55.7 F
San Diego
Tuesday, Mar 19, 2024
-Advertisement-

Alternative Loan Products Provide Options to Borrowers

Tightening banking regulations coupled with a restrictive lending environment has some businesses turning to alternative means for accessing cash quickly such as hard money lending and factoring.

One option for those seeking any type of residential or commercial loan with a business purpose is Maggio Capital Inc., a San Diego operation that has offered hard money loans since 2009.

The firm’s president who also serves as broker, Carl Maggio, said the company provides short-term financing solutions to borrowers who are unable to obtain conventional loans from traditional mortgage services. Lending throughout California with an emphasis on Southern California, Maggio Capital’s territory covers improved properties rather than financing undeveloped land or ground-up construction.

Loan terms can extend up to three years, according to Maggio, although he says most loans are paid back in 12 months. Interest rates can be as low as 8 percent and as high as 12.5 percent, but most fall in the 9 percent or 10 percent range, he says.

“Our pricing is a little bit higher than with a conventional loan, but the borrower knows we can close much quicker,” he said. “We generally quote seven to 10 days when the borrower has their money and is on their way.”

The typical business loan serves real estate investors who are buying distressed properties from banks. While the properties may be suffering from neglect and deferred maintenance, these investors are willing to renovate, then sell the properties turnkey to consumers. The prospects for recovering properties with $30,000 to $40,000 of paint, carpet, landscaping and other cosmetic improvements has been booming lately as a wave of distressed property owners stopped paying their mortgages.

Interest Only Payments

Other customers include property owners such as the owner of four rental units in Mission Beach who is looking to spend $100,000 on property upgrades, and a coffee shop owner who wants to convert to a Mexican eatery to take advantage of a location in close proximity to a high school.

Most of Maggio Capital’s loans are in the $50,000 to $1 million range and as many as two to three loans are transacted each month, or up to 30 to 40 loans per year. Borrowers are required to make interest only payments and pay off the loan when the balloon payment is due.

Although the property may be put up as collateral, Maggio Capital ensures the borrower has an exit strategy, either through paying off the loan through the sale of the improved property, a refinance, business deal or sale of another property, Maggio said.

“We don’t anticipate taking back people’s property,” he said. “We need to make sure the borrower has the capacity to make the monthly payments and have a realistic exit strategy. We don’t like to make loans when there’s uncertainty of how to get out of it.”

Maggio said borrowers turn to Maggio Capital for a variety of reasons, but generally hard money lending services offer less restrictive guidelines. He said the company may request tax returns and pay stubs or even a credit report to find out how many debts the borrower is servicing but their main concern is with how much equity is in the property and the borrower’s ability to repay the loan.

‘Banks Are Still Wary’

“There’s still a lot of uncertainty out there about what’s going to happen,” said Maggio, who obtained his real estate license in 1997 and a broker license in 2006. “The banks are still wary about making long-term loans. They’ve got so much stricter underwriting guidelines. They’ve got a lot of people to answer to. Whether it be loan committees or shareholders of the company, they’re kind of under the microscope. We don’t have the same large corporate hierarchy.”

Another alternative source of cash for borrowers who are unable to get a traditional bank line of credit is factoring, or purchasing of receivables.

Factoring is available to companies that provide a product or service and don’t want to wait 30 to 60 days or more to receive the cash from the sales transaction. Factoring companies will provide immediate cash for the service performed or the product that was sold.

Companies such as San Diego-based Primary Funding Corp. that are in the business of factoring expect to be paid directly by the clients’ customers.

“The responsibility for the most part is on us to follow up on our clients’ customers that owe them money,” said Primary Funding President Patricia Spencer Burns. “We’re following up and making sure they pay us.”

Primary Funding generally buys a minimum of $25,000 in receivables from a client. The payments typically range from 80 to 85 percent of the receivables total. So, for example, if one of Primary Funding’s clients sells a $10,000 item to 10 different customers for a total of $100,000 in receivables, Primary Funding’s payment would range from $80,000 to $85,000. When Primary Funding collects the total balance of $100,000, the remaining 15 to 20 percent is given back to the client minus the fees charged for this service.

Uptick in Factoring

Spencer Burns said the fee structure depends on the clients’ customers, what services or products were provided, and what the nature of the receivables are, but typically range from 2 percent to 3 percent for the first 30 days and 1 percent per month beyond that.

Spencer Burns said a factoring service sets itself apart from a bank by considering the financial situation of a client’s customers while a bank considers the financial situation of a particular customer. And factors can readily get cash to clients within a matter of several days, she said, which in turn helps businesses be able to buy inventory or increase sales.

With the economic downturn and difficulty obtaining traditional financing from banks Spencer Burns says she’s noticed a considerable uptick in factoring business during the past several years.

Primary Funding has 75 to 100 regular clients who range from retailers to manufacturers and service providers such as law firms and staffing agencies. Most of the clients are small and medium-size businesses with revenue ranging from $2 million to $20 million. Loyal customers appreciate the extended collections and credit check services that Primary Funding provides, Spencer Burns said.

“Sometimes they have a new customer that they want to sell their product to, or there’s a larger order or they’re unsure of how creditworthy their customer is so they rely on us to do the research and give them feedback on whether or not to sell to them,” she said. “We have a vested interest in it because if we’re going to buy that receivable from that new customer we want to be sure they’re creditworthy. It puts us on the same page with our clients.”

-Advertisement-

Featured Articles

-Advertisement-
-Advertisement-

Related Articles

-Advertisement-
-Advertisement-
-Advertisement-