Investing in Debt
I know you “Financial Guru’s” know what I mean when I use the term, Private Financing, but most of us haven’t had your education. And, sadly, our primary and secondary institutions of learning spend little time, if any, on preparing students for the world of credit and debt. Most young people learn about credit, and don’t understand what it means, until they graduate high school and get to college.
The bankers and credit card companies meet freshmen during college orientation and pass out their cards. The first time our students swipe those miraculous pieces of plastic and get what they want, their feeling of financial power is awesome. After all it will be 30 days before they’ll see the billing and interest due for their purchases.
This is, of course, the wrong side of the “debt equation” as I see it. One should want to be on the side of the banker and not be the debtor. But how does one accomplish that?
My, Late in Life, Education
You see, I had no formal education in financing and therefore I was always on the wrong side of the debt. My education in Real Estate Financing started much later in life than it should have. In fact I met Frank, my instructor, about a dozen years ago when I answered an ad about “Investing in Debt”.
Just the ad caption intrigued me enough to call the number and set up an appointment. At first I didn’t understand the idea but after our conversation, the process became more clear. I had never heard the term “Private Mortgage” before that day, at least not by that term.
Private Mortgage Notes
Simply stated, private mortgages are exactly the same as loans you get from the local bank which lends money to buy a real estate. The banker lends the money and the mortgagor (you) pay back the money plus interest over time. You own your house and the bank’s depositors are happy to make interest on their money. Everybody wins!
Private Mortgage “Holders” are little private banks. For instance, your next door neighbor might be a private financier who lends a buyer the money to buy a home. In fact, I found out that my parents bought their first home with a private mortgage, financed by our next door neighbor. They were, by no means financial experts, but they accepted his generosity and bought their first home. What did they know that I didn’t?
A Pleasantly Rude Awakening
My conversation with Frank opened up the extraordinary world of Private Financing and Creative Financing. But before your eyes glaze over and you stop reading, listen to Frank’s story about a farmer, who needed money to buy seed for his fields.
“Having no cash available, he surveyed a piece of his property and offered to sell it for $10,000. A neighbor agreed to buy the property on which to build a house. Between them they created a promissory note or promise to pay $10,000 plus interest over a certain period of time. The purchaser would build his new home on the property. The farmer had just invested in debt by becoming the bank and by receiving payments with interest.” Sound familiar? But there’s more….
Notes Are Negotiable Assets
With no money out of his pocket, the farmer had turned one type of asset, land, into another, a mortgage note, which would provide monthly income (principle and interest) for the life of the loan.
But that was not his plan; he wanted to seed his other fields. So he went to the nearest “Note Broker” and sold his promissory note for about $8,500 and then bought seed and planted a crop which he harvested the next Fall and sold for $20,000, a $10,000 profit over the market price of the land.
Using My New Knowledge
After more conversation with Frank, I caught on and asked a question. “I’m not a farmer, but I own a home which has equity, (market value minus debt) let’s say 50% equity. If I sell my home and create a note for the 50% equity, I can get paid with interest until the loan is paid off?” Let’s say when I want to retire.
All Frank did was smile at my answer. I then realized that I owned a “farmer’s field” right under my own roof. I could become the bank and lend my equity to a potential buyer of my home for principle plus interest or I could “sell the note” and get my cash now.
The Forgotten Art, Revisited
Since that time I have sold two houses using a lease purchase agreements and private mortgages to develop income. One of those was my mother’s home when she moved into a retirement residence. Her earnings over the past 4 years have been over $80,000 which she uses to fund her rent and living expenses, her personally funded retirement fund.
What If They Don’t Pay?
By this time you “Financial Guru’s” and some Attorneys, who are reading this article, are busting to tell my readers that there is a “risk” that the person who borrowed the money won’t pay off. However, government statistics show that about 4%, of the millions of outstanding mortgages, go bad. And that means that, in 96% of the millions of mortgages, the borrowers Do Pay!
Yes,, 96% of mortgagors Do Pay. And you’re rights, to get paid on a “Private Mortgage”, are protected by the law in every State, just like the loans the banks give.
So, what if we actually taught our children about “The Forgotten Art of Private Financing”? And about being on the correct side of the “debt equation”. How much better off would their futures be?
Robert J. Sivori Business Therapy
By way of introduction, I work with start-up as well as established businesses to increase business profits, assist with business planning and expansions using my small business and Corporate America experiences , in other words, I provide “Business Therapy”.
I will help you perform business profit analyses and develop marketing programs and help you obtain business financing. I operate under the premises that as business owners you want to maximize your sales, your profits and achieve your short and long term business goals.
It would be interesting to compare two sciences of physics and finance. While one deals with the money the other deals with the physical universe. Both are important branches of studies so drawing a parallel between them will be interesting to many lovers of sciences.
Most of the theories in physics have models explaining a certain phenomenon. Whether it is electricity, magnetism, thermodynamics, gravitation each field has a subsets of models to explain various observations. For e.g. the Doppler Effect model in waves theory explains the plain variation of sound frequencies by a single set of equations. The Kirchhoff’s law explains the law of flow of electric current in a closed circuit of electricity is a model based on some set of equations. The financial theory in recent times has become model based where the price of options comes from Black S Merton models. There are a set of inputs required in the model to describe and price the option. Similar to the physics models where one need to put in several parameters values to find an ideal solution.
Uncertainty is common to both finance and quantum physics. Quantum physics has a ground in uncertainty and that everything we see is in a random state of motion. Everything is arbitrary and does not has well-defined laws that can predict the outcome. Heisenberg’s uncertainty principle states that the place and momentum of the electron cannot be determined simultaneously with exact precisions so where will be the electron located after sometime in the future cannot be determined exactly. Similar case happens in stock markets where an investor cannot be certain as where would be the index after sometime with exactness. There is always a degree of uncertainty associated with the market movements and thus closely resembles the Heisenberg’s principle. Interest rates are the most dynamic measure of all that keeps on changing with the time and shows volatility so predicting where it will go the next moment requires a rocket scientist who can by all his knowledge can come out with a shrewd model that can predict the interest rates sometimes if not all the times. This uncertainty is a very important concept that happens everyday in the financial world. The speculators, hedging traders and the arbitrage traders all face this uncertainty and the risk of the market movement that could loss or gain them financially.
The geometric Brownian motion describes the path of the particle suspended in a liquid. A physician first observed this random motion of a pollen grain suspended in a liquid to follow a random path termed as the Brownian motion. Einstein described these Brownian motion mathematically in his paper, giving a set of equations that could describe the path followed by the suspended particle. His equation explains that the path of the particle is jointly described by a constant displacement term and a volatility term. It is the set of these equations that explains today the path of interest rates, the path of stock market index or the volatility path.
In their famous paper Black S and Merton describes the path followed by the stock prices follows Brownian motion equations which laid the foundation for the famous Black S Merton model that is widely used today by traders all over the world to values options. Black did use the law of equilibrium of physics to lay the basic idea behind the Black S equation. The joint portfolio of a long stock and a short call option would yield the same constant risk free rate over a short period. So the joint position would always be restored to the same risk free return. Various interest rate models like the lee model, Ross model or the White Hull models are mathematically given by the same set of Brownian motion equation difference is only that they are different in their displacement terms and volatility terms to describe the interest rates movements. The displacement coefficient can depend on time, a constant or a zero.The volatility coefficient is also sometimes depends on time or on the volatility itself. Thus when it comes to determining an uncertain quantity in the future there comes into play Brownian motion equations.
Uncertainty plays a big role in valuation models used today for valuing securities like equity and bonds. There are a thousand of different scenarios of future are possible when forecasting the interest rates, earnings or the discount factors in the valuation exercise. Similar observations happens when calculating the path taken by electron. An electron can take a very large number of paths when moving from one place to another. Richard Feynman gave an approximate number for the path that the electron can take through his sum over histories methods. Similarly the earnings of the company can follow several paths. Monte Carlo simulation can see different scenarios of path and a final value calculated by taking a mean of values calculated from values observed in several different paths. The forecasted values could be misleading and could be totally different, in a similar fashion the electron place could be misleading and incorrect. So if price of a security cannot be determined precisely and exactly, the present state of the electrons cannot be used to predict the future place by the quantum theory precisely.
If there is uncertainty then some models and theories do come close to predicting the next outcome. Take such as the theory of photoelectric effect which has a single equation given by Einstein. Theory is simple and elegant and beautifully explains the observed phenomenon with high degree of precision experimentally. The bond valuation includes discounting the future cash flows which are certain to occur and through proper discount rates one can come close to exact present value of the bond in the market. Sometimes theories do come close in explaining the real world. If a physicist wants to explain the falling of a ball under gravity he would use equations of motion to describe the path of the body. The frequency of light in a heat radiation is given by energy divided by the Planck’s constant. Similar scenarios happens when a credit analyst wants to find the credit spread of a bond he would simply multiply the loss given default for the bond and the Probability of default for the bond.
Phenomenon of heat equilibrium states that the heat flow between two surfaces takes place until the temperatures of both the surfaces attains the same temperature and is in thermal equilibrium. Once the thermal equilibrium or two surfaces have equal temperatures the flow of heat stops. Arbitrage is the trading of incorrectly priced securities in different markets so if security is over-priced in one market trader sells in that market and buys in the market where it is under-priced until the price levels are same in both the markets. So flow of security takes place from the market where it is under-priced to the market where it is over-priced. See how temperature and price are analogous in explaining the two different phenomena’s in same way. So money is flowing from one market to another market in the same way that the heat is flowing from one surface to another surface till the state of equilibrium of prices or temperatures reaches.
The quantitative theory of money states that measure of money in the economy determines inflation. So if money supply increases then there is inflation and if the money supply decreases then there is lower inflation. It could be compared with the heating of a body so that if the temperature of the body increases the heat radiates in large proportions to the fourth power of temperature and if it lowers then the heat radiated lowers proportionally. The inflation measures the amount of excess money in the economy in a similar way the temperature of the body measures the amount of excess heat in the body.
Thus overall the theories of finance and physics could be seen in a similar way except that they are taking place in two different worlds. Various theories have models that have a few set of parameters. There is uncertainty in some theories then there is some certainty in other theories in explaining the observed phenomenon. Laws of electricity, magnetism, gravitation and heat are applicable in finance also but not in same way as in physics. The same sets of explanations characterize what happens in both the worlds in the end they are different sciences. While physics deals with the study of nature and observed phenomenon then finance deals with the study of markets and its instruments.Nevertheless some parallels can still be drawn that should not sound meaningless.
Very much interested in writing about the topics on finance and science. There is large variety of topics that should be addressed and write about. Have a flair for writing and have written articles on science and finance.
In your search for commercial financing in the midst of the ongoing credit crunch, here’s something to factor into your consideration: It may be time to look at factoring in a whole new light.
It’s unfortunate that, for whatever reason, factoring has gotten a bad rap. A lot of the myths about factoring simply aren’t true-for example, that factoring is too expensive to be considered a viable commercial financing option for the average small business. In truth, factoring can make the difference between success or failure for companies operating without adequate working capital-at a cost that’s probably a lot less than most business owners think.
How Factoring Works
With factoring, companies sell or borrow against their outstanding commercial accounts receivable. The cost is a fee called a discount-typically between 2-5% of the invoice or the amount borrowed. By factoring, companies immediately benefit from improved cash flow: Instead of waiting somewhere between 30 and 90 days or longer to receive payment, they will receive approximately 80 percent of the receivable in the form of an advance when the receivable is presented to the factor.
In addition, the factor performs credit checks on customers and analyzes credit reports to uncover risks and help manage appropriate credit limits. Most factors will also provide a follow-up service to assist with keeping the debtors paying more promptly.
One thing to note is that factors need to be more insightful about the inner workings of their client’s business than traditional lenders are. Since they are lending against their client’s outstanding receivables, it’s their job to know all about the client’s customers, terms, backup and the billing process itself. Factors need to possess an in-depth understanding of their clients’ industries and the business nuances between their clients and the clients’ customers.
A Factoring Success Story
An industrial service business in Philadelphia recently entered into a factoring arrangement with a well-established factor because it was in need of short-term working capital assistance and decided on a factoring arrangement instead of a traditional line of credit
Since the business’ customers are of high credit quality, factoring was a logical credit facility for them to turn to. The business has been factoring invoices for several months now and is extremely pleased with the arrangement.
The owner especially likes the fact that he can use the factoring company’s online system to determine how much money he can borrow through factoring at any time, 24/7. This is a big help when it comes to daily cash flow and working capital planning.
Factors for Success
Here are a few areas you should concentrate on in order to increase your chances for factoring success:
• Financial statements, management reports and forecasts: It is important to generate accurate and timely financial statements, as well as for the owner to know exactly where the business is financially at all times-and where it’s headed. By accurately tracking factoring fees, the business is better able to build in and earn back those fees. Value will be gained via an increase in gross sales, discounts for paying vendors early and overhead reduction. Factoring will look expensive unless it is properly measured against the value it brings.
• The factoring contract: Be sure that you understand all details in any contract you sign with a factor, as well as the fees you will be charged. Beware of factors who issue a term sheet without doing proper due diligence. What may appear to be a low factoring rate at the outset could end up being very expensive when things like lockbox, minimum usage, credit checking, and wire transfer fees are included.
• Monitoring of factoring facility and working capital: Make sure that a senior financial person on your staff has sufficient time to monitor usage of the factoring facility and working capital-oriented items. By borrowing only what you absolutely need, you will be able to minimize your factoring expense. It’s also important to monitor the aging reports and become involved if any trade or payment disputes arise.
• Maximum efficiency: Increasing efficiencies in your backroom operation can have significant positive implications on your bottom line. By understanding all the services that your factor performs, you will be able to better utilize your staff and your own time. Understanding the reports and implementing controls and procedures will minimize errors and increase efficiency.
• Open communication: It’s important to have a clear channel of communication with your factor. You might be surprised at the flexibility your factor (and others) will provide when you are open and honest with them. It’s also important that you communicate directly with the factor if you are aware of any issues or problems with your invoicing or customers. A good factor can deal with most issues if aware of them-but like most lenders, factors don’t like to be surprised.
Since a factor will become an integral part of your business team, it’s important to select your partner carefully. Professional experience and adequate capitalization are especially crucial. Don’t be fooled by Internet claims of very low rates and a “24-hour application process.” Good factors are as choosy about their clients as you should be about your financial partner. When everyone performs their proper due diligence, you are more likely to build a foundation for a positive relationship for many years to come.
If your car insurance is due for renewal and you are considering buying another policy then this article will provide you with important facts that you should know about. Car insurance policies are getting increasingly expensive and you should do all that you can to reduce your costs. How much you have to pay for your car insurance is dictated by a variety of factors as they apply to you and your vehicle.
In this article we will examine coverage limits, your age, gender and marital status, your location and insuring other household members. All of these factors will have a great influence on how much you will have to pay for your policy.
Coverage limits are generally dictated by the price that you are willing to pay for your insurance. A higher level of coverage will generally result in higher premiums. The best way to find a good value policy is to comparison shop. Nowadays it is generally accepted that the best way to do this is by using a car insurance comparison website.
Your age, gender and marital status will have a great effect on the auto insurance rates that you are offered. Insurers rate drivers using a variety of criteria, if you are a young single male driver you will usually have to pay higher rates. If you are a middle-aged female married driver then your rates will be lower. Insurers calculate the best car insurance rates for you by comparing levels of risk. Those groups which are statistically more likely to be involved in an accident have to pay correspondingly higher rates.
Location plays an important part in deciding how much your premiums will cost. Drivers who live in an urban environment will usually pay more than those from a rural area. This is because drivers who live in cities and heavily populated areas are more likely to be involved in an accident, or to have their car stolen or vandalized. Insurers generally offer better rates if you’re able to demonstrate that you keep your vehicle in a garage at night. You may also be able to improve the security arrangements of your automobile by fitting an alarm, immobilizer and steering wheel lock.
Insuring other household members will have an influence on the cost of your policy and the best car insurance rates that you offered. If you have teenage family members living with you and they are added to your policy, then your costs will increase. This may still work out cheaper than if your teenage driver were to have a separate policy in their own name.
In conclusion, there are a variety of different factors which can affect your ability to be offered the best insurance rates. Some of these are coverage limits, how old you are, whether you are male or female and whether you are married or single. Your rates will also be affected by the area where you live and whether other household members are included in your policy.