Search The Library
Learn to think about money the way a banker does - as a bookkeeping entry - and get your balance sheet to work for you.
Business Balance Sheet Loans
Wouldn't it be wonderful it one's business could create net worth just like a bank? With an accommodating financial institution, it is possible. The case history that follows shows how small businesses can use these methods to get the financial help they need.
William Ballast is the owner of a wholesale distribution company. When one of his suppliers announces a gigantic inventory sale, Ballast is eager to take advantage of it. He knows that if he can increase his inventory with goods at the lower price, his average unit cost will be lower and profits would increase accordingly.
Ballast calls a financial consultant to discuss his problem. Ballast is advised to submit a current balance sheet reflecting higher cash assets to obtain a more favourable line or credit. Although Ballast favours such a move, he also wants to avoid a long-term debt commitment. He fears that the interest payments from such a debt would wipe out any gains made by buying the additional inventory on sale.
Step 1: Owner borrows moneys from lender. The consultant suggests that a personal loan be made to Ballast. The funds from this loan are to be placed in a savings account in the name of Ballast's company. After the funds are deposited, the company would have a new balance sheet prepared according to accepted accounting practices, which would reflect its increased liquidity. With the stronger financial picture presented, the supplier could be more favourably disposed toward extending the line of credit. Ballast is convinced that this is a sound approach and enters into an agreement to implement the plan whereby the funds would be provided by a lender supplied by his consultant.
Step 2: Deposit loan proceeds in company account. When the funds are lent to Ballast, he simply endorses the cashier's check to the bank on which it was drawn. At the same time, a passbook for a savings account, containing an identical balance and bearing the name of Ballast's company, is issued and turned over to Ballast.
Step 3: Increase company assets on balance sheet. Based on the updated balance sheet, the supplier increases the line of credit for Ballast's company. After the new credit line is established, the funds, no longer needed, are returned to the lender. The cost of the program was kept to a minimum and the desired profits realised.
Robert Jensen knows of a valuable parcel of land that he believes could be profitably developed. If he could get an option on the property, he could organise a highly successful joint venture to develop the land. Jensen is afraid that if he doesn't act quickly, someone else will buy the land from under him. He needs time to secure funding for the option and line up partners for his joint venture.
Step 1: Secure option on land. Jensen convinces the landowner to give him 90 days to raise the total purchase price of US $2million. In order to hold the land for 90 days, Jensen needs to deposit 10 percent in an escrow account as a demonstration of his financial strength.
Step 2: Borrow money to open escrow account. Working with a consultant, Jensen arranges for a bank to loan him US$ 200,000 and hold it in an escrow company account on his behalf. After the account is opened, the company provides Jensen with documents showing that the moneys are on deposit. The escrow company then writes a series of letters indicating the steps being taken to assure the successful completion of the transaction. The satisfies the seller and gives Jensen time to put his investment group together.
Step 3: From joint venture. Potential investors approached by Jensen are excited by the project and are especially impressed by the fact that Jensen has already secured an option on the land. They agree to fund the project with Jensen as equity partner and project manager. Jensen contributes his option.
Step 4: Substitute new escrow account. The joint venture then opens a new escrow account for US$ 200,000 and substitutes it for the one originally opened by Jensen. The old account is closed. The funds in the original escrow, having served their purpose, are returned to the lender.
As a result of the above transaction, Jensen now holds substantial equity in a commercial real estate development worth several million dollars. His only costs were a few points for the loan, the escrow account, and the supporting documents that went to the various interested parties.
If the reader can learn to think about money the way a banker thinks of it - as a bookkeeping entry - then he can get his balance sheet to work for him. He can also use this knowledge to provide sophisticated services to others through his own financial service business. Balance sheet loans and bearer depository receipts are natural products to sell through an international bank or financial brokerage business.
This document was excerpted, modified & otherwise prepared by the 'Lectric Law Library ('LLL) from materials supplied by Baltic Banking Group - www.BalticBankingGroup.com Copyright 1998 - 2002 'LLL & BBG, all rights reserved.