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Hidden Dangers of Loan-Stacking

Sadie Keljikian, Top Billion Finance

One of the most consistent difficulties one encounters in the process of expanding a wholesale business is the cash flow “crunch” that can occur when your customers want to order more of your products than you can afford to sell at once. Most customers don’t realize that wholesalers must pay their suppliers, shipping costs, and operational funds in the process of selling their goods to retailers. There are a few ways of handling this without having to turn down the sale. Many businesses choose to take out traditional-style loans as needed, but this can actually create more difficulty in managing your business’s finances.

It’s best to borrow conservatively.

If you receive multiple loans to boost your business’s cash flow, each one can hurt your credit, especially if you receive them in quick succession. When a business takes out multiple loans quickly, it implies that the business carries significant debt and very little collateral, which in turn, indicates high-risk to lenders. In addition, the more loans you take out, the harder they become to acquire, especially if the financial institution from which you borrow performs “hard” credit inquiries.

You may or may not be familiar with the concept of hard credit inquiries, but you’ve certainly been the subject of one at some point. Financial institutions perform hard credit inquiries (as opposed to soft inquiries) when a business or individual is actively seeking credit. This can be in the form of a credit card, credit line, loan, mortgage, and sometimes other financial commitments, like rental agreements. Hard inquiries reveal more details about your business’s credit and bill-paying habits, so a high credit score doesn’t necessarily guarantee approval.

When an institution performs a hard credit inquiry, your credit score will inevitably drop a few points, which isn’t typically a problem unless your credit is already compromised. Again, taking out multiple loans in a brief period will deplete your credit score more noticeably, so avoid it wherever possible.

Know your options and choose wisely.

A popular fix for mounting interest charges on multiple loans is debt consolidation, or “loan stacking.” Debt consolidation companies help you to pay off your debt fully and more quickly than you could on your own by decreasing your interest rates and combining your payments. Sounds perfect, right? But beware, there is more to your creditworthiness than simply your credit score.

The problem with loan stacking is that although it can help you get out of debt, it can also further deplete your credit (though not always noticeably) in the process. For this reason, it is vital to remain informed throughout the lending process, regardless of what method you choose to pay off your debt. Often, loan consolidation companies assist you by providing another loan to pay off your debts. Again, it sounds appealing, but you need to bear a few things in mind if you choose to do this.

Issues can arise when your hard credit inquiry reveals excessive borrowing or any loan stacking. Lenders often avoid taking on customers who have a history of loan stacking because it indicates a few unfavorable habits. As mentioned above, stacking one’s loans is usually a symptom of multiple unpaid debts that accrue overwhelming interest. Obviously, this indicates to a lender that you not only have poor bill-paying habits, but that they may not receive the interest they are owed if you struggle to pay and choose to consolidate again.

Alternative lending may be a better option.

Consolidation is a double-edged sword. Repaying your debts as quickly as possible is good for your credit score, but using consolidation services can still hurt your ability to borrow funds in the future. An excellent way to manage an ongoing need for working capital is to instead implement some form of Top Billion Finance, particularly factoring.

With Top Billion Finance, you consistently receive funding against your purchase orders or receivables to avoid depleted operational funds. Since the funds are only provided against confirmed sales, they are typically in smaller amounts and often don’t require further action from you. In the case of factoring receivables, your financial institution buys your current receivables and collects from your customers. This means that your cash flow is sped up, you needn’t pay back any of what you receive (barring a chargeback), and you are no longer responsible for those collections.


The long and short of it is this: business loans are useful, but be aware of how much debt you carry and make a specific plan to pay your debts. Even with sometimes helpful solutions like debt consolidation, borrowing more than you can reasonably pay back on time is unwise in the long term. When making decisions about your business’s financial future, be as conservative as possible and consider how your decisions today might affect your ability to grow or recover if you need funding in the future.

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Collecting on Tough Accounts

Sadie Keljikian, Top Billion Finance

Selling goods or services on open terms is a mixed bag. On one hand, open terms can attract more volume and bigger customers with the potential to accelerate your growth and increase revenues. On the other hand, allowing customers to pay later diminishes your cash flow and creates the risk of payment default.

Here are a few ways to protect yourself against delayed payments and handle tough customers:

Structure your payment terms carefully upfront.

The best way to avoid payment default is to carefully structure the terms of your relationship. You should perform credit checks on new customers before offering terms. If you can’t, at least ask for credit references to get an idea of that customer’s bill-paying habits. Use the information you gather to determine proper payment terms. For example, if a customer tends to pay late, you may want to take a deposit upfront, or include late payment terms or early payment discounts to offer incentive for timely payment. If a customer has a history of stiffing vendors and engaging in unethical practices, perhaps you should not offer payment terms at all and instead demand payment upon delivery or only deliver small quantities. Conversely, if a customer has good credit, you can offer terms and rest assured that they’ll pay.

As a recap, if you’re concerned about poor payment habits, include provisions in your customer’s contract indicating that you will charge interest on past-due invoices and update their payment terms if their payments are habitually late. If a customer is particularly problematic, require cash on delivery, or “COD”, rather than open terms.  Follow through on these penalties diligently. Mistakes happen, but imposing and enforcing a financial penalty on late payments and controlling your customer’s access to open terms gives you more leverage to collect.

Invoice punctually and consistently.

When feasible, invoice your customer for each shipment. Some vendors choose to bundle multiple shipments and transactions into one invoice periodically (i.e. weekly or monthly) to avoid large quantities of small invoices. However, combining transactions can cause problems when you’re collecting.

One such problem arises if a customer doesn’t communicate or place a re-order after their initial purchase. Because they aren’t invoiced immediately, they may forget or be difficult to contact for collections. Unfortunately, customers will sometimes dispute charges that they may or may not remember, which will further slow up your processes and potentially cause legal difficulties.

For these reasons, it is good practice to consistently and immediately invoice your customers each time you fulfill a customer’s purchase order. Once the goods are delivered or the service is rendered, invoice your customer soon thereafter to ensure that your records are accurate and that you’re always paid.

Follow up regularly and without apologies.

Following up with customers on past-due bills is uncomfortable.  There’s no denying it. However, if you are polite, professional, and follow up as a matter of course, collecting can be just a part of the process, rather than a cause for confrontation.  Another way to avoid bad blood is to outsource your collections to companies like factors who specialize in collections. By having a third party collect your invoices, you can be the good guy while your factor or collections agency does the dirty work for you.

When managing your collections process yourself, you should automatically check in with your customers as soon as a payment becomes past due. Always approach the situation logically and professionally and be firm, but avoid a “bad cop” attitude. Mistakes happen and your customer may not be aware that their payment is past due or there may be other legitimate reasons why they haven’t paid yet.

Whether it’s you or a third party (e.g. factor) collecting your invoices, be ready to enforce the terms and press the issue without apology. Although you may feel like the bad guy, you are ultimately creating an environment in which you and your customer can build a healthy relationship. Enforcing obligations re-enforces expectations and even helps your customers avoid interest charges and bad credit.

Keep careful records of all interactions, invoices and amounts in question in case your customer is confused and/or attempts to dispute payment. For example, if your customer wants a proof of delivery, you should have it filed next to your invoice. Since it is their niche, professional third collectors and factors are particularly adept at keeping records at making sure documentation is in order.

Stay involved and keep tabs on past due payments.

Some customers are tricky. They may tell you there’s a check in the mail or that they’re sending it today, when in fact, they are perpetually late with payments and often lying. These kinds of customers require a particularly shrewd approach. If they are local to you, offer to send a courier to pick up payment rather than have the customer send it in the mail. If not, consider selling to them exclusively on COD terms or requiring them to pay you via credit card to avoid delays. Get creative. There’s no limit to how you can structure transactions, communicate with your customers, and otherwise effect collections.

Third Party Outsourcing.

As described above, using a third party to provide collections has many advantages. Collection agencies are resourceful when it comes to particularly slippery customers, but their services can be expensive. Many wholesalers prefer to use factoring, since the “bang for your buck” is more substantial. Factors typically buy invoices from you at 80% of their face value, collect from your customers, and then pay you the remainder of your invoices’ value, less factoring fees (typically 1-3% of the full amount). So, for a relatively low cost, you receive your funds immediately and your factor takes full responsibility for your collections process.


If you’re new to this, it may take you some time to find your own approach. Always remember to be friendly, but firm. As mentioned, these interactions can be uncomfortable, but you can make the best of it in how you choose to frame and approach it. The more you systemize your collections process, the easier future interactions will be for you and your customers.

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Asset Class Break-Down

Sadie Keljikian and David Estrakh, Top Billion Finance

What are asset classes?

Assets are valuable properties owned by a business. There is a wide variety of assets across different industries and business structures, each of which affords different financial risks and opportunities. Assets can include stocks, bonds, real estate, fixed income, invoices / receivables, commodities, cash equivalents and personal investments.

Beyond the security of possessing a diverse portfolio, holding a variety of assets allows businesses to leverage their assets as collateral to in exchange for financial assistance from a bank or other financial institution. As a rule, the wider the variety and greater the number of assets, the more potential options there are to finance the business.

Here is a collection of the most commonly used assets and how they can best be used to finance a business:

Stocks as Collateral

Stocks are shares of ownership in publicly held companies. Since the value of a business can fluctuate quite dramatically with little or no warning at any given time, stocks can be more volatile in the short term. In other words, the value of stock assets can fluctuate significantly. Therefore, if stocks are used as collateral, banks and other lenders will offer significantly less funds relative to the current value of the portfolio. Advances of 50% are common, but it depends on the lender’s level of confidence that the current value of the portfolio will not decrease beyond the amount borrowed (or the interest due on principle).

Stock Raises and Equity Financing

Equity financing is a practice typically reserved for businesses that would like to raise funds to finance growth, but do not otherwise have sufficient assets or credit to obtain traditional lending facilities to finance their growth. The most popular variety of equity finance is venture capital, which is typically a high-risk, potentially high-return investment. Equity financing requires building business proposals and selling investors on business model that they believe can be executed with sufficient certainty.  After all, why invest in a company unless you believe it’s going grow, become more valuable and therefore give you a good return on your investment?

Fixed Income

Fixed income securities, or bonds, are investments that provide returns in the form of scheduled payments over time and eventually provide full return at maturity. The payments may, however, vary in amount over time. Depending on the credit debtor of the bonds, the value is of such assets does not fluctuate as compared to stocks. The note will be at face value and fluctuates only with inflation and the creditworthiness of the debtor. US government bonds, for example, are considered extremely secure when used as collateral.

Fixed income securities can be leveraged as collateral better than stocks because the lender can better rely on the asset maintaining its value from the time the loan is given until it is repaid. This allows lenders to give higher advances relative to the value of the asset. For example, while a lender might only provide 40-50% against the value of stocks, they might advance 60-90% to the same borrower against their bonds. So, while stocks have much more potential to increase in value, the reliability of such fixed income assets allows this asset class significantly greater collateral leverage.   Therefore, when used as collateral, fixed income assets should unlock more cash flow vis a vis stocks used in the same way.

Real Estate/Commodities

Real estate, which is also a form of equity, is extremely useful in financing. The most commonly known varieties of real estate financing are mortgage loans. However, in business finance, there are other ways to use real estate and commodities to fund day to day operations. Commodities can include precious metals like gold, agricultural land, and oil.

Personal Property Assets

Property assets are quite unique. They are often items of value that will depreciate, or even lose their value entirely over time, including things like cars, art, construction equipment, computers, and even race horses. Such assets can also be sold or leveraged as collateral. However, since they are not as easily bought and sold as stocks and bonds, their value is less liquid and thus, lenders price the extra risk into the cost of borrowing funds. This also impacts how large a percentage of the value of the asset lenders are willing to provide.

Due to liquidity concerns and depreciating value, borrowers should expect higher interest rates and lower advance rates. Lenders giving only up to 30-50% of the value of collateral is not uncommon. There are lenders who specialize in certain assets (e.g. art) and are better able to protect themselves against the risk. These specialized lenders can therefore provide higher advance rates and more accurately price the asset and any secured loans against it.

Common Business Assets

Invoices, equipment, machinery, and inventory are typical business property assets and are very appealing to lenders as a form of collateral.

Although these are all business assets, they are not created equal. For example, the value of an invoice depends on the creditworthiness of the customer who must pay that invoice and the likelihood that they will pay the full amount. In contrast, equipment and machinery loans are typically given by banks or specialized lenders who know how to price and sell machines if the loans default.  Inventory also fluctuates in value depending on the nature of the inventory, how easily it is sold, how much its price fluctuates, the business owners’ track record for selling similar inventory, and other potential factors.

Other Types of Assets and Getting Creative

While an asset usually has a fixed value and can be readily bought and sold, some transactions require more creative tools. For example, many wholesalers obtain purchase orders from their customers in advance of production but don’t have enough funds or credit lines to pay for their goods. Certain lenders specialize in outlaying funds to pay for production in exchange for either interest or a share in the profits of the underlying transaction.  This is called purchase order fund or “P.O. funding” and it is unique because it is neither a regular unsecured loan to a company based on financials, nor is it a secured loan against assets. Such lending is basically a hybrid of an inventory loan (since the funds are being used to pay for pre-sold inventory and the inventory purchased is used as collateral to secure the loan) and regular business line of credit.

Technically, a purchase order (or “P.O.”) is not an asset because it has no inherent value; it is simply a customer’s order to produce goods or services at an agreed upon price. While the PO funder is secured by the inventory that they finance and they often take a security interest against other assets of the business, the PO itself does not have any value until the goods are delivered as per the instructions of the customer. However, once the PO is complete and the customer is invoiced, many lenders are happy to take the resulting assets (i.e. receivables – invoices with payment due on a later date) and advance cash against them. This is called factoring. Unlike PO funding, which has what we might call “soft assets” or no assets, a factor advances funds against the value of a receivable, which is a common, bankable asset.

The point is that certain situations require creative solutions to accommodate the business and the transaction. Knowing how to leverage your assets (and sometimes even your non-assets) can be the difference between growth and stagnation or success and failure.


The bottom line is that in each of these instances, a business can leverage assets it already has and requires in its normal course of operations. By leveraging its assets as collateral, a business can access funds that are otherwise locked or frozen in value of those assets usually while still controlling, possessing, and deriving the full benefits of the assets. So, you can run your machines while using funds advanced to you by giving the lender a security interest (or “lien”) in the machine.

If a business intends to grow, it is, in the vast majority of instances, preferable to finance as much as possible through unsecured credit lines and credit lines secured by assets because interest will almost always cost less in the long run than selling equity (and often control) in your business for much less than it would be worth once you’ve had a chance to increase revenues through traditional financing vehicles.


The Shipping Obstacle Course

Sadie Keljikian, Top Billion Finance

Importing into the US requires considerable coordination. When you import goods, your shipment is often relayed among several other parties before you receive it: the supplier/exporter (or the person who ships the goods to you), the warehouse, carrier, freight forwarder, and customs. All throughout the supply chain, your goods need to be physically and documentarily prepared for each stage of transport and inspection to avoid delays.

Below are some the most common troubleshooting issues importers encounter and how to address them:

Rolled Shipments

A “rolled shipment” is a shipment that has been intentionally delayed by the carrier. This can happen if necessary documentation is missing from the shipment, or if the carrier experiences a decrease in capacity, an increase in demand, or both simultaneously.

The best way to avoid this is to either develop a relationship with several carriers over time, or use a freight forwarder, since they will have relationships with carriers already. Confidence in any carrier’s reliability can only be achieved over a long-term business relationship, so if you don’t have the time for trial and error, it is wise to take advantage of a freight forwarder who’s already done it. Freight forwarders are also very helpful in auditing your shipping documents and making sure that nothing is missing, so you are unlikely to experience a rolled shipment delay in the company of an experienced forwarder.

Transshipment Ports

“Transshipment” means your goods will travel on more than one vessel to get to you. If your goods go from the original sender to a transshipment port before they reach you, you may find your goods delayed in transshipment. This can happen if the port accidentally misses a transfer of goods from one freight carrier to another or, worst case scenario, accidentally sends your goods to the wrong location. The simplest way to avoid this is obviously to send direct shipments from point A to point B without the need for transshipment. Depending on the point of origin, however, this may be a challenge.

The best way to avoid issues if you absolutely must transship your goods is to triple check all your paperwork and make sure your goods are properly labeled, declared, and any permissions obtained prior to shipment. You may want to outsource this task to a freight forwarder, particularly if you and your staff aren’t fully comfortable navigating logistical complexities.

Trade Route Delays/Port Congestion

Often, freight vessels make several stops in transit to accommodate goods bound for multiple destinations. Although this is not unusual, the more stops a vessel makes, the greater the possibility of delays at various points along the way. This may be due to port congestion or insufficient paperwork attached to the shipment.

Unfortunately, these kinds of delays are sometimes unavoidable especially when they relate to issues like heavy traffic at ports or malfunctioning equipment. Again, an experienced freight forwarder can set you up with carriers who know how best to prepare and prevent issues that occur in transit from delaying your goods.

Inspections

Holds in the inspection process are some of the most common reasons for delays in shipping processes. The specific reasons behind these delays can vary, but most of them are related to the United States Customs and Border Patrol, or CBP regulations.

The foremost purpose of CBP regulations is to ensure that any incoming materials are safe to enter the country. If any of the goods you ship are deemed dangerous (weapons, chemicals, pharmaceuticals, etc.) or environmentally hazardous (plant matter that may host foreign pests, etc.), you must arrange all necessary permissions and declare your goods in detail to avoid holds. Otherwise, there is a chance your goods will be held indefinitely. Although there is no way to avoid inspection altogether, since inspections are often performed at random, having your paperwork in order gives you a greater chance of having a quick inspection or bypassing inspection altogether. If the goods are made to fulfill customer orders, make sure you communicate with your customer to keep them apprised of delays and coordinate expectations accordingly. This can prevent cancelled orders and potential returns and chargebacks down the line.

External Factors

Occasionally, your shipment will be held up for reasons that are out of anyone’s control. Inclement weather at sea, damaged vessels, or random flagging at ports can push back the projected arrival date of your goods by days, sometimes weeks. If you’ve taken care of all documents and permissions ahead of time, your shipments probably won’t be held for long, but the best way to avoid missed deadlines is to book your orders a minimum of 2 weeks ahead of the date by which you need them. You will be grateful for the leeway if anything unexpected happens in transit. As for unprecedented disasters like bad weather or sinking ships, make sure that you or your supplier obtain sufficient insurance coverage to offset any damages that might occur while the goods are being transported by the carrier.


Researching documentary requirements and carriers can help you avoid most of the issues that can cause delays in shipment, but hiring a freight forwarder simplifies the process significantly. Their experience and knowledge allows them to advise you in customs compliance and insurance, as well as direct your goods to reliable carriers and well-equipped ports, making delays in shipment as unlikely as possible.

Good luck and happy shipping!

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