FHA loan to buy a house that needs work.?

My brother was approved for $200,000 through an FHA loan, 3% down payment, he offered the full asking price for a house that is in foreclosure ($179,900). Its been on the market for 3 months and the price has been lowered twice. (3,071sq ft. 4bd/3.5 on 4.2 acres)
The last owners, took all the light fixtures, all the doors, and made some holes on the walls. The property is full of garbage and overgrown shrubs, but no damage or anything that will have to be fixed, just cleaned up.
I've been reading about FHA loans, and most people say that properties that need work can not be purchased with an FHA loan. Is it true?
We have family and friends that work in construction, so we would be doing all the repairs.. Won't go over $5,000.
We were told by our realtor, that we would get a respond from the bank in about 5 business days...

What are your thoughts on this?

This is in central California, where most home prices have fallen by 50%
california construction loan

California reverse mortgages are becoming extremely popular with seniors in this state since The U.S. Department of Housing and Urban Development (HUD) created one of the first.

"A reverse mortgage in California allows older Americans to supplement social security, meet unexpected medical expenses, make home improvements or take a vacation by converting a portion of the home equity into cash," states George Lincoln, Vice President of http://FreeFinancialConsulting.com

"FreeFinancialConsulting.com is not a mortgage broker but offer free advice

to the public on all personal money matters, including all home loans, and California reverse mortgages. California reverse mortgages are of interest to seniors and children that are concerned about their parents' financial well being in later years."

"Unlike a traditional home equity line of credit (HELOC) or second mortgage, repayment is not required until the borrower no longer uses the home as a principal residence," continues Lincoln.

"To be eligible for a California reverse mortgage the borrower must be at least 62 years old, own the home and also live in it. The mortgage balance must be low enough that it can be paid off at closing with proceeds from the California reverse mortgage."

"With a traditional second mortgage loan, or a California home equity line of credit (HELOC), there must be sufficient income versus debt ratio to qualify for the loan, and monthly mortgage payments are required. The California reverse mortgage is different in that it pays the homeowner and is available regardless of current income."

"The California reverse mortgage amount depends on the borrower's age, current interest rates, the type of reverse mortgage selected and the appraised value of the home."

"The loan is not repayable as long as one of the borrowers continues to live in the house and keeps taxes and insurance current. Seniors quite often use the money for medical treatment, home improvement or repairs, long-term care insurance or just to supplement their income."

"One important concern for seniors is that a reverse mortgage in California allows them to convert home equity to cash while retaining home ownership."

"If the home is sold or no longer used as a primary residence, the homeowner or the estate repays the California reverse mortgage, plus interest and other fees, to the reverse mortgage lender."

"Because California reverse mortgages are considered loan advances and not income, the IRS considers them to be Not Taxable."

The remaining home equity belongs to the homeowner or heirs. No other assets will be affected by a reverse mortgage in California and the debt will never be passed along to the estate or heirs."

"Our seniors deserve financial peace of mind in later years and a reverse mortgage in California offers that," concludes Lincoln.

Keith Hunt

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www.MadisonRealty.wordpress.com Orange County and Riverside County Real Estate Broker. Helping Buyers and Sellers achieve their Real Estate Goals. First Time Homebuyers, Short Sales, Bank owned homes. Search homes for sale in Orange County, Riverside County and San Diego County at www.MadisonRealtyHomes.com

Despite the fact "big dog" newspapers such as the OCRegister and the L.A. Times seem to be reporting real estate going downhill fast, the actual numbers in a historic perspective say otherwise. As I see it from the numbers, the Orange County real estate market is simply adjusting to a moderate market after 200% gains in the last 6 years. I have seen these incredible gains have only been offset by about 5%-8% price decreases in an 8 month time span and in my opinion that is hardly prices "plummeting" as the newspapers put it. I think everyone know it's the newspapers job to sell papers and dramatic headlines make for good sales.

So, how about employment? The last time real estate dropped significantly in value Orange County had double the unemployment rate, much higher interest rates, and the aerospace industry moved along with many jobs. Is the decrease in real estate activity going to slow the economy here in Orange County? Well, I don't have a crystal ball but I do know the Kiplinger California Letter reports on the impact of $43 billion in bonds. According to the report, "A public works construction boom over the next 10 years, benefiting builders, designers and construction materials firms. Not since the 1960s has there been so much work undertaken on the state's infrastructure." The article further states an expected 140,000 new jobs over 10 years, in excess of those to be gone in the current home-building downturn. These jobs will assist strengthen the employment for more population entering California as well as the trickle down and trickle up economics associated with that number jobs.

Is now a good time to buy? All I have to say is can you afford to purchase an investment which historically appreciates over time and offers huge tax write-offs benefits. Across the street from my home in Serrano Heights I saw a home listed for sale in April for what at the time was "priced right." By October one persistent home buyer purchased it for $130,000 less than the original asking price and saved over $700 per month on the mortgage and another $125 per month on taxes after the reduction. see details There are more deals out there for the buyer who seeks out the most motivated sellers. Sellers, who have already purchased another home, are moving out of state, own there home "free and clear", or are in financial distress. You can find a list of these properties at http://ocbuyersmarket.com. and see more details on the above mentioned purchase.

Here is the breakdown for those contemplating purchasing real estate in Orange County. If you own a home and are moving to a larger home now is a great time to purchase a "move-up" property and it makes absolute financial sense to do so assuming you don't need a negative amortization loan to afford your payment. However if you can't afford a "move-up" property now then it is highly unlikely you will be able to afford one when the market shifts into an upswing. If you are a first time home buyer and again can afford to purchase an Orange County homes without over extending yourself in regards to financing then now is a great time to purchase as well. You will also start taking advantage of tax benefits by doing so and inevitably build equity.

A reason NOT to move in Orange County's real estate market. O.K., here is a scenario where I would recommend holding on to the property if at all possible ( another 3-5 years). If you own an Orange County home and are looking to stay in Orange County but downsize to a smaller less expensive home don't do it yet! It just makes financial sense to wait.

So if you are looking to "move-up" or are a first time home buyer seek out some of those motivated sellers and best buys I mentioned earlier in this article. Here are links where you can find a list of motivated sellers, price reduced homes, and best buys.

This article can be freely published on a website as long as it is not modified in any way including author bylines, plus the hyperlink must be made active just like below.

Andrew Thomas Willoughby is the editor of " Orange County Homes & Real Estate - To Buy Or Not To Buy? That is the Question ."

Andy Willoughby

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Building a budget is no fun, but to make sure you don't overextend yourself, you need to make sure you know how much you can truly afford to pay toward your mortgage each month.

How to Build Your Budget
To begin, add up all your monthly expenses other than your house payment. In addition to the big items -- loan payments, groceries and savings don't forget the little things. How much do you spend on transportation? Going out to eat? Dry cleaning? The little items add up, so to really be accurate try to track every penny you spend for a week, and base your spending on that.

Now that you've got your monthly expenses other than housing together, subtract that from your pay. This will give you an idea of what kind of mortgage payment you can afford at your current spending level. If the number is smaller than you thought it would be, you need to decide what's most important, and make that your spending priority, cutting back in other areas.

Keep housing to 28 percent of income
A simpler way to gauge how much you can afford each month is to use a percentage of your income. A general guideline that many lenders use is that no more than 28 percent of your total monthly income should go toward your mortgage payment (including taxes and insurance) and that no more than 36 percent of your total income should go to pay total debt, including credit cards.

For example, if your monthly gross income is $4,000, then 28 percent, or $1,120, would be your total housing expense. In some areas, such as California, lenders expect a greater portion of income to go toward housing expenses. However, the closer to the 28 percent guideline you can get, the better off you will be.

Also remember that your housing expenses go beyond your mortgage payment. Your total monthly payment will include property taxes and homeowner's insurance, and for some people private mortgage insurance (PMI). It also costs money to maintain a home, so make sure you leave yourself room to pay for home improvement projects and regular maintenance. If you are moving from an apartment to a home, consider whether you will need to buy more furniture or purchase appliances. Most people find that they spend a lot more moving into their new home than they anticipated, so give yourself room in your budget so you can make your new house your home.

Your price range
Once you have your budget, you can use an online home affordability calculator to help you determine what price home you can afford. Just remember, calculators don't take into consideration your entire financial picture.
For example, if you have a lot of debt, the monthly payment you can afford may be less than what the calculator tells you. Conversely, if you are putting down a large down payment, you can probably afford a more expensive home than the calculator suggests. To really know what you can afford, you need to get pre-approved by a lender.

Chris Navi

One of the most popular and cost-effective guaranteed online personal loans are your home improvement loan. It is quite functional for any kind of home extensions and renovations. Usually, home improvement loans california refinance mortgage loan can be availed for revamping your kitchen, add an extra bathroom, get double glazing or a complete home remodeling, or any thing that you can think of to add new look to your house as well as improve its value on the whole.

Get a kitchen remodel, new siding or stucco, new foliage, addition of any thing to give you more living space with simple home improvement loan. Such renovations of simple kitchen revamp can add up to 150% of your cost of the project to your home’s resale value. Similarly, 90% of the project cost is added to your home’s value by just adding an extra room. But not all home improvements translate into resale value. Smaller improvements such as replacing doors or windows, getting a new plumbing line or heating system will not make any difference in your equity value.

Your investment made is directly proportional to your home value!

The benefits of getting your home revamped:

Adds new look to your old house, gives a total face lift

Increases your home equity

Improves your resale value

If you are struggling to sell your home, a home improvement loan uk can provide you a solace. Such home improvement plans can be funded by means of a secured loan, unsecured loan, re-mortgaging or taking further advance on your mortgage.

Dartmouth Staff Forum, March 7, 2011

Compare home improvement loans online, do not just settle down with anything that you bump into. If you are already duped by a lender and are paying high in terms of interest rate, the best solution to get out of this financial predicament is to go for mortgage loan debt consolidation refinance home improvement. Be prudent about your choice of a home improvement loan and not pay high interest rates. Online loan quotes give you a fair idea of how much you end up paying every month and other loan costs if any. Always ask for a detailed loan rate plan before opting for one.

Get a quality home improvement loan to finance your project!

Also obtain a home insurance policy to cover any kind of damages or losses incurred. Consider a home insurance policy which reimburses you for any damages that may result out of natural disasters. Some of them cover the contents of your home. However, Home insurance policies differ in the amount of personal property they will cover, but some providers offer add-on options to increase the amount of coverage.

For all your online home improvement loan needs visit : Quick Online Loan uk

Kirthy Shetty

www.lendinguniverse.com california construction loan When the Roman Empire collapsed, the highly developed monetary systems of the ancient world collapsed with it. Subsistence agriculture and petty barter dominated the scene. Money was used only in the trickle of long-distance trade in luxuries...

A SECRET STRATEGY TO TURN LOSERS INTO WINNERS

I received a question from a Realtor last week that will give you insight into a purchase strategy that you can use with a commercial property whose current cash flow can’t support a loan large enough to complete its purchase. In other words, loan to value is restricted to 50% or less because values have shot up and cap rates have declined. We see this a lot on the coasts, in large cities, and on high quality properties.

In this particular situation, we were dealing with an apartment building in a beach community that was selling for 22 times the current gross rent! (I kid you, not!) And believe it or not, that is a fairly standard Gross Rent Multiplier in higher end beach communities in California.

The property could only support a loan of about $1.5 Million and the asking price was over $3.5 Million. To purchase that property “as is” would require a $2 Million down payment and would only offer the investor a 3.7% cash on cash cap rate with its current income (less with the loan). You’d be better off finding a good money market account!

However, there were two options we could take that involve looking at what the property could be, not what it is. And herein lay one of the most powerful financing/acquisition strategies involving construction loans you could ever learn as a real estate investor.

Option 1 was to look at the building as apartments, but with upgraded rooms, exterior, and hallways. Adding some granite counter tops, wood floors, better appliances, and the like would allow the new owner to raise rents approximately 33% to 40%. This would raise the maximum loan to almost $2.2 Million on a permanent basis. We could potentially get a construction loan to acquire and renovate the property in that amount, preserving the Buyer’s capital and increasing return.

Option 2 involved looking at the building as a potential condo conversion. Condos located that close to the beach and the local towns were selling from $800,000 to $1.2 Million. There were 9 units in the building. Taking the low end of the range would give us a final sales value of $7.2 Million!!! That’s a potential profit of over $3 Million on what might amount to a $300,000 renovation and conversion. In this case, a lot of investigation remains to be done to see if this is a viable alternative. On top of that, the overall market for condominiums has become rather soft and it might be a hard project to sell to a financial institution at this time.

So what’s the lesson? In older investment properties, commercial properties that have been neglected by the current owner, or properties whose owners’ have fallen on hard times, there exists an opportunity for an educated investor to purchase real estate at a significant discount with high leverage! Construction loans on commercial property usually allow the investor to come in with 15% to 20% of the total costs of the project, provided the construction loan doesn’t exceed 75% to 80% of the final, stabilized value. On multifamily and tract homes, the loan to costs can be as high as 90%.

So the next time a lender tells you “no” because a project doesn’t cash flow, is in need of repair, or has had an ownership problem, turn the tables and consider using a construction loan to acquire and add value in one step.

Craig Higdon

FINANCIAL MYTHS vs. FINANCIAL FACTS

Evaluating Funding Options for your B2B Business

The world of commercial finance is complicated. It is suggested that all businesses consult with their trusted advisors (CPA, Attorney, or Partner) before entering into any financing transaction that will have long term effects on their business. The following statements are the opinions based on the dictionary definitions herein below.

Merriam-Webster Online Dictionary Abridged Definitions:

MYTH:

Pronunciation: 'mith

Function: noun

Etymology: Greek mythos

1 a: a usually traditional story of ostensibly historical events that serves to unfold part of the world view of a people or explain a practice, belief, or natural phenomenon.

2 a: a popular belief or tradition that has grown up around something or someone; especially: one embodying the ideals and institutions of a society or segment of society

2 b: an unfounded or false notion

FACT:

Pronunciation: 'fakt

Function: noun

Etymology: Latin factum, from neuter of factus, past participle of facere

1: a thing done

2: the quality of being actual

3 a: something that has actual existence

3 b: an actual occurrence

4: a piece of information presented as having objective reality- in fact: in truth

“A fool and his money are easily parted”

FINANCIAL MYTH: No. 1

Finance companies that promise funding in 24-48 hours are the best choice.

FINANCIAL FACT:

Unless you are desperate for funding, you should take time to compare alternatives, read the proposed contracts, and consult with your advisors.

It is recommended that you read the proposed contract before you agree to terms, and carefully consider the risks regarding following matters:

1. Percentage to be advanced: This may range from 60% to 90% of the face value of an invoice. Will the percentage to be advanced be sufficient to help you grow profitably?

2. Your obligation to work with the finance company: Are you required to sell 100% of your accounts receivable every month, or are you permitted to sell at your discretion? Are there monthly minimum charges and if so, would you be likely to use the services of the commercial finance company to this degree every month?

3. Will you be more profitable if you use the finance companies services? In other words, can you afford to pay the commercial financing fees in order to grow your business?

4. Which source is better for you: a small commercial finance company, a large commercial finance company, or the asset based lending department of a bank? With the small companies, you are more likely to work with the decision makers and their usually is more flexibility and discretion. With the large companies, you can accomplish larger transactions and this may be of great significance especially if your business is international. Banks may be an excellent choice if your accounting is perfect and you are good at dealing with strict requirements. Banks are regulated institutions with safety and soundness requirements which generally make banks more conservative than private lenders. GFS works with all three types of lenders.

5. Choice of law: If you are in California, and any dispute must be litigated in New York can you afford the risk that you might have to travel to protect your interests? Where are disagreements or disputes to be decided? Is there binding arbitration?

6. Penalties for early termination: Some yearly contracts provide that if you want to leave the commercial finance company, you are liable for “the greater of Two percent (2.00%) of the Maximum Credit Line, or the number of months remaining in the agreement multiplied by the Monthly Minimum Fee”. Is the termination fee risk affordable?

7. Penalty interest if you client fails to pay on time: Some lenders provide that if a client defaults, you can substitute another invoice and not be charged a penalty. Other lenders may require that if a client fails to pay an invoice within 90 days, you are charged 20% of the invoice face amount plus 7.5% per month until payment is made. What does the commercial financing agreement require when your client does not pay on time?

“Economical with the truth”

If someone is economical with the truth, they leave out information in order to create a false picture of a situation, without actually lying.

FINANCIAL MYTH: No. 2

Finance companies that promise lower rates are the better choice. For instance, Co. “A” offers 3% per month; Co. “B” offers 3.25% per month. Co. “A” is the best choice.

FINANCIAL FACT:

Contract terms and conditions determine your actual costs based on when your clients pay. This requires analysis.

It is recommended that you carefully consider the contract terms regarding how interest is charged and your experience regarding how your customers typically pay to project the true costs of financing. Here are several examples:

1. You sell an invoice with a face value of $100.00. Assume the contract charges are 3% for 30 days, with an 80% advance to you and your customer pays the commercial finance company the full amount due on the 30th day. You take an $80.00 advance on day 1 and your customer pays the commercial finance company $100.00 on the 30th day:

v Suppose Lender “A” charges 1% for every 10 days period. Assume “Payment date” is defined in the commercial finance contract as the date the finance company receives payment from your customer pays plus ten (10) banking days. Ten banking days are two calendar weeks. You will be charged for 44 days. One percent for the first 10 days, plus 4 percent for the next 34 days equals a charge of 5%. Your cost = $5.00.

v Suppose Lender “B” charges 1.5% every 15 day period. Assume “Payment date” is defined in the commercial finance contract as the date the finance company receives payment from your customer plus three business days for check clearance. You will be charged for 33 days. You will be charged 4.5%. Your cost = $4.50.

v Suppose Lender “C” defines “Payment date” as the day they receive the check or wire funds transfer. This commercial finance company stops the interest clock on the day they receive payment from your customer. You will be charged 3%. Your cost = $3.00.

v Suppose Lender “D” defines “Payment date” as the day they receive funds and charges daily interest only on the actual funds advanced, also know as per diem interest. Since you are being charged 3% on $80.00 your cost = $2.40.

2. In every contract the definition of “Payment date” and method of interest calculation are critical to anticipate your actual costs of financing. All of the above methods of calculation, except Lender “A”, may be reasonable on account of the risks inherent in the transaction. Gregg Financial Services works to obtain the most competitive rates and terms for our client’s initial funding; and GFS works to reduce commercial finance costs as you grow.

3. If you customers typically pay in 60-90 days, a contract that requires a minimum interest charge for 60 days is not unreasonable. This condition may be a required for medical accounts receivable financing.

4. Consider whether the commercial finance company’s contract requires you to sell every invoice (100% of all invoices) on the day you issue them, or may you sell individual invoices up to 59 days past due, according to your needs? There are tradeoffs: lower price vs. flexibility. It is very much a question of assessing your commercial financing requirements and your gross margins to pay for financing costs.

“Easier said than done”

If something is easier said than done, it is much more difficult than is sounds. It is often used when someone advises you to do something difficult and tries to make it sound easy.

FINANCIAL MYTH No. 3

You can determine the best finance company to work with by simply by comparing several different websites.

FINANCIAL FACT:

Websites are advertising. Knowledge of the lender, their reputation and business practices are essential to choose wisely.

KEY POINTS TO CONSIDER:

When assessing the most appropriate commercial financing company to use, make sure:

• the provider is a reputable company

• your contract corresponds with any verbal or written quotations

• you are aware of any financial penalties if you wish to end the agreement early

• the financing credit limits are sufficient for your initial needs

• you have read the contract carefully before signing it, checking the amount of financing and notice periods

• you understand all terms and conditions, and the costs you will have to pay

Commercial Finance Brokers work with many dedicated commercial finance companies and banks across several businesses of all sizes. There are many areas of specialization, such as purchase order financing, accounts receivable financing, inventory financing and SBA financing. Most commercial finance companies limit their services to one or two of these categories. A commercial finance broker will assess different companies and match you with one that best fits for your business needs. They also keep a close watch on commercial finance companies that may charge non-competitive fees and will not match you with them. In addition to comparing rates, there are many points to consider when choosing services.

To anticipate problems with customers that inevitably arise, find out what level of customer service they offer to help resolve problems. Do they provide telephone support and in-person meetings, e-mail help and live chat, or a combination of services? Choose the commercial finance company that offers multiple ways to reliably address concerns or answers questions. Consider differences in where you are located and the time zone where the commercial finance company is located. How will this affect cut off times for funding? How will this affect your ability to reach your key finance representatives?

You may want to ask for a list of references before you do business with them. Make sure to ask such questions as:

• Were they able to quickly process your funding requests?

• Was the approval process simple? How long did it take?

• Was the company easily accessible through phone and email?

• How long did it take before you received funds?

• If you had a problem with your account, what did they do to resolve it?

• How did your clients react to working with the commercial finance company? Did they handle them appropriately?

• Would you recommend this company?

“Face Value”

If you take something at face value, you accept the appearance rather than looking deeper into the matter.

FINANCIAL MYTH: No. 4

A non-recourse contract means you do not have to pay the finance you to pay unless your company if there is a default.

FINANCIAL FACT:

Most contracts require you to pay unless your client files bankruptcy or goes out of business.

There are two general types of factoring: recourse and non-recourse. Recourse factoring is the most common. With recourse factoring, the commercial finance company generally will fund every invoice you submit, but will require a refund plus their fees for invoices that are not paid within a specific period of time, usually 90 days.

Non-recourse factoring may free your company of any responsibility for non-paying accounts, if, and only if, it is truly “non-recourse” without conditions.

The commercial finance company with a non-recourse contract will have more stringent policies for the invoices they will accept. In a non-recourse contract the commercial finance company agrees to purchase the invoice from you and takes some or full responsibility for its payment. It depends on the contract terms. Credit insurance may be required. This is an additional expense.

Non-recourse factoring generally is defined in commercial finance contracts to mean: if the customer does not pay in limited situations, it’s not your problem. For example, should the customer declare bankruptcy or go out of business you are not responsible to pay back the commercial finance company for the advance on certain invoices. But, if there is a warranty issue, if anything at all is wrong with your product or service, you may be held responsible for the advance you received. And the commercial finance company can assert a breach of the many warranties and representations in your contract as a defense to accepting responsibility for a loss due to non-payment in a non-recourse agreement.

There are also commercial finance companies that will provide a mix of the two. These companies will promise to assume the risk of your invoices but require you to swap in a replacement of equal or greater value for slow-paying or defaulted accounts. This is not a true “non-recourse” contract in the literal sense of the idea because you are required to substitute non-performing invoices with new invoices that are likely to perform.

On the surface, non-recourse sounds better than recourse. But if the fees for the non-recourse factoring are significantly higher than full recourse, is the added cost to transfer the risk of payment default worth the expense? How many of your customers will file bankruptcy or go out of business? Over a period of time it may cost you more of your potential profits to transfer some payment risk to the commercial finance company.

Most commercial finance companies offering full non-recourse factoring conduct extensive credit checks on the customer before they will pay an advance on an invoice. This is a benefit to all concerned. When it is predictable that an invoice will get paid by a creditworthy customer, the invoice will be purchased. This credit quality check is of benefit to you because you do not want to knowingly sell your products or services to businesses that are not likely to pay. On the other hand, there may be companies you would prefer to do businesses with that do not meet the creditworthiness standards for non-recourse factoring. There may be compelling business reasons to choose recourse vs. non-recourse factoring.

“Look after the pennies and the pounds will look after themselves.”

If you look after the pennies, the pounds will look after themselves, meaning that if someone takes care not to waste small amounts of money, they will accumulate capital.

“Hook, line and sinker”

If somebody accepts or believes something hook, line and sinker, they accept it completely.

FINANCIAL MYTH: No. 5

Startup companies with a new hot product need venture capital to grow rapidly.

FINANCIAL FACT:

You can grow exponentially with purchase order financing, factoring, and inventory financing from a commercial finance company.

In general, more products you sell, the higher your revenues and profits. The more orders you have, the more you can sell, provided you can pay your suppliers upon delivery. Purchase order financing is like inventory financing for goods in transit to your customer.

Commercial finance companies provide purchase order financing to pay your suppliers, enabling you to close the sale and deliver your orders to your customers. This often involves a letter of credit using the commercial finance company’s credit to guarantee payments to the factory producing the product, especially if the manufacturing facility is not located in the US.

When the goods are accepted by your customer, an account receivable is created. An invoice factor, or commercial finance company that purchases accounts receivable, pays for the purchase order financing. You are paid the profit when your customer pays.

The commercial financing structure may follow these steps:

Letter of credit (to guarantee manufacturer payment for goods) â–º Purchase Order Financing (pays manufacturer/supplier) â–º Accounts Receivable Financing (pays Purchase Order Financing) â–º Inventory Financing â–º Customer pays â–º Factor is paid

â–º You are paid profits from your sales after financing costs are paid

Commercial Finance Brokers help you determine what financing is available according to your circumstances, at competitive rates.

“Play hardball”

If someone plays hardball, they are very aggressive in trying to achieve their aim.

Venture Capital Funding

The Venture Capital Industry:

Venture capital is money provided by professionals who invest alongside management in young, rapidly growing companies that have the potential to develop into significant economic contributors. Venture capital is an important source of equity for start-up companies.

Professionally managed venture capital firms generally are private partnerships or closely-held corporations funded by private and public pension funds, endowment funds, foundations, corporations, wealthy individuals, foreign investors, and the venture capitalists themselves.

Venture capitalists generally:

• Finance new and rapidly growing companies;

• Purchase equity securities;

• Assist in the development of new products or services;

• Add value to the company through active participation;

• Take higher risks with the expectation of higher rewards;

• Have a long-term orientation

When considering an investment, venture capitalists carefully screen the technical and business merits of the proposed company. Venture capitalists only invest in a small percentage of the businesses they review and have a long-term perspective. Going forward, they actively work with the company's management by contributing their experience and business savvy gained from helping other companies with similar growth challenges.

The advantage of venture capital investment is that you get money that enables you to expand your business and obtain market share before someone beats you to it. Venture capital is not a loan that needs to be repaid; rather, venture capitalists (VCs) invest their money in exchange for equity (an ownership share) in your company. VCs get their cash out only when your business is acquired by another company or "goes public," that is, when its shares can be publicly traded on a stock exchange. The disadvantage is that you are no longer the sole owner of your company and may lose control. Moreover, a VC may move your company towards an Initial Public Offering (IPO) of publicly traded shares faster than might be best for the long-term health of the business.

In general, the earlier the stage where you receive funding, the more you have to give up. A few VC companies or "angel investors" might invest in what is not yet a real operating business but just a concept. For $500,000, they might take a 60% ownership in the company, and put in their own management team. If they decide that this can become a viable business ("proof of concept"), they might fund the company for another $5 million, taking yet more equity. By the second round of financing, the original business owner might retain only a 5% to 10% ownership.

What are the Pros and Cons in having Venture Capital Funding as a partner?

Pros:

- Financial strength for global competition

- Share buy-back opportunity

- Easier to get listed on a stock exchange

- No conflict of interest

- VC network can enhance the company's business

VC’s provide experience, advice, and mentoring. They are objective, helpful with networking and hiring the right people. They add credibility and prestige to your business, share the risks, and help eventually to sell the business.

Cons:

- Lose part of the ownership

- Cannot manage the company as a family-run business

The risk of working with a VC may be their concern is more for a profitable and mandatory exit, compared to your concern for your employees and customers. You loose independence to manage your business and the VC’s may have the right to fire you and your management team. It can be a full-time job to manage the venture capitalists that are funding your business. Venture capitalists usually ask for:

•Anti-dilution protection. If the company's stock price goes down any time in the future, they get additional stock for free.

•Dividends. In addition to stock, they get a guaranteed rate of return.

•Liquidation preferences. VCs get their principal and dividends back before anyone else gets a penny.

•Participating preferred. They get to double dip—they first get their investment plus dividends, then the value of their stock.

•Mandatory redemption. This requires the company to buy their stock back by a certain date, establishing a deadline for an exit event.

•Demand registration rights. The VCs can force the company to file a registration statement with the Securities and Exchange Commission to initiate an initial public offering—another way of forcing an exit event.

•Approval rights. The VCs must approve any new financings and have the right to participate.

•Reps and warranties. You'll also have to accept personal liability for representations you've made about key aspects of the company. They will have the right to sue you for all you own if you forgot to give them any bad news.

CONCLUSION: There are no easy choices. If you have orders for your product with a sufficient gross margin, commercial finance companies may be your best choice. If you need to develop your product and lack the capital to fund your business to develop the product, market your brand and receive orders, venture capitalists can be the best thing that ever happened to your company. If you commit to a commercial finance company, you can terminate the contractual relationship. If you commit to a venture capitalist, the exit strategy is in their domain.

“Make a mint”

If someone is making a mint, they are making a lot of money.

“Feel the pinch”

If someone is short of money or feeling restricted in some other way,

they are feeling the pinch.

FINANCIAL MYTH: No. 6

All finance companies charge interest on 100% of the face value of the invoices you sell to them.

FINANCIAL FACT:

Some finance companies base their charges only on actual amount of money you receive.

There is a large range of pricing in the commercial finance business. Although competition tends to hold prices down, different industries may be charged more because of historical risk. For instance, medical and construction accounts receivable financing will be more costly than commercial financing for a staffing agency.

At one extreme, some commercial finance companies require that 100% of invoices be sold and interest is charged on 100% of the invoices. This may be reasonable because the business is high risk and if your company goes bankrupt, the commercial finance company cannot collect any of the funds that have been advanced.

The best pricing available is computed with regard to the actual funds advanced with interest payable on a daily basis for the period the funds are utilized. This is called per diem interest. Most banks and some commercial finance companies offer this option which may be described as a “line of credit” or “asset based financing” for larger transactions.

Assume a commercial finance company charges a 3% monthly fee and you sell an invoice for $100.00. Assume further that you customer pays in 5 days. Here is a range of costs you would pay, based on various minimum contract time and payment terms:

Based on 100% of the invoice:

59 day minimum term = $6.00 cost

30 day minimum term = $3.00 cost

15 day minimum term = $1.50 cost

10 day minimum term = $1.00 cost

Per Diem interest 5 days = $ .41 cost

Based on an 80% advance Per Diem for 5 days = $ .33

“Leave no stone unturned”

If you look everywhere to find something, or try everything to achieve something, you leave no stone unturned.

“Game Plan”

A game plan is a good strategy

FINANCIAL MYTH: No. 7

A finance company contract with no term is better than a contract with a one year term.

FINANCIAL FACT:

If you will need financing for one year and rates and terms are lower, the one year contract may be a better choice.

“Keeping your options open”

If someone is keeping their options open, they are not going to restrict themselves or rule out any possible course of action.

FINANCIAL MYTH: No. 8

SBA business loans are similar at every bank.

FINANCIAL FACT:

Some banks originate SBA business loans with delegated authority. This allows additional financing for purchase order, accounts receivable and inventory from third party lenders creating more capital for growth.

“Put all your eggs in one basket”

If you put all your eggs in one basket, you risk everything on a single opportunity, which, like eggs breaking, could go wrong.

FINANCIAL MYTH: No. 9

All finance company contracts, terms, and conditions are similar.

FINANCIAL FACT:

Terms range from fair to onerous. When you factor invoices you entrust all your cash flow to a commercial finance company.

“Comfort Zone”

It is the temperature range in which the body does not shiver or sweat, but has an idiomatic sense of a place where people feel comfortable, where they can avoid the worries of the world. It can be physical or mental.

FINANCIAL MYTH: No. 10

All finance companies require that your customers be notified that you are working with them. This is called notification and verification.

Financial Fact:

Some finance companies allow non-notification factoring. This makes the financing transparent to your customer.

“Take the plunge”

If you take the plunge, you decide to do something or commit yourself even though you know there is an element of risk involved.

Submitted by:

Gregg Elberg, President

GREGG FINANCIAL SERVICES

930 Irwin Street, Suite 209

San Rafael, CA 94901

415-482-9221

415-482-9228 Fax

415-847-8434 Cell

gregg@greggfinancialservices.com

Gregg Financial Services is a full service brokerage for commercial finance companies and banks that fund manufacturers, distributors, assemblers, jobbers, importers, staffing, service, agribusiness, construction and health care companies. We shop for the lowest rates and terms. We arrange various types of financing including purchase order financing; factoring; factoring with an inventory component; and asset based loans on receivables, inventory, equipment and machinery. GFS also provides cash flow financing and SBA loans on real estate and equipment. We work with all industries and can arrange financing transactions throughout the US and Canada, Mexico, Australia and several areas of Europe including the UK, Ireland, France, and Poland. GFS arranges funding from $25,000 to $50 million at competitive pricing, and we work to reduce your financing costs as your company grows. For more information about GFS, please visit our website: www.greggfinancialservices.com

Copyright 2006 Gregg Financial Services.

Gregg Elberg

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