt. The structure allows the paper holder greater flexibility.

In the event these sellers ever wished to convert their paper (that is the $165,000 wraparound mortgage note they hold) into a cash sum, the investor who would purchase such a note would be in a position to fund the sellers a lump cash sum for the purchase of their wraparound mortgage note.

Then, from those proceeds advanced, simply pay off the $115,000 underlying first lien mortgage, thereby extinguishing that debt against the property. When the transaction is completed, this process called “unwrapping a wrap” would mean that the former $165,000 wraparound mortgage note would now become a far more desirable first lien mortgage note against the property.

Wraparound notes and mortgages can solve many problems once you become familiar with the concept.

Written by: Michael T. Morrongiello is an active investor who specializes in real estate and real estate paper. He has bought, sold, or held for investment thousands of mortgages secured by all types of real estate, including residential and commercial properties, apartments, mobile home parks, and development land in every state. Michael strongly believes in the powerful unity that generates solutions when real estate is creatively coupled with paper.

Michael shares his wealth-building concepts and techniques that work in any market in his comprehensive home study course: The Unity of Real Estate & Paper

Imagine for a moment there exists a world where several buyers stand ready and willing to purchase your car at substantially more than its trade-in value, and you get to choose the highest bid. No advertising, no price negotiating, and no expense to you. Science fiction?

Actually, such a world now exists for owners of life insurance policies that are no longer needed, no longer affordable, or no longer serve their original purpose. The life settlement industry has created a secondary market for policies intended for lapse or surrender.

The life settlement industry was spawned by the viatical settlement industry, which created a secondary market for terminally ill policyholders who needed life insurance benefits prior to death to pay for the costs of care.

Policyholders who would qualify for life settlement are generally older than 65, have deteriorating health but are not terminally ill, and have realistic life expectancies of between 4 and 15 years. Qualifying policies will have face amounts of between $100,000 and $5,000,000 and be beyond the contestability period (which is generally 2 years from the date the policy was taken out.)

The creation of a secondary market for life insurance could not be more timely. Substantial declines in the equity markets coupled with near historic lows in short-term interest rates have devastated the portfolios and income of many seniors. Because of this "double whammy", these seniors may not be able to afford the premiums on their current life insurance policies, and are forced to consider lapse or surrender of these policies. A life settlement provides the senior with an alternative: sell the policy to a 3rd party in exchange for a lump sum payment in excess of the cash surrender value.

In 2002, life-settlement providers paid approximately $340 million to acquire policies with an aggregate cash surrender value of $94 million. This represents an increase of 262%! The market for senior-held life insurance is quite large. It is estimated that seniors currently own $500 billion in life policies of which $100 billion would likely qualify for life settlement.

Secondary markets exist for virtually every financial asset. Thankfully, that list now includes life insurance.

Jake King is a Regional Director in New England for Gateway Financial Distributors, a nation organization that represents the leading, institutionally-funded life settlemene companies. If you have any questions about life settlements, please e-mail lifesettlements@mdtaxes.com.

What would you get if you took all your overdue bills and laid them end to end? If you're like many entrepreneurs, a paper trail as long as the Pacific Coast Highway and enough heartburn to put an Alka-Seltzer factory into overdrive. But it doesn't have to be that way. By carefully deploying the guerrilla collections techniques the experts use, you can turn those invoices into a virtual geyser of cash for your business -- starting today. And you don't have to take steroids or start talking like the Godfather to get phenomenal results.

COLLECTIONS 1: A BACKGROUNDER

Before we plunge ahead, let's just take a minute to be sure we've covered the basics. That's essential in order to target the 100 percent success rate every entrepreneur should be aiming for. (If you've got this part down pat, feel free to skip ahead to Part 2, below.)

BE A SPORT. Your personal style has an impact on pay-up rates, according to the American Collectors Association, a trade group for collections agencies. The most effective collectors know how to determine quickly what motivates someone, how to communicate well, and how to work with people to get accounts paid. Cultivate a friendly, responsive attitude that makes customers actually want to pay you, and you're on your way to success.

GET ORGANIZED. Sometimes all it takes to collect an overdue payment is asking for it. But you can't ask if you can't keep track. Your billing records and details of your invoice-related conversations with clients should be meticulously updated. If you're currently mired in the many-scraps-of-paper method of organization, invest in some sanity-preserving software, like, right now! One good program is Goldmine 4.0, which tracks communications with customers and can be linked to accounting programs from Creative Software Enhancement, Peachtree, Algorithm Inc., and others.

DIAL. Now that you're organized, make that call--before the bill is due. Start building a relationship with your clients by phoning every few weeks to assure yourself they're satisfied with your products or services. Follow up promptly on any complaints. By the time the deadline arrives, you'll be able to issue the friendly reminder as an afterthought.

TIGHTEN THE PURSE STRINGS. Take a good, hard look at your credit policy. Must you extend credit at all to remain competitive? Start thinking about demanding more payments up front, says Cynthia Brower, a manager at the National Association of Home Based Businesses (NAHBB) in Owings Mills, Md. "If you give somebody even one week to pay, you are extending credit Most small and home-based businesses can't afford that," she adds Phase in the no-credit policy gradually with each new customer and with those who've abused your credit in the past, to avoid alienating existing clients, suggests NAHBB president Rudy Lewis.

Got all the basics covered? Good. Now let's move on to...

COLLECTIONS 2: THE MASTER CLASS

CALL FOR BACKUP. Assuming you have to issue credit, you obviously don't want to dish it out to every Debtors Anonymous dropout who shows up on your doorstep. So, have all clients fill out a credit application. Then, actually call their references for an honest appraisal of their payment habits, advises Kelsea Eckert, a collections attorney based in Jacksonville, Fla., and the author of Getting Paid in Full (Sourcebooks Publishing, 1994).

As a side benefit, credit applications give you a discreet way of finding out the name of each clients bank. If you have to obtain a court judgment to collect a payment in the future, you'll be able to make a beeline to the bank account you're going to attach instead of wasting time and lawyers' fees trying to locate it.

PRINT WITH A PRO. Many entrepreneurs let their inner cheapskate take over when it comes to invoices, whipping them out on a PC. Squelch the urge. "Your image should be equal to or greater than your price tag," Brower says. "If you look as if you really don't care about getting paid, they won't care about paying you." The lesson: Have your invoices printed up professionally when you order your stationery and business cards.

COLOR BY NUMBERS. Highlight the "balance due" section of your invoices in color. That can speed up accounts-receivable performance by 30 percent, according to a study by Xerox Corp. Use a color copier or a laser printer if you have one, says Linda Stern, the author of Money-Smart Secrets for the Self-Employed. Otherwise, use a yellow highlighter.

CUT 'EM A BREAK. It's easy to train your clients to pay you on time if you give them a cash incentive -- or a disincentive against being late. Offer a price break if they mail their check by an early deadline, suggests mortgage broker John Svirsky. As an alternative, charge monthly interest or a late fee on overdue bills. (To bypass the sticky banking regulations that come with charging interest opt for a flat "rebilling fee" of $10 or $15 a month, Stern advises.)

KEEP IT SHORT AND SWEET. Spending hours haggling with clients over the fine points of your bills? Rather than itemize each detail of the service you've provided, bill them for something general, like "accounting services," Stern recommends. This will discourage nit-picking. (Of course, you'll have the breakdown available if it's called for.)

DON'T DELEGATE. It may be tempting to foist off on a staffer the unpleasant task of making collection calls. Resist that temptation if you want your money, says Elizabeth Mallory, owner of Heritage Financial Recovery Services, a collections agency in Upper Saddle River, N.J.: "The higher the person the phone call comes from, the greater the chance of collectibility."

... BUT IF YOU DO, MAKE IT WORTH THEIR WHILE. Motivate any staffer who does help you with bill collecting by offering a set percentage of each invoice that gets paid. Bouchard attributes her nearly 100 percent collections rate, in part, to a similar deal she worked out for herself as administrative director of Travmar Destination Directories, a publishing house in Providence, R.I.

DROP 'EM A CARD. If clients understand why your business needs their money, they may be more willing to pay quickly. Elizabeth Ann Lander, owner of Mail In Motion, a mailing house, describes how she once called a client to explain that her outstanding invoice was keeping Mail In Motion's accountant from closing out its books for the quarter. The check arrived promptly.

GET RHYTHM. If some of your late-paying clients work on a seasonal basis, concentrate your collections efforts at those times, says Mark Loetscher. He seldom sees a bill go uncollected at his Unishippers franchise, which handles sales and marketing for companies like Airborne Express out of Fort Lee, N.J.: "Work with that cyclical cash flow."

MAKE A TRADE. When trying to secure a payment from a small business that's in a money crunch, consider a barter agreement as a last resort, Brower suggests: "You may be able to exchange services and come up with a more positive arrangement" But discuss the tax implications with your accountant first, Eckert says.

CUT YOUR LOSSES. If a bill goes unpaid longer than four months, your chances of collecting it diminish greatly, Mallory notes. Offer those in dire business straits a discount on their bill if they'll pay you a reduced lump sum up front, says Denise Manniello, vice president of JDR Recovery Corp., a collections agency in Ramsey, N.J. You'll be able to put that money back into your business immediately without investing any more time and money in collections.

GIVE 'EM A HAND. Svirsky asks down-and-out clients if there's any way he can assist them in earning more money. He's willing to help a debtor find work, connections, a financial planner, or an accountant. "If I can help, everyone wins," he says. Recently Svirsky helped a client secure a second mortgage on a house to temporarily cover a $7,000 debt. "If the client had paid me the $7,000, he couldn't have put that money back into his business. This way, his money can make money for him, and he'll pay me in six months." But Svirsky admits he's no saint: "He's paying interest -- 12 percent." (In a pinch, you can also refer someone to Debtors Anonymous, at 212-642-8220, which has a special program for business owners.)

WHEN ALL ELSE FAILS, OUTSOURCE. If those 120-day-old bills are taking valuable time away from your business, don't feel guilty about sending them to a collections agency You may be able to defray the cost by negotiating a volume discount. You can also try resolving stubborn problems in small-claims court, Eckert points out. You don't need a lawyer, just good records.

Consider reporting anyone who has written bad checks intentionally to your state attorney general's office. Since this is a crime, you may wind up with some free legal help.

A FINAL NOTE. Many people think of bill collecting as a hostile process. But, as veteran collections agents know, you're actually doing your delinquent clients a favor by forcing them to get their lives in order. "I have received thank-you letters from people for helping them," says Mallory.

Mind over Money

Mortgage broker John Svirsky used to have trouble getting his clients to pay up -- until he saw the light. Rather than pester clients for money or sue them, Svirsky "thinks his money home." First he gets into a calm, meditative state. Then he visualizes debtors writing out a check and thanking him for a job well done. "I send them blessings, wish them prosperity, and hope their business thrives," says Svirsky. "This is a New Age technique that may sound foolish, but it works amazingly well."

Since he began implementing this technique 15 years ago, Svirsky has seen less than $10,000 go uncollected. One client spontaneously took out his fountain pen and wrote him a check for $32,000 "with great flourish," says Svirsky. "He said to me, "You earned every penny of this. Thanks for the good work.'"

Written by Elaine Pofeldt for Success Magazine

Source: FindArticles.com

When Susie Cooke took an early retirement package from Verizon last year, she opted to receive her pension benefit in one lump sum rather than as a lifetime annuity.

''The basic reason was dollars and cents,'' says the Tampa resident, who consulted her financial adviser. ''I calculated that I'd have more money in the long run.''

Rodger Drueke, a former energy manager for a Michigan utility, retired 18 months ago and took a lump-sum payment, largely for the same reason.

John Niemeyer, a Vancouver, Wash., resident who retired from Hewlett-Packard last year, also took a lump sum, figuring he can do better by investing it himself.

These retirees are not unusual. Many pensions provide only an annuity payout. But when they offer a choice, retirees often select a lump sum, according to a government report released last month.

That is cause for concern, many retirement experts say. Workers are retiring earlier and living longer -- adding to the risk they will outlive their nest eggs. An annuity is intended to alleviate the financial uncertainty by providing a stream of income for as long as the retiree lives.

When given a lump sum, retirees have a tendency to be either too frugal or to use up a lot of the money in the early years for travel and big-ticket items, experts say. ''In my view, lump sums are a very scary proposition,'' says Alicia Munnell, director of the Center for Retirement Research at Boston College.

But there is no one-size-fits-all pension choice. Each person needs to evaluate his or her circumstances, skill and inclination to manage investments. Here are some things to consider if you're about to retire:

Lure of lump sums

It's hard to compare a lump-sum benefit with a monthly annuity payment. Say, for example, that a worker is eligible to get a lump sum worth $100,000 or an annuity of $1,000 a month at retirement. ''People are always tempted to take the lump sum even though the annuity may be worth much more,'' Munnell says.

To make a comparison, you have to estimate how much you could earn over time if you invest the money. As recent stock market volatility illustrates, it can be tough to predict returns.

You also can compare your pension annuity with what you could get if you took the lump sum and purchased a private annuity with it. Because the cost of the pension annuity might be subsidized by your employer, it can be a very attractive option, says Harold Evensky, a financial planner in Coral Gables, Fla.

Last fall, the IRS proposed regulations to require plans to provide more guidance for workers in comparing the relative value of different pension payout options.

It can be especially tricky for workers who are eligible for a subsidized early retirement package. In that situation, a worker typically gets a better pension annuity if he retires at age 55. But employers don't have to factor the subsidy into a lump-sum payment and, under current rules, they don't have to tell you.

''So if you take a lump sum, you could end up forfeiting the early retirement subsidy,'' says Karen Ferguson, director of the Pension Rights Center.

Payout pros and cons

Some experts say annuities are in theory the perfect payout option because they protect you and your spouse for as long as you live. ''If a husband cares about his wife, an annuity is a good way to protect her for life,'' says Teresa Ghilarducci, associate professor of economics at the University of Notre Dame.

In practice, there are some drawbacks. Most notably, they are not indexed for inflation in most cases.

Some workers -- those who are single, have a domestic partner, or who are likely to have a short life span because of serious illness -- might prefer a lump sum so they can leave the money to their children, partner or other heirs. ''I'm single, and with an annuity, if I die, none of my heirs would get anything,'' says recent retiree Niemeyer.

Retirees also sometimes take a lump sum because they don't like the idea of leaving their pension with their employer. But even if the company goes belly up, the pension benefits are insured by the Pension Benefit Guaranty Corp. Unless your pension benefit exceeds the maximum benefit guaranteed, which is about $44,000 a year this year, you shouldn't need to worry. The PBGC doesn't protect 401(k) plans, however.

There can be a delay in getting benefits from the PBGC, and disputes can arise about how much you are owed, some experts note. If you know that your company is on shaky ground, you might want to take a lump sum if given the option.

You can always take some or all of the lump sum and buy an annuity if you want the security of a lifetime stream of income. But you need to shop around and consider the financial strength of the company behind the annuity by checking with a rating firm, such as Moody's or Standard & Poor's.

Keep in mind that lump sums require retirees to be good managers in two ways. You must invest money wisely and accurately estimate how long you'll need the money to last. Neither one is necessarily easy.

''A person taking a lump sum has to be astute,'' says Mary Rinehart, a financial planner in Charlotte. ''They can earn more, but they are subject to more volatility.''

Often, unexpected expenditures such as an illness can use up your retirement savings. Then you've shot your lump sum, and you've got nothing but Social Security,'' says Jack VanDerhei, a business professor at Temple University.

Written by Christine Dugas for USA TODAY.

Source: Global Aging

The cash flow industry provides a marketplace where businesses and individuals are able to obtain cash when they need it. One way to generate quick cash flow is to sell an income stream. An income stream is debt owed over a period of time that creates a stream of income for a company or individual that is owed the money.

In the cash flow industry, the outstanding debt--or stream of income--is an asset that can be sold. By selling off income streams, individuals and companies not only have access to cash that may be needed today, but they also eliminate collection issues. Plus, with cash in hand they might be able to take advantage of an investment with a higher yield.

Most income streams sold and purchased in the cash flow industry are privately held, owed to a business or individual, rather than to a bank.

Generating Cash

The process starts with determining the specific needs and goals of a client. Sometimes partial streams may be sold off instead of the whole income stream. This allows a client to meet a particular urgent need while retaining a later stream of payments. The later stream of payments, or any portion of, may also be sold down the road.

Owner vs. Accounts Receivables Financing

The concept of selling an income stream has been a part of the financial services industry for many years. The cash flow industry has roots in two seemingly unrelated methods of finance--owner financing and accounts receivable financing.

Homeowners and commercial real estate investors have utilized owner financing as a method of buying property for decades. In the 1970s, individual investors and investment companies recognized a profit opportunity in those notes, and they began to buy them directly from sellers. Accounts receivable financing is the second method of financing impacting the development of the cash flow industry. Prior to the 1980s, it was mostly used in the garment, textile and furniture industries and was available only to large companies.

Categories of Income Streams

Various funding companies can purchase a large variety of income streams. The following are categories by which they are grouped: business-based, collateral-based, contingency-based, consumer-based, government-based and insurance-based. In addition to income streams being purchased, there are other types of loans such as the newest--no-margin call, non-recourse loans against stock.

Business-based income streams involve an existing stream of payments owed to a business by another business. It may also include other types of business funding.

Accounts receivable--also referred to as invoices. The purchasing of accounts receivable at a discount is called factoring. Factoring is a discounted purchase, not a lending service. The process is as follows:

1. The business is advanced a certain percentage of the invoice amount by the factor (funder).

2. A percentage of the invoice amount is held on paper as a reserve by the factor.

3. The factor assumes the right to receive payment on the invoice.

4. The business's client submits payment to the factor.

5. The business is rebated the reserve amount less the factor's fee.

Purchase orders and contracts--a purchase order is a formal agreement that a product is going to be purchased at a specific price while a contract is on a service rather than a product. In some cases money can be advanced in order for a business to be able to fulfill an order.

Commercial leases--may include office properties, industrial properties (warehouses, factories), research facilities or retail properties. The property owner sells future lease payments, or a portion, and does not incur debt or pledge the property as collateral or pay closing costs as in a bank loan. In order to be able to sell future lease payments the lease must have an acceleration clause that secures payments for the full term of the lease. This protects the property owner from tenants who do not fulfill their lease agreements.

Delinquent commercial debt--when a business purchases products or services on terms and then defaults on payment of the debt. Delinquent debt would refer to debt that is more than 30 days overdue. This would be sold in pools or portfolios.

Other business-based income streams could include equipment leasing, aircraft leases, construction receivables, medical receivables, sports contracts, bankruptcy receivables and billboard leases.

Collateral-based income streams include payment streams secured by tangible assets such as aircraft notes, marine notes, mobile home notes, RV and business vehicle notes, equipment notes, automobile portfolios, pre-foreclosed mortgage portfolios, condominium assessments and property tax liens.

Business notes--when a business owner sells a business using owner financing. About 85 percent are sold in this manner. The whole note or partial may be purchased.

Collectibles--high ticket collectible or a collection.

Equipment--printing, computer, office, construction, industrial etc.

Privately held mortgage notes--using seller financing in exchange for a piece of property. Either the whole note or partial may be purchased.

* Residential--houses, townhouses and condominiums.

* Commercial--retail, office, apartment and industrial.

Contingency-based income streams are generated when the amount of the payment may be uncertain or contingent upon outside factors. Examples include:

* Consumer and commercial judgments--this can result from a lawsuit against an individual, business or organization.

* Corporate charitable contributions--a donation made to a non-profit organization by a business or corporation. Corporations may have elected to donate in a series of payments over several months. A funding source could advance a certain amount on future payments. This could benefit the non-profit if it is struggling to meet obligations.

* Royalty payments--a share or percentage of earnings paid to someone who has ownership interest in something generating revenue. They may arise from transfers of ownership in entities such as software, screenplays or other copyrighted works. Also owners of oil or mineral producing land receive royalties.

* License fees--paid to a patent holder for the right to use a name, trademark or other intangible property.

* Others in this category may include inheritances, trust advances and franchise fees.

Consumer-based income streams originate with individuals and are paid to businesses in installment contracts. These installment contracts are usually sold in portfolios.

Purchasing more than one consumer contract lessens the risk for the funding source of a payer defaulting.

* Health and country club memberships, timeshare memberships and retail installment contracts.

* Delinquent debt--may arise from service providers, retailers, financial institutions, hospitals or any other business that allows its customers to pay using credit.

Government-based income streams are paid by the state or federal government to individuals. Lottery winnings would be an example.

Insurance-based income streams encompass cash flow that originates from insurance companies and paid to individuals. They tend to be from legal proceedings or insurance coverage.

* Annuities--could have been purchased by individual or corporation. It may have been purchased for a lawsuit settlement.

* Prizes, awards, casino winnings--this may include installment payments from corporations, foundations, game shows and casinos.

* Structured settlements--damages paid to a plaintiff over a period of time.

The Transaction Process

Gathering information about the cash flow or income stream situation is the start of the transaction process. Information that is needed differs from one income stream to another. Click here to access typical information needed when utilizing business notes in an income stream transaction.

This information is considered and submitted to an appropriate funding source. Funding sources work within certain parameters, categories and risk factors. Based on the information submitted, a funding source will review the transaction and put together a quote or several quotes for different purchase structures.

If the seller accepts the offer, the funding source will proceed with due diligence on the transaction. Due diligence may include:

* Verification of the down payment at time of sale.

* The payer's credit history.

* Tax returns or audited financial statements.

* Cash flow and credit statement.

* Appraisal of the collateral.

* Income/expense reports.

* Copy of the lease for the business premises.

When due diligence is completed and the funding source is satisfied, a title company or attorney may be used to handle the assignment of the business note. The closing process typically involves a long underwriting procedure.

The whole transaction takes approximately six to eight weeks. Underwriting in other income stream areas may take less time depending upon the criteria needed to be reviewed.

When faced with a cash flow crunch, by selling a partial or entire income stream, your clients can have cash now instead of waiting for payments to trickle in.

The following questions are typical issues to be covered when utilizing business notes in an income stream transaction.

Data on the note

* What is the balance owed on the note?

* What is the monthly payment amount?

* What is the interest charge?

* What is the time period or term on the note?

* What was the down payment amount at the time of sale?

* Is there seasoning or time on the note?

* Is it a first position note?

Data on the collateral

* What kind of business is it?

* What is the approximate worth of the business and its property

* Does the business lease its property? When does the lease expire if it does?

* What is the business location?

* Is the business a franchise?

Information on the payer

* Who is the payer? Does the payer have good credit? Does the payer have previous experience running a business?

* Is the payer an individual or corporation? If the payer is a corporation, an individual in the corporation must personally guarantee the note.

Documentation on the income stream

* Is there documentation for the sale of the business? What is the seller trying to accomplish

* Does the seller desire to sell all payments or just a portion of payments?

* How much cash does the seller require, and when?

Article written by Valerie Greenberg a cash flow consultant. Her Michigan-based company, Valerie Greenberg and Associates, works with funding companies and clients nationwide. She can be reached at 248.548.1086 or valgreenberg@hotmail.com.

A Viatical and/or Life Settlement is the sale to a third party of an existing life insurance policy for more than its cash surrender value but less than its net death benefit. The industry generally uses the term “Viactical Settlement” to refer to a transaction involving a terminally or chronically ill insured and a “Life Settlement” to refer to a transaction involving an insured who is not terminally or chronically ill, generally over the age of sixty-five (65). However, as used in the laws and regulations of each state, these terms are not consistently used in this manner. For example, some states use the term “Viatical Settlements” to refer to the sale of all life insurance policies, regardless of whether the insured in terminally or chronically ill or not. And at least one state uses the term “Life Settlements” to refer to all transactions, including ones in which the insured is terminally or chronically ill.

Does my state regulate Viatical and/or Life Settlements?
Viatical/Life Settlements are regulated by state Insurance Departments. Some states have enacted statutes addressing the sale of life insurance policies insuring non-terminally or chronically ill individuals and some only laws that only regulate the sale of life insurance policies insuring terminally or chronically ill individuals and others do not regulate the transaction at all. Of those states that regulate the transaction, most require both the Viatical/Life Settlement Broker (facilitator of the transaction) and Viatical/Life Settlement Provider (purchaser of the policy) to be licensed. Please check with your state insurance department for viatical broker information.

How much money will I get if I sell my life insurance policy?
The value of a life insurance policy is determined by a number of factors, including, but not limited to, the age and medical condition of the insured, type of insurance policy, rating of the issuing insurance company and amount of premium payments to keep the life insurance policy in force.

What types of life insurance policies can be sold?
Most types of life insurance policies can qualify, however, the most common are Universal Life, Whole Life, and convertible Term Life.

After I sell my policy, are there any restrictions on how I can use the money?
No, there are no restrictions on use of the funds – the money is yours to spend as you like.

Are the proceeds of a Viatical/Life Settlement taxable?
The proceeds are tax-free up to the amount you have paid in premiums during the life of the policy. Whether or not and how the balance of the proceeds will be taxed depends on your specific situation. Please consult your tax advisor for additional information.

What are some of the reasons why I might consider the sale of my policy?
- The policy is no longer needed or wanted
- To pay for healthcare costs
- Premium payments have become unaffordable
- Considering lapse or surrender of the policy
- Change in estate planning needs

What happens to the policy after I sell it? (viatical settlement)
All rights and obligations of the policy are transferred to the new owner. You will no longer be responsible for making premium payments on the policy, the new owner will. The new owner will name a new beneficiary of the policy who will collect the proceeds upon the insured’s passing.

Source: RTG Consultants LLC

Having trouble getting a loan for your business? Consider factoring your accounts receivable instead.

A factor works by providing a cash advance based on the total value of the invoices that you provide as collateral. You typically receive 80 percent of the invoice value upfront. Then you receive the remaining value once the client pays the factor, minus a factoring fee. This fee can be structured in any number of ways, but it generally nets out to be about three to five percent of the invoice value.

To quality for invoice factoring, your company must satisfy two basic conditions. First, you should have no existing primary liens on your accounts receivable. Essentially, this means that no other company should have a claim on payments when they come in. This can make it difficult for companies in certain industries like construction to find a factoring company that will take their invoices.

Your customers must also be creditworthy. Factoring only works successfully if clients pay their invoices. Your company's creditworthiness will not necessarily factor into a decision to approve or deny your account. Instead, the factor will focus on evaluating your clients to determine whether and how quickly they will pay their invoices.

There are many factoring companies ranging from small financial service businesses to large banks. Not all will take your business, though. Some specialize in particular industries like manufacturing or medical. Others may require a certain minimum per invoice or total invoice amount before they will conduct business with you.

Take the time to compare your options when choosing a factor. The pricing structure should be a critical point of comparison. Using likely customer payment scenarios, calculate what the total fees will be for the different vendors. Deposit or application fees, the advance rate and monthly minimums should also be explored. Finally, check whether a minimum length contract is required and, if so, what penalties are assessed if you break it.

Definitely inquire about how the factor handles unpaid invoices. Some factors will assume all the risk and not require you to repay the factor if the invoice is not paid within a set period of time in what is known as non-recourse factoring. On the other end, recourse factors will require repayment of funds plus the factor's charges. Treading the middle ground are factors that will allow you to swap in other invoices for the non-payers.

Finally, put yourself in your customers' shoes and inquire about what the invoice handling process will be like from their perspective. Look for a company that is as focused on customer care as you are. You should know that many factoring companies adhere to "notification factoring" where it is clearly indicated on the invoice that payment should go to the factor.

Getting paid in advance for your invoices, even with a percentage taken off the top, might be the right step for your business to take. In this new math, factoring your invoices can help your revenues multiply.

Written by Mie-Yun Lee for BuyerZone.com

Source: Entrepreneur.com

At many property and casualty companies, structured settlements have gained a solid following. Yet, many claim professionals still hesitate to incorporate them into negotiations. This shuts off a viable settlement option, as an outside structured settlement consultant is, essentially, a free resource to help settle open cases.

Some of this hesitancy probably stems from a misunderstanding of structured settlements' role in the claim process. Typically, they are not substitutes for cash settlements, although there are exceptions. Rather, a structured settlement is most effective when used as a complement to cash, a replacement for that part of the settlement designed to compensate future needs.

For a casualty company, the greatest appeal of a structured settlement is the bottom-line impact. Because federal law allows claimants to take advantage of the time value of money tax-free, a structured settlement offers significant additional benefits over cash. By casting settlement discussions in terms of meeting specific future needs, a structured settlement approach helps focus attention on appropriate compensation, rather than on lump-sum demands that may be arbitrary. For insurers, that could mean faster closure of claim files, lower administrative costs, savings on legal bills, and, most significantly, reduced danger of runaway juries.

For the overworked claim professional, there is a more personal benefit. Bringing a structured settlement into negotiations means gaining the services of an outside specialist who also will analyze damages, tailor payment streams, and handle much of the closing paperwork. Because this individual is paid by the life insurance company that issues the structured annuity, there is no additional cost to the claim department.

Increasingly, plaintiff lawyers are receptive to structured annuities, often directly encouraging clients not to accept all-cash settlements. "It's a no-brainer in my view that a structured settlement for someone who's not a sophisticated investor is the right way to go," said Fayrell Furr, president of the Southern Trial Lawyers Association.

Most importantly, structured settlements are purely financial transactions, but ones that provide built-in protection for injured parties and their dependents. When presented forthrightly, they can help overcome claimants' mistrust of something coming from "the other side."

Since 1983, federal law has provided an incentive for parties in physical injury litigation to resolve their cases with structured settlements. The 1983 law and other IRS rulings allow all payments from structured settlements to be income tax-free to claimants if they compensate for physical injury or wrongful death.

Under a structured settlement, a claimant agrees to a series of payments that funds living needs, health care, lost income, children's expenses, and other future needs. The payments can be in varying amounts and incorporate occasional lump sums for identifiable future outlays, such as wheelchair replacement or nursing home fees.

Once both sides agree on a specific payment schedule, liability to make the payments is assigned to an affiliate of the life insurance company. The affiliate then purchases an annuity from its life company parent to fund these payments. The defendant and its casualty carrier receive a complete release from the claimant, which enables them to remove the liability from their books.

For the claimant, the federal laws governing structured settlements offer advantages over cash pay-outs. First, federal law specifies that the annuity must be funded by highly secure investments, typically life insurance annuities or United States Treasury bonds. With this financial security, the claimant need not worry about the economy or the next corporate scandal.

Second, because federal law establishes that the long-term payments from a structure are free from federal income taxes (and such payments usually are exempt from state income taxes, as well), the claimant's net return typically will be higher than realistic returns from taxable post-settlement investments.

Case Resolution

Because most casualty companies have computerized their loss reserve projections for open cases, it should be easy to identify cases with suffix loss reserves above a given amount, say, $50,000. Loss reserve projections should be included for both medical and indemnity, so that workers' compensation cases are not overlooked. Assuming that this information is computerized, however, it is a simple matter to run an open case report.

The claimant's age is extremely important. A casualty company that settles a minor's claim with cash to a parent or guardian risks future liability should those funds be dissipated early. That claimant may argue that the casualty company knew, or should have known, that the parent or guardian was not a suitable custodian of the settlement funds. A structured settlement with periodic payments linked to the child's future needs, for lifetime care if necessary, helps to ensure that will not happen.

As New York Yankee shortstop Yogi Berra once said, "You can observe a lot by watching." The best way to explain the advantages of using a structured settlement is by example. In one case, a small damage claim with minimal need for up-front cash, a six-year-old girl was attacked in her own yard by a neighbor's pit bull. She was bitten several times, including two severe bites to the face. The neighbor's homeowner's policy specifically includes dog attacks and, therefore, liability was clear.

The child's father did not retain counsel; likely, because he believed that he could get a better final settlement without paying attorney fees. He demanded $100,000, claiming that his daughter would need at least one scar revision surgery when she turned 15. The medical report suggested that permanent facial injuries were unlikely.

You make an initial offer of 525,000. The father rejects it, emphasizing the cost of surgery and the child's future needs.

This case is ideal for a structured settlement because the girl's health insurance probably already has paid for her treatment. Therefore, the family likely does not need immediate cash. The entire settlement could be placed into a structure, allowing it to grow tax-free. Moreover, incorporating the structured settlement addresses the father's chief concern: how to pay for his daughter's future medical and living needs.

After internal discussion, you receive authority to make an offer in the low- to mid-540,000 range. Consider the following payment stream:

1. At age 15, the daughter would receive a 55,000 lump sum to provide for a skin surgery, if needed.

2. At age 18, she would receive 512,000 per year, guaranteed for four years, to cover follow-up medical expenses, including therapy.

3. At age 22, she would receive 5500 monthly for five years for post-college needs.

4. At age 30, she would receive a 510,000 lump sum for unexpected future medical or other needs.

The total guaranteed benefit payments equal 593,000, all free from federal income taxes and guaranteed to be paid to the claimant, or her beneficiary if she is not alive when benefits are due. At current interest rates, the cost to fund the annuity that would make these payments is about 544,000.

In the end, the father in this case may prefer to take that settlement in cash. However, by directly addressing his greatest concern, his daughter's future needs, the chances of settling the case improve dramatically.

A Serious Damage Claim

A 45-year-old male laborer, making about 530,000 a year, fell off a scaffold, resulting in multiple injuries to the shoulder, back, and legs. He is likely to be out of work for about three years. The medical report suggested that future medical bills would average 55,000 annually for 10 years.

The accident took place in California, which has expensive workers' compensation costs, meaning that disability, wage loss, and medical claims must be addressed. The plaintiff, represented by counsel, made an opening demand for $1 million. Your initial offer was $200,000, which was rejected outright.

Given the worker's injuries, his immediate financial needs, and his attorney's fees, this claim, inevitably, will begin with a large cash pay-out, say, $200,000. The difficulty in settling this claim, however, involves the worker's future needs.

Consider two options, both costing $400,000. In an all-cash settlement, the worker would see half the lump sum go to his attorney, debt settlement, and other immediate needs. That would leave him and his wife $200,000 to make up for future wage losses, pay medical expenses, and help with retirement.

A good structured settlement broker could produce a payment stream with that remaining $200,000. At current interest rates, the worker would receive:

1. Basic living payments of $1,000 per month tax-free when he goes back to work in three years. These payments would continue for IS years.

2. Medical expense payments of $5,000 per year for 10 years beginning a year after settlement.

3. A $50,000 lump sum at age 65 to assist with retirement.

4. A $100,000 lump sum payment at age 70 to help with medical expenses and future nursing care.

An extended payment stream can work in tandem with other benefits. For example, the $1,000 monthly payments would conclude after 15 years, because the worker then would be 63 and eligible for Social Security.

Either way, the cost to settle is $400,000, but incorporating a structured settlement for half that amount could produce a more attractive payout. The $200,000 placed into a structured settlement annuity would produce a tax-free revenue stream of more than $380,000.

A Catastrophic Claim

A truck that your company insures failed to yield to a pedestrian in a crosswalk. The accident left the pedstrian a paraplegic. Your liability includes his medical bills, lost wages, and loss of job and livelihood. He will need a wheelchair for the rest of his life and his house will have to be refitted for wheelchair access. He has continual pain and will need significant medication and therapy. The victim is 34 and has been given a rated age of 46, meaning that his life expectancy matches that of a typical 46-year-old. His 33-year-old wife, who will be his care giver, also has filed a claim for loss of consortium.

The plaintiffs' initial demand was for $6 million. Your initial offer was $1.2 million.

A case this large could drag on for months. After extensive negotiation and internal discussion, your company agreed to propose a settlement total of $3.4 million. As with the example above, any settlement will involve an initial lump-sum payment. In this case, assume $1.4 million for attorney fees, lien settlements, and cash for the claimant's immediate medical and other living needs, such as fitting the house for a wheelchair.

That leaves about $2 million for future needs. Because structured settlements are funded with life insurance annuities, if a plaintiff's life expectancy is reduced, life-contingent annuity payments will increase. Leveraging the claimant's age rating of 46 allows creation of an attractive payment stream for the claimant to secure a settlement within your budget authority.

1. For basic living expenses, the claimant and spouse/care giver will receive $4,000 per month for the rest of their lives, with the first 30 years guaranteed. This means that if the claimant passes away within 30 years, one or more beneficiaries will be entitled to receive the remaining payments. Alternatively, the settlement can include a commutation that, upon death, pays a lump sum to the beneficiaries based on the value of the unused payments.

2. For major medical expenses, the structure will provide $40,000 annually for the rest of the claimant's life, perhaps to be directed to a trust for the administration of future medical bills. The claimant may be able to gain further benefits by choosing a special-need trust funded by a structured settlement.

3. For wheelchair replacement and servicing, repeating lump sum payments of $40,000 are provided every 10 years for the rest of the claimant's life, compounding at 3 percent per payment, again directed to a medical trust.

This offer directly addresses the claimant's biggest concern, ensuring long-term financial stability. For two people facing years of therapy, this could be highly attractive and conducive to settlement.

As claim professionals know, there is no such thing as a typical case, even among cases of similar settlement size. The above examples are illustrations of possible outcomes using structured settlements. However, with the inherent flexibility of a structured settlement, you and an outside broker have latitude to design financially appealing payment streams.

The key is preparation. It is very important to involve the structured settlement consultant early in the case so that he can begin creating sample payment plans for the claimant. That helps focus attention on how best to compensate specific future needs.

In the end, the decision to accept or reject is solely the plaintiff's. By providing tailored funding, however, claim handlers can focus the plaintiff's attention on his specific future financial needs. That often is the first step in closing a case successfully and within budget authority.

WHO IS THE STRUCTURED SETTLEMENT BROKER?

Many claim professionals bring in structured settlement consultants or brokers to help design claimants' payment streams. The brokers are paid by the life insurance companies that issue the annuities to fund the settlements. Among the jobs that a broker will handle on a typical case are:

* Reviewing the claimant's current and future needs.

* Assisting in determining whether Medicare or Medicaid issues should be addressed.

* Determining whether a rated age is available from the life insurance carriers and then securing the rated age, which lowers the cost of lifetime benefits.

* Preparing and presenting the structured settlement portion of the proposal.

* Preparing and circulating the documents for signatures, and delivering them to the life company funding the structured settlement.

Written by Raymond Blanchfield claims director for American Re-Insurance Co. in Princeton, N.J.

Source: NationalUnderwriter.com

According to Pricewaterhouse Coopers, investment by institutional venture capitalists in startups grew from less than $3.0 billion at the beginning of the 1990's to over $106 billion in 2000. Although venture capital volume has retreated significantly since the economic "bubble" years of the late 1990’s, the present volume of around $ 19 billion per year still represents a substantial rate of growth. Venture capitalists will fund more than 2,500 high growth startups in the U.S. this year.

The growth in venture capital investing has given rise to a relatively new and expanding area of equipment leasing known as "venture leasing". Exactly what is venture leasing and what has fueled its growth since the early 1990's? Why has venture leasing become so attractive to venture capital-backed startups? To find answers, one must look at several important developments that have bolstered the growth of this important equipment leasing segment.

The term venture leasing describes equipment financing provided by equipment leasing firms to pre-profit, early stage companies funded by venture capital investors. These startups, like most growing businesses, need computers, networking equipment, furniture, telephone equipment, and equipment for production and R&D. They rely on outside investor support until they prove their business models or achieve profitability. Fueling the growth in venture leasing is a combination of several factors, including: renewed economic expansion, improvement in the IPO market, abundant entrepreneurial talent, promising new technologies, and government policies favoring venture capital formation.

In this environment, venture investors have formed a sizeable pool of venture capital to launch and support the development of many new technologies and business concepts. Additionally, an array of services is now available to support the development of startups and to promote their growth. CPA firms, banks, attorneys, investment banks, consultants, lessors, and even search firms have committed significant resources to this emerging market segment.

Where does equipment leasing fit into the venture financing mix? The relatively high cost of venture capital versus venture leasing tells the story. Financing new ventures is a high risk proposition. To compensate venture capitalists for this risk, they generally require a sizeable equity stake in the companies they finance. They typically seek investment returns of at least 35% on their investments over five to seven years. Their return is achieved via an IPO or other sale of their equity stake. In comparison, venture lessors seek a return in the 15% – 22% range. These transactions amortize in two to four years and are secured by the underlying equipment.

Although the risk to venture lessors is also high, venture lessors mitigate the risk by having a security interest in the leased equipment and structuring transactions that amortize. Appreciating the obvious cost advantage of venture leasing over venture capital, startup companies have turned to venture leasing as a significant source of funding to support their growth. Additional advantages to the startup of venture leasing include the traditional leasing strong points --- conservation of cash for working capital, management of cash flow, flexibility, and serving as a supplement to other available capital.

What makes a "good" venture lease transaction? Venture lessors look at several factors. Two of the main ingredients of a successful new venture are the caliber of its management team and the quality of its venture capital sponsors. In many cases the two groups seem to find one another. A good management team has usually demonstrated prior successes in the field in which the new venture is active. Additionally, they must have experience in the key business functions—sales, marketing, R&D, production, engineering, and finance. Although there are many venture capitalists financing new ventures, there can be a significant difference in their abilities, staying power, and resources. The better venture capitalists have successful track records and direct experience with the type of companies they financed.

The best VCs have industry specialization and many are staffed by individuals with direct operating experience within the industries they finance. The amount of capital a venture capitalist allocates to the startup for future rounds is also important. An otherwise good VC group that has exhausted its allocated funding can be problematic.

After determining that the caliber of the management team and venture capitalists is high, a venture lessor looks at the startup’s business model and market potential. It is unrealistic to expect expert evaluation of the technology, market, business model and competitive climate by equipment leasing firms. Many leasing firms rely on experienced and reputable venture capitalists who have evaluated these factors during their "due diligence" process. However, the lessor must still undertake significant independent evaluation. During this evaluation he considers questions such as: Does the business plan make sense? Is the product/service necessary, who is the targeted customer and how large is the potential market? How are products and services priced and what are the projected revenues? What are the production costs and what are the other projected expenses? Do these projections seem reasonable? How much cash is on hand and how long will it last the startup according to the projections? When will the startup need the next equity round? These, and questions like these, help the lessor determine whether the business plan and model are reasonable

The most basic credit question facing the leasing company considering leasing equipment to a startup is whether there is sufficient cash on hand to support the startup through a significant part of the lease term. If no more venture capital is raised and the venture runs out of cash, the lessor is not likely to collect lease payments. To mitigate this risk, most experienced venture lessors require that the startup have at least nine months or more of cash on hand before proceeding. Usually, startups approved by venture lessors have raised $5 million or more in venture capital and have not yet exhausted a healthy portion of this amount.

Where do startups turn to get their leases funded? Part of the infrastructure supporting venture startups is a handful of national leasing companies that specialize in venture lease transactions. These firms have experience in structuring, pricing and documenting transactions, performing due diligence, and working with startup companies through their ups and downs. The better venture lessors respond quickly to lease proposal requests, expedite the credit review process, and work closely with startups to get documents executed and the equipment ordered. Most venture lessors provide leases to startups under lines of credit so that the lessee can schedule multiple takedowns during the year. These lease lines typically range from as little as $200,000 to over $ 5,000,000, depending on the start-up’s need, projected growth and the level of venture capital support.

The better venture lease providers also assist customers, directly or indirectly, in identifying other resources to support their growth. They help the startup acquire equipment at better prices, arrange takeouts of existing equipment, find additional working capital funding, locate temporary CFO's, and provide introductions to potential strategic partners--- these are all value-added services the best venture lessors bring to the table.

What is the outlook for venture leasing? Venture leasing has really come into its own since the early 1990s. With venture investors pouring tens of billion of dollars into startups annually, this market segment has evolved into an attractive one for the equipment leasing industry. The most attractive industries for venture leasing include life sciences, software, telecommunications, information services, medical services and devices, and the Internet. As long as the factors supporting the formation of startups remain favorable, the outlook for venture leasing continues to look promising.

George Parker is a Director and Executive Vice President of Leasing Technologies International, Inc. ("LTI"), responsible for LTI's marketing and financing efforts. A co-founder of LTI, Mr. Parker has been involved in secured lending and equipment financing for over twenty years. Mr. Parker is an industry leader, frequent panelist and author of several articles pertaining to equipment financing.

Headquartered in Wilton, CT, LTI is a leasing firm specializing nationally in direct equipment financing and vendor leasing programs for emerging growth and later-stage, venture capital backed companies. More information about LTI is available at: http://www.ltileasing.com.

Source: EzineArticles.com

Did you know that eight out of 10 American companies lease some or all of their business equipment? Put another way, nearly one-third of all business investment in equipment is financed with some form of equipment lease. Despite changes in tax laws and economic conditions, equipment leasing remains one of the most popular means of financing business-equipment acquisitions in this country.

Like many types of financing, equipment leasing is form-driven. Counsel unfamiliar with key legal, tax and business considerations important to this type of financing often fail to spot problem language in some of the forms.

This article will focus on some of the more common "gotcha's" in lessor-generated form documents. Although the article will deal chiefly with financing provided by third-party lessors (as opposed to equipment vendors), most of the considerations listed below are applicable to a wide variety of equipment leases, including third-party and vendor leases, true leases and leases intended as secured transactions, short-term and "full payout" leases, leases of various types of equipment and leases of various sizes. Although advice will generally be given to lessee counsel, counsel for lessors should consider lessee priorities and options in tailoring forms to specific transactions.

Before looking at the terms of the typical lease, a few words about the role of lessee counsel are appropriate. Counsel, particularly in-house counsel representing lessees, need to be aware that equipment leasing is a specialty having a limited overlap with other types of financing. Form documents are prepared, and usually negotiated, by experienced lawyers who specialize in equipment-lease financing. It is rare that the negotiations are conducted on a level playing field.

Adding to the problem is the danger that the client will actually work against its own counsel. If the client has selected the leasing company prior to initiating negotiations on documentation, the leasing company has an immediate advantage and a strong disincentive where negotiating is concerned.

Finally, lessee counsel needs to assemble information about the circumstances of the negotiations before proceeding. The correct response to lessor demands often requires an understanding of the lessor’s and lessee’s respective priorities:

- Know your lessor - Leasing companies come in many varieties, including banks, brokers, equipment specialists, captives, independents and companies of all sizes. Each has a different level of flexibility as to various matters, such as the ability to provide future funding for upgrades or equipment additions, regulatory and practical limitations on the acceptable amount of end-of-term exposure (the "residual assumption"), and the ability to fund the transaction should a change occur in prevailing interest rates or other circumstances between execution and delivery.

- Know your equipment - Will the equipment require special maintenance and does the lessee want to provide this maintenance in-house? Is it likely that the equipment will require upgrades or modifications during the lease term? Is it likely that the equipment will become obsolete or otherwise undesirable during the lease term? Is it likely that the equipment will become essential to the lessee’s business so that the lessee will want the right to purchase the equipment at the end of the term for a pre-agreed purchase price?

- Know your client - Is the lessee likely to merge or undergo another change of circumstances during the lease term? Is the lessee particularly rate-sensitive? Does the lessee have other means of financing equipment? Is it likely to be necessary to move the equipment during the term or to make other arrangements?

Some of the most serious problems with equipment leases come at the very outset. Most leases provide that the lease term does not start until the acceptance date (or commencement date), which is the date on which the lessee signs an acceptance certificate indicating that it has inspected the leased equipment and found it to be in acceptable condition.

Once the acceptance certificate is signed, the lease become irrevocable and is an absolute obligation of the lessee. Virtually all equipment leases contain a hell or high water clause stating that the lessee must make payments in all events, even if the equipment fails to function properly. The hell or high water clause is never negotiable. Lessor counsel usually responds by comparing the lease to a loan financing, in which the borrower is not permitted to cease making payments to the bank should the collateral fail to function as desired.

With this in mind, it is crucial that the lease provides that the lessee has the absolute right to reject equipment that does not properly function. Consider the two following provisions regarding commencement of the lease term:

The lessee shall be deemed to accept the equipment upon its delivery and installation by the supplier and shall evidence such acceptance by execution of an acceptance certificate.

Upon delivery, the lessee shall inspect the equipment and, if the lessee determines in its sole discretion that the equipment functions properly, the lessee shall execute an acceptance certificate.

A second, related issue is whether the term of the lease begins prior to the date the lessor makes payment to the vendor. Should the lessor be entitled to a 30-, 60- or 90-day "float" while the lessee is paying lease rentals? Is there a danger (given the size and nature of the leasing company) that the lessor will go out of business and be unable to make the required payment to the vendor after the lessee has signed an irrevocable lease?

A third issue that often escapes attention at the outset of a lease is the matter of interim rent. Most leasing companies, and many lessees, prefer to pay rent on the first or fifteenth day of the month. Because the lease term starts on execution of the acceptance certificate, it is unlikely that the actual lease commencement date will fall on the first or fifteenth day.

Most leases provide that the lessee pays interim rent during the period from actual acceptance to the pre-agreed first rental payment date. On its face, it seems perfectly logical to calculate this rental as 1/30th of a monthly rent payment (or 1/90th of a quarterly payment).

Consider, however, that the lessee generally calculates the amount of rent it will be paying over the agreed term of the lease: 36, 48, 60 months, etc. Paying a full interim rent can increase the lease term by as much as 29 days (89 days in a quarterly rent lease).

In some circumstances, this does not present a problem for the lessee. Often, however, the lease is a full payout lease, in which the lessee is aware that it is repaying the full initial purchase price of the equipment with implicit interest over the lease term. If so, by paying interim rent, the lessee is paying more than the entire purchase price of the equipment. Even in a shorter-term lease, the additional payment is something for which the lessee has not bargained.

Standard responses often acceptable to the lessor include shortening the lease term by the number of days during the interim rent period or requiring the lessee to pay only an interest factor between acceptance and the first day of the rental term. Many lessors, especially those who will delay actually paying the vendor for the equipment, are willing to forego interim rent altogether.

From an equipment-use perspective, leases are generally more restrictive than secured loans. Most form leases prohibit movement of the equipment to a new location without "lessor’s prior written consent." If the lessee desires to move the equipment, it should negotiate the right to do so by simply giving the lessor advance notice.

The issue of modifications and upgrades is key to many types of equipment, particularly technology equipment. Absent strong language in the lease, and a lessor with the ability to do so, the lessee has no right to obtain additional financing for equipment upgrades.

Moreover, many leases contain language prohibiting any alterations or modifications of leased equipment without prior written consent of the lessor. Many leasing companies are willing to permit at least readily removable alterations if the lessee requests this right during the documentation negotiations.

Consider also the effect of the following language on the lessee’s ability to obtain financing for any modification or upgrade:

Any item of equipment attached to the equipment shall become an accession and deemed owned by the lessor upon attachment.

This language, which can subject the lessor (and the lessee through indemnification obligations) to additional income taxes, can prevent the lessee financing a desired upgrade or addition through a third-party institution or bank. Again, where the modification can be removed without substantial damage to the leased equipment, the lessee should have the right to do so.

Equipment leases are designed to run for a specified term and then, absent a purchase option, obligate the lessee to return the equipment to the lessor. Often, however, the lessee will need flexibility in dealing with the equipment. This is particularly true in the case of technology equipment and where the lessee’s circumstances may change because of the availability of more productive technology.

Many lessors are willing to allow the lessee an early termination option (ETO). If a lease is silent with regard to an ETO, the default cost to the lessee will normally be all (undiscounted) remaining lease payments - a highly unattractive option. Under an ETO, the lessee may terminate the lease by either returning the equipment to the lessor or arranging for its sale to a third party. In either event, the lessee is responsible to pay a termination value, calculated as an amount to preserve the yield the lessor originally anticipated earning over the full lease term.

A termination value schedule may be incorporated into a lease, which specifies the termination value to be paid during any month of the lease. Such values are typically expressed as a percentage of the original cost of the equipment under lease. A termination value as of a particular month is generally equal to the present value of remaining lease payments (that would have been paid had the lease run its full course) plus the present value of the residual value originally booked by the lessor, adjusted for tax effects.

Many lessors inflate residual assumptions when calculating termination value to protect potential windfall profits on the equipment. Savvy lessees, however, understand that termination values so calculated leave a lessor better off than had the lease run full term because (1) the lessor’s yield is preserved; (2) any sales proceeds obtained for the returned equipment is pure "upside," and (3) equipment returned prior to the end of the lease term is typically more valuable than the end-of-term residual value assumed by the lessor in agreeing to the lease. Termination values can be lessened by astute negotiation focusing on the lessor’s actually anticipated residual value.

Other lessees may prefer an early buy-out option (EBO). An EBO gives the lessee the right to purchase the equipment from the lessor for a pre-agreed amount. Again, this purchase price covers the lessor’s anticipated return.

The difference between the two is fairly obvious: Under an ETO, the lessee parts with the equipment for an agreed-upon cost to cancel. Under an EBO, the lessee purchases the equipment during the lease term. As such, the EBO really protects only the lessee’s initial cost-of-funds assumption; if interest rates fall or lessee acquires additional funding ability, an EBO may be preferable. On the other hand, the cost of exercising an EBO will normally be significantly higher than an ETO. This is because the lessor’s hoped-for residual upside must be recovered, as well as the conservative residual estimate the lessor originally assumed. Further, the lessee will in all likelihood be required to pay sales tax on exercising the EBO, since title will pass to the lessee - a cost not relevant to the ETO case.

A third, often overlooked, alternative is the sublease right. Subleasing is often available where the lessor is not in the position to offer an ETO or an EBO, or the lessee cannot negotiate either of those two options on acceptable terms. In order to avail itself of the sublease option, however, the lessee must be in a position to market equipment to similarly situated lessees who may be better able to use the leased equipment. In a large organization, prospective lessees could be sister companies, which might make the search for a potential user less daunting.

Common to virtually all leases is a requirement that the lessee insure the leased equipment and be responsible in the event the equipment is damaged or destroyed. Among the key issues to be considered in this portion of the lease are whether the lessee desires the right to apply insurance proceeds to replace leased equipment (preserving the financing and expediting acquisition of replacement equipment) and how the lessee’s obligation with respect to loss or destruction is calculated.

Most leases provide that the lessee must pay (through insurance proceeds or otherwise) the stipulated loss value (SLV) or casualty value of the equipment. In theory, the SLV simply compensates the lessor for its anticipated return on the lease at the end of the term.

SLV and EBO values are very much the same, since the lessor is disposing of its interests in the leased equipment under either scenario. An SLV value for any month during the lease should equal the present value of remaining lease payments and originally booked residual value (as in the ETO case), adjusted for tax effects. The lessor often increases the residual value component to cover its potential upside on disposition of leased equipment. In fact, SLVs typically are significantly higher than their theoretical value because of aggressive residual value components (and lack of lessee understanding). Significant improvement (reduction) in the cost of SLVs can be achieved by vigorous negotiation.

Before leaving this area, counsel should be careful as to the wording of any replacement "option." Many lease forms currently require the lessee to replace equipment that has been destroyed. The option to replace should always rest in the lessee because that company should be fully compensated through payment of SLV. Also, care must be taken as to the precise wording of what is permissible as replacement equipment. Standard language often requires identical replacement equipment, or equipment from the same manufacturer. Greater flexibility in substitutable equipment is desirable in most cases.

At the end of the lease term, most leases state that the lessee must return the equipment to: "a location designated by the lessor within the continental United States." Return is to be at the lessee’s own cost and exposure, but often by a common carrier or other means selected by the lessor.

Many consultants urge that the lessee not agree to pay the cost of return of the equipment as the purchase price usually includes the cost of freight-in. The lessee should be aware, however, that refusing to pay for return delivery usually results in higher lease rates because it affects the lessor’s assumed end-of-term residual-value recovery.

A better negotiating position is often to limit the areas to which the equipment must be returned, such as return within a 100-mile radius of the lessee’s place of business, or to negotiate a cap as to the financial obligation to be incurred by the lessee.

Another common pitfall is language reading as follows:

At the end of the term, the lessee shall deliver the equipment to a location within the continental United States specified by the lessor, fully de-installed and crated and recertified by the manufacturer for future use.

This language would require the lessee to cease using the equipment, de-install it and have it checked by the manufacturer for recertification during the lease term. Better language requires the lessee to begin these procedures at the end of the term, assuring the lessee full use of the equipment during the entire lease term.

As to purchase and renewal options, the best advice is for the lessee's counsel to read carefully the printed form. Many draftsman insert in "standard" language terms such as the following:

So long as the lessee is not in default hereunder, the lessee shall have the option to purchase the equipment at its fair market value (as determined by the lessor)"; or "at the greater of fair market value or 10 percent of the original equipment costs …"; or "… at the fair market value as determined by mutual agreement or, if the parties cannot agree, by an appraiser selected by lessor ….

Many of the problems with these types of language are readily apparent. What is not so apparent is the use of the term "in default." Unless otherwise defined, this would deny the lessee the right to exercise its purchase option (or, if used elsewhere, its early termination, early buy-out, replacement or renewal option) if the lessee is one day late in providing annual financial statements, paying a property tax or taking any other action. Better language reads "so long as no event of default has occurred and is continuing hereunder," giving the lessee the benefit of any grace period.

In the case where options to renew the lease or purchase the equipment at lease end are important, it is important to have a more objectively determined fair market value process than the standard provisions summarized above. Many leases are silent altogether regarding such options.

Also, the stated language requires the lessee to purchase the "equipment," which is likely to be read as "all but not less than all equipment." If the lessee desires the right to purchase only selected portions of the equipment, the language should so state. The language is particularly onerous if the lease covers many types of equipment, such as a computer, telephone system and fleet of delivery vans.

Because of its popularity, equipment leasing has emerged as a distinct form of financing. Counsel faced with lessor-generated documents should be aware that it is not merely negotiating another loan-type arrangement, but attempting to work in a field dominated by full-time specialists. Careful reading and education will go far in leveling the playing field.

By Barry S. Marks and James M. Johnson

Marks is a shareholder with Berkowitz, Lefkovits, Isom & Kushner in Birmingham, Ala. Johnson is a professor of finance in the Graduate School at Northern Illinois University in Dekalb, Ill.

Source: American Bar Association

Key limitations on equipment use - Ability to move equipment to new location - Ability to secure financing for equipment upgrades - Right to modify or improve equipment - Right to remove modifications free of lessor claims

Provisions adding flexibility - Early termination option - Lease terminated. Equipment returned to lessor. Lessee guarantees lessor return when equipment sold to a third party. - Early buyout option - Lease terminated. Lessee purchases equipment for pre-agreed price. - Sublease right - Lease term continues, with lessee obligations remaining in place. Equipment possession transferred to a third party, who pays rental to lessee (or to lessor by assignment). - Assignment right - New lessee assumes original lessee duties under lease. Original lessee is released.

Return and purchase option - Who must pay cost of return (shipping, insurance, de-installation)? - To what location must the equipment be re-delivered? - When must de-installation, crating and shipping be completed (when must it start)? - How is fair market value calculated? - May lessee purchase less than all equipment?

One of the easiest ways to establish credibility as a cash flow consultant is by being perceived as a professional. You can do that by using the process that professionals use.

What is this process? It is following steps that lead to the discovery of clients needs and wants and, ultimately, a solution to their problems. Doing things in this manner instantly makes people perceive you to be a professional.

Think back to the last time you visited any professional. (For our purposes, we will define a "professional" as a doctor, lawyer, accountant, and even an upscale automotive salesman.) What was the process they used? By the very act of following a specific set of procedures, this "professional process," they established themselves as professionals.

Here it is, in the short form:

1) Qualify
Find out if the client is qualified. When you go to a doctor's office, the first thing they do is qualify you (your ability to pay, the nature of the treatment you require). Then the doctor sits with you and asks close-ended questions. Such as, "Where does it hurt?"

The first step in the process for a cash flow consultant is to determine if a client qualifies. The next step is to determine if you can help them. In cash flow, you do that by asking qualifying questions. These are short, close-ended questions. If the prospect is selling a mortgage, here are some questions to ask:

- Are you receiving payments on a cash flow stream? What is the cash flow stream?
- How many months have you received the payments? Are they on time?
- What is the note balance?
- What is the monthly payment?
- What is the interest rate?
- What is the credit of the payor?
- What is the loan to value?
- How old is the collateral?
- How much money do you need?
- Other streams would have similar questions tailored to their needs.

With factoring, you would ask different close-ended questions. Notice that the questions are structured to elicit a short, one-word response:

- Is this business to business?
- Do you have invoices?
- Do they pay in a timely manner (30 to 90 days after invoice is presented)?

By asking these questions, you determine quickly if you can help the client. In the qualification process, eliminate those clients that you can’t help. The process consists of close-ended questions (probing questions that can be answered in short sentences) and amplifying questions (questions that amplify the probing questions and require more elaborate answers). The next step is the most important aspect and is ignored by non-professionals.

2) Needs/benefits analysis
A doctor does his needs/benefits analysis through a process they call an examination. If a doctor brought you into the office and, without examining you, told you that you needed surgery and whipped out a knife and start waving it at you, you would run out of his office. The same rules apply to you as a certified cash flow consultant. You have to build your credibility by asking open-ended questions to determine the client's motivation, situation, and circumstances.

One of the first questions that my mentor used to ask was "Can you tell me a little bit about your situation?" He called it "intense listening." As the client described his situation, my mentor would direct the conversation in a series of open-ended questions.

Here are some open-ended questions that you want to ask:

- Can you share with me a little about your situation?
- Can you tell me a little about what you want to do?
- If you had the cash to grow, how would you do it?
- What would growing your business quickly do for you? (Let them visualize this. Let them own the vision, and let them understand that the avenue to reaching that vision is by following your lead.)
- Determine broadly what the clients needs are and when they need something to happen, then narrow them down to specifics.

As you listen, look for indications that what they are saying is important to them. If they become animated in response to one of your questions, go deeper and probe. (If their eyes are bright and their pupils dilate, they are excited. If their eyes glaze over, they are not interested in that aspect.)

Think of the needs analysis process as a funnel. The top of the funnel is very wide. At each step of the way, you are probing deeper and attempting to determine the clients’ needs and to have a laser-sharp focus on achieving that need.

At times, you will need to go back and ask qualification questions. It might be that you had thought that a specific deal was a straight factoring deal, but after doing extensive questioning, you determine that the client would be better served by first doing purchase order funding, followed by invoice factoring. Don’t pigeonhole the clients until you have started asking the questions that you need to get a deeper understanding of their businesses. You want to get to know their needs better than they do by asking open-ended questions.

If you do the needs/benefits analysis well, you will spend the majority of your time in this section. If you try to rush to the close, you will have a very limited success rate.

The majority of your time should be spent doing a needs/benefit analysis with a qualified client. When you go in depth with the clients, you will be delving into areas that they possibly haven’t explored before. They will be flattered and want to tell you EVERYTHING. Your challenge is to channel the conversation and guide it to a deeper understanding of what their needs are in their business. Your role is to guide the client toward their goal. Think of it as herding cattle, not cats. Cattle can be driven to a destination; cats wander aimlessly.

Let's clarify what the needs/benefits analysis is not. It is not getting chummy with the person and having a free-flowing conversation with no goal in sight. Instead, it is a focused, intense listening session where you are probing with open-ended questions and clarifying with close-ended questions to discover exactly what the client desperately needs.

Your goal is to discover their road to success, even if they don’t know the direction. When you give people a goal and a plan, it is not a difficult task to convince them that they should take that path with you as the guide, rather than going with another service provider.

They already know the answer; your task is to find it within them. By finding out specifically where they want to go and how they want to get there, you will be facilitating their solution to their problem. When you get to the close, it will not be a surprise; they will have helped you prepare it.

3) Presentation
In the presentation, you are going to be doing a summary of their wants and needs and presenting proposed solutions. In the doctor analogy, the presentation is the diagnosis. "According to my examination and after receiving the results of the tests from the lab, it appears that you have … In cash flow, you would want to state; "According to our discussion and after having done due diligence to determine the best solutions for your business, it would appear that ..."

You want to get acknowledgement at this point that your proposed solutions are correct. By articulating the question, you typically answer the question. One of my students uses a phrase to summarize, "If I understand you correctly, you are stating that ... " Use that phrase. You want to find out what the client feels is his need so that you can accurately identify the solutions.

If you have done a thorough needs/benefits analysis, the clients will agree with your summary and you are ready to skip quickly to the price and close section. If they have objections, the presentation stage is the perfect opportunity to handle them. You haven’t moved toward the close; instead, you are clarifying and perfecting the solution. The clients are going to assist you in helping close the sale because they are telling you exactly what they are looking for. The more thorough the discovery stage is a needs/benefit analysis, the easier the close will be.

Here is where you are going to do the needs/benefit analysis. You are going to match up their needs with your benefits. Let's do an example.

Needs:
- To not have payments show up on debt to Income ratio or credit report
- To not have to borrow money to make payroll
- To have cash to purchase supplies to manufacture materials to sell at a profit
- To have greater ability to get more cash as needed

Our benefits are:

- We will buy the invoices for cash
- Since this is a purchase, it will not affect the debt-to-income ratio and will actually improve their credit report
- The purchase will provide cash to purchase supplies; with cash, the client can make volume purchases and get a large discount
- The faster the client grows, the more factoring can help it. At a certain point, it will grow out of the need to factor, unless it continues rapid growth
- This will relieve the client’s stress about needing cash and being able to pay their bills
- We match up their highest need with our highest priority: If they have a need for which we don’t have a benefit, ignore it.

We will simply address our strongest benefits. You have just found out their concerns and solved their problems.

4) Price
In a doctor’s office, the price section is handled by the reception ists. Doctors are smart. You want to have the price be so far into the process that the benefits outweigh the offer that you are making. People are looking for a professional to lead them by the hand and solve their problems. If you follow the professional approach, they will gladly accept your price.

In cash flow, the price (or quote) is determined by the funding source. When you have done a thorough job with the needs/benefits analysis, you will have solved the clients’ problems and earned their eternal thanks. They will be grateful to pay your fee because you have earned it.

5) Close
In a doctor’s office, the close is usually so routine that you don’t even think about it. "Why don’t we schedule your heart surgery (that is going to cost $100, 000) for next Tuesday?" In cash flow – following the professional process approach, you want to have the summary of benefits in relation to needs be agreed upon before you ask for the close. By the time you get to the close, the client will see the benefits to their solution clearly and be more eager to close than if you do not use the professional process. "If you would like to move forward on this, for all of the obvious reasons, let's start by just putting some thoughts on paper. What’s your full name?" (And start filling out the worksheet.)

In the traditional sale, the close is a high-powered, nerve-wracking test of wills where the high-pressure salesperson power closes a customer, not a client, by forcing his will upon him. Sales manuals are filled with examples of closing techniques to distract, mislead, and overpower the customer.

Using the professional sales approach will create a collaborative atmosphere, rather than an adversarial atmosphere. You will have manifested ultimate professional credibility. The clients will willingly allow you to lead them to a beneficial solution to their problem.

As Jay Abraham, the marketing guru and author of Ho w to Get Everything You Can out of All You’ve Got, describes it: "A customer is somebody that you sell things to. A client is someone under your protection."

If you treat your seller like a customer, you will be taking yourself out of the professional process. If you treat him like a client, he will be working with a professional.

Written by Reed Sawyer a Member Advisor Specialist for the Dynetech Corporation.

Source: The American Cash Flow Journal - October 2005

What is a wraparound seller-financed note? It is simply a second promissory note carried back by a seller who continues to pay the existing first note. The key to a wraparound is that the seller continues paying the first note after selling the property, just as they did before they sold it. At the same time, they now receive a larger amount from their second note which is now owed to them by their buyer. The buyer gets title to the property, but the seller remains in control and remains legally responsible for payment of the first note.

By: Lorelei Stevens, President
Wall Street Brokers, Inc.

The first note, which is now "wrapped around" by the second note, is known as the "underlying" note. Thus, when you hear people say they just sold property on a wraparound and are still paying their underlying, it is not a secret code. It is common real estate jargon for a fairly common transaction. A wraparound is also sometimes called an "all-inclusive".

For example, let's say you own property and are paying the underlying mortgage, which has a balance of $30,000.00. You want to sell the property. You would like to sell it for $90,000.00, yet keep control of the $30,000.00 underlying note to make sure that it gets paid. Your best option would be to sell the property for $90,000.00 to a buyer who has an adequate down payment, say $20,000.00, and who qualifies for a wraparound second mortgage note for the $70,000.00 balance.

In this case, the $70,000.00 second "wraps around" your existing $30,000.00 underlying first mortgage. The wraparound does not change the underlying mortgage at all. The $70,000.00 second wraparound is owed to you by your buyer, while you still owe $30,000.00 to your lender on your underlying mortgage. However, you now have a $40,000.00 equity as follows: Your sales price of $90,000.00, minus the $20,000.00 down payment, equals the $70,000.00 second mortgage wraparound note, minus the $30,000.00 first mortgage, equals a $40,000.00 equity in the second mortgage, your wraparound note.

Why would you want to use wraparound financing? Because this simple transaction can solve some very complex problems:

CONVENIENCE

One notable appeal of a wraparound is convenience. It has the selling point that your buyer has only one mortgage payment to make, whereas in an assumption or similar type of financing, your buyer will usually end up with two mortgage payments and a lot of red tape. Making the sole agreement with you, and paying on one wraparound note, is easier for your buyer to understand and may help you make the sale.

BETTER THAN AN ASSUMPTION

You will also find the wraparound to be a nearly ideal solution to the problems of selling on "assumption". There are two kinds of assumptions, one of which leaves you completely liable for paying the first mortgage, but completely unable to control the property or your buyer's performance. In a such a "simple" assumption, if the buyer fails to make payments on your first mortgage, you in many cases will not even know about it until the mortgage is about to go into foreclosure, and by then you may have no power to re-possess the property. Any of the buyer's late payments may automatically appear on your credit rating and public and legal documents. These are serious disadvantages of simple assumptions that sellers rarely take into consideration.

The other type of assumption is called a "novation", which is a legal term for a new agreement that substitutes one debtor for another and requires permission from the underlying first mortgage lender. Novation assumptions are expensive, time-consuming, and sometimes impossible to get. Even though a novation assumption removes your legal liability for the first mortgage, the underlying lender may charge substantial fees because your new buyer must undergo credit and financial investigation similar to what you did when you got the loan. Some lenders simply refuse to grant novation assumptions for policy reasons.

Assumptions are so precarious that sellers, when possible, should avoid using them altogether and use the wraparound instead. However, it is recommended that you get written permission from the underlying lender approving your sale of the property on a wraparound. If the underlying will allow an assumption, chances are the underlying will allow a wraparound sale. Even if your underlying includes a "due on sale" clause, calling for a payoff of the underlying if you sell the property, sometimes a lender will waive it and allow your wraparound sale to go through.

Using a wraparound, instead of an assumption, gives you these advantages:

(1) Staying Informed. You completely avoid the problem of having your buyer fall behind on their wraparound payments without your knowledge. Because you make the payments on the underlying first mortgage yourself, you stay informed on the payment status of the underlying.

(2) Maintaining Control. Because the payments you receive from your buyer on the wraparound note are larger than the underlying, you have sufficient funds to pay the underlying first mortgage and are in control over the funds. If wraparound payments fall behind, you know it immediately. If necessary, you can foreclose on the property and thereby exercise the greatest control possible.

(3) More Money. Tailor the wraparound to get better terms and conditions from your buyer than those you are paying to your underlying first mortgage lender. For example, you can charge a higher interest on the wraparound than you are paying on the underlying, or you can get a larger monthly wraparound payment, or you can do both. Even a 1% increase in the interest rate would provide you with a nice additional amount every month over what you would get otherwise, because you would be making an additional 1% on the underlying principal balance. A higher monthly wraparound payment could mean a faster cash return to you.

(4) Income Tax Advantage. A wraparound is an installment sale and the payments you receive may be taxed as you receive them. The taxes you may owe on your profit can be spread out over the years the payments are received.

STRUCTURING YOUR WRAPAROUND

The first step in constructing a wraparound is to review the underlying first note and mortgage thoroughly because, in order to benefit financially, you must structure your wraparound with better terms than those in your underlying first mortgage. If you don't know the details of the underlying first mortgage, you can't make the wraparound better. It is not unusual to have more than one underlying, and you need to review all underlyings that you are planning to "wrap around".

THE BASIC RULE

The basic rule of wraparounds is this: Create equal or better terms on your wraparound than exist on the underlying. You want the principal balance, monthly payments, and the interest rate on the wraparound to be as large or larger than the underlying. If the underlying contains a balloon payment, for example, you must write a similar balloon payment into your wraparound. (With balloon payments, it's preferable to make the wraparound balloon payment due a few months earlier than the underlying, to give yourself time to pay the underlying balloon from other sources if you do not receive the balloon payment on the wraparound.) Similarly, if the underlying contains a provision for collecting tax and insurance reserves, your wraparound must also include such a provision. If the underlying contains a pre-payment penalty, a variable payment clause, a variable interest rate, a late charge provision, a due on sale clause, or any other cost item, you must also write such items into the wraparound. Likewise, the general terms of the underlying, including promises to keep the property in good condition, to allow no waste, and so forth, must also be reflected in the wraparound.

PREPARE AMORTIZATION SCHEDULES

The second step in constructing a wraparound is to print out amortization schedules for both the wraparound and the underlying, to make sure that the wraparound takes at least as long to pay off as the underlying. It is important to understand the reasons for making them both amortize out at the same time. First, because you rely on the income from the wraparound to pay the underlying, you must construct your transaction so that the money flow from the wraparound does not stop before you pay off the underlying. This is a safeguard for both you and your buyer. It protects you from inadvertently spending the wraparound income on something else and it protects the buyer from your potential failure to pay on the underlying. This protection is vital for a successful wraparound. (Comment: If the underlying has a variable interest rate, you cannot print out an accurate amortization schedule).

Your amortization schedules on both the underlying and the wraparound will reveal if there is any difference in pay off dates.

If they pay off at different times, there are two basic ways to make them pay off simultaneously: (1) If the underlying pays off first, you can hasten the wraparound payoff date by inserting a "payment in full" provision in the wraparound. This provides for a complete wraparound payoff at, or prior, to the underlying's payoff date. (2) If the wraparound pays off first, you can hasten the underlying payoff date by arranging to make larger payments on the underlying so it pays off at the same time as the wraparound. Another approach to the problem of the wraparound paying off first is to lower the payments on the wraparound. Structure your transaction so that the wraparound payments become lower at the time the balances on the underlying and the wraparound are equal. From that point on, lower payments will extend the payoff date of the wraparound so it will pay off at the same time as the underlying. You want to make the wraparound pay off as rapidly as possible, which is why you should not allow lower payments for the entire term of the wraparound. Keep in mind that the faster the wraparound pays off, the more it's worth if you need to sell it for cash.

The ideal wraparound that pays off at the same time as the underlying is not the only approach. There may be reasons for allowing the underlying to pay off first. If you are not concerned about having to sell the wraparound for cash in an emergency, then lower payments, that continue longer than the underlying, may be your best option. The benefit of this choice is that once the underlying is paid off, and you no longer need to make payments on it, all of the wraparound payments go in your pocket. An increased cash flow, which extends far out into the future, may be exactly what you want. However, once you make this choice of lower wraparound payments over a longer period of time, you cannot undo it. If an emergency forces you to sell the wraparound, you will get less cash than if you had made it pay off sooner because of the time value of money.

DUE DATES

An important aspect of income management is to make the monthly wraparound payment due sooner than the monthly underlying payment date. This way you will have the funds needed to pay the underlying on time to avoid late charges and a blot on your credit report. If possible, the best plan is to make one payment ahead on the underlying at the time your property sale closes. By doing so, you always have a month's leeway.

FIRE/HAZARD INSURANCE

Another cost management detail you must handle is to cancel your fire/hazard insurance on the property. Your buyer must obtain such insurance and if you fail to cancel yours, there will be two outstanding policies covering the property which is a waste of your money. You and the underlying should both be named on your buyer's policy, you as second mortgagee and the underlying as first mortgagee.

PROFESSIONAL SERVICING

It is good practice to have a professional servicing agent collect the payments from your buyer and disburse the underlying payment portion to the underlying mortgage holder and the remainder of the wraparound payment to you.

Using a professional servicing agent is preferable to allowing your buyer to pay the underlying portion directly to the underlying mortgage holder. The buyer legitimately wants an assurance that you will not fail to make monthly payments on the underlying, but if you allow such language into the wraparound note itself, it could render the note "non-negotiable" and thereby substantially decrease its cash resale value.

The reason your wraparound note may be non-negotiable with such language is that terms and conditions of another note would be governing the wraparound note. This negates negotiability and is language you wish to avoid. You can give your buyer assurance that the underlying will be paid by engaging a professional servicing agent to perform all collections and disbursements on time.

LIMITING YOUR RESPONSIBILITY TO PAY THE UNDERLYING

Consider having a separate agreement with the buyer agreeing that you are not bound to pay the underlying payments unless you receive the payments from the buyer on the wraparound. In an extreme case, if your buyer quits paying you on the wraparound and the value of the property substantially diminishes you could "walk away" from the situation and take your losses without being concerned that the buyer could hold you responsible for keeping the underlying payments current. While this will not change your obligations between yourself and the underlying, it could help protect you from claims by your buyer.

CONSULT YOUR PROFESSIONALS

Be sure to consult a qualified real estate attorney to assist you in structuring any wraparound. You should also contact your tax professional to evaluate tax considerations. Furthermore, an expert in seller-financing can assist in structuring your wraparound.

By: Lorelei Stevens, President
Wall Street Brokers, Inc.

In the mid-1980s, when the AIDS crisis was at its height, insurance brokers offering terminally ill patients cash upfront for their life insurance death benefits began flocking to Miami. But the "viatical" industry, attracted by the area's large population of seniors and HIV patients, was plagued by fraud and unscrupulous practices.

One of the main reasons: The amount investors pay for policies largely depends on the life expectancy of policyholders, a patently unpredictable factor.

Here's an example of how the policies work: Through a broker, an investor pays the holder of a life insurance policy $50,000 upfront for an insurance policy with a death benefit of $100,000. The investor continues to pay the premiums, so the longer the policyholder lives, the smaller the return and the longer it takes to collect.

Now with a new name--"life-settlements"--and a target client base that extends beyond terminally ill patients, viaticals are finding support among mainstream institutional investors such as AIG, Berkshire Hathaway and GE Capital. The financial service professionals are promising credibility and accountability.

"We're now seeing a house-cleaning that was borne from the sins of a decade ago," says Gary Brecka, president and managing principal of Miami Beach-based Life Asset Group, a year-old firm that brokers policies. Like others entering the field, Brecka is a licensed securities broker who sees life insurance policies as estate-planning vehicles.

Brecka and other upstarts promote strict guidelines and support tightened state oversight. Firms such as his broker policies only to institutional buyers, not individual investors, who are the source of most fraud complaints. Only a small amount of his firm's business involves terminally ill patients, a highly speculative market segment fertile with abuse. Many policyholders taking Brecka up on his offer are young and healthy.

But unlicensed brokers still plague the industry, and the Florida Office of Insurance Regulation routinely receives complaints from investors who say they were misled about the life expectancy of a policyholder.

Bob Lotane, a spokesman with the Office of Insurance Regulation, says while recent legislation has added protection for policyholders and investors, the nature of the business--essentially speculating on when people will die--is bound to produce complaints.

Brecka disagrees: "This industry has grown phenomenally over the last few years. As awareness grows, people will see it as a mainstream estate-planning tool just like any other."

Source: David Villano for Trend Magazines, Inc.