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The methods of business financing are not only different, but some can also be very special and applicable only to a specific industry category. Loans and lines of credit are the traditional methods of providing money to business, whether during startup or for sustaining it on an ongoing basis. The majority of business categories enjoy the financing facility that is most widely practiced.
Business is always unpredictable, and the uncertainty affects liquidity or cash flow. Since business scenarios keep changing very fast and many extraneous factors affect cash flow, the strains become unavoidable.
There will be situations when you experience big gaps in the supply of money and would need an immediate infusion of cash to steady the boat. No matter how well you budget or forecast the requirement for money, it becomes almost inevitable to seek funds, and you must stay prepared. The easiest way is to use the lines of credit and or loans for tiding over the crisis. Some would even cash out the sale bills for goods before the term of payment matures by way of selling to some companies or banks for a discount so that they can access quick money. Therefore, even if they face cash crisis, they have some ready solution to it.
The exceptional business category
The financial models for pumping cash into business as explained above does not include all kinds of business but excludes some types especially those related to the service industry. The real estate brokers offer services only and belong to this category. No financial institution or bank is willing to provide finance to real estate brokers who are professionals engaged in running their own business. Since the financial requirements of brokers are no different from any other business, they are unable to avail the traditional methods of business financing. This puts them into serious problems as they find it very difficult to cope with cash crisis that crops up now and then.
The real estate business is high risk in the eyes of the financiers because of the extreme volatility of the market and uncertainty of earning by brokers. Since any lender would like to work with the least risk exposure, the real estate industry does not fit the bill.
The payment cycle for brokers is to blame
Real estate brokers suffer from irregular earning for two reasons. The volatility of the market does not allow steady business to happen. Some months may experience high transactions while some other months may run completely dry. Brokers have to spread out their earnings throughout the year taking into account the lean periods that they have to face. However, the problem is that the delay in cash available from the earning puts brokers in a tight spot. The delay happens because brokers earn from commissions only and have to wait for a few months before the money reach their banks. Signing the agreement confirms the earning, but the disbursal of funds takes place only after deal completion. The delay in availability of funds puts stress on the cash flow, and it becomes difficult to sustain the business.
Speeding up payment
On analyzing the problem, you would find that the only way that brokers could find relief is to ensure the money from their earning reach them speedily. Also, if they can market aggressively, they could maintain steady earning that would put an end to their financial woes. Some financial companies interested in funding real estate brokers have created a special arrangement for payment known as commission advance that ensures speedy cash availability from assured commissions.
The process explained
In this method, the broker has to submit the documents to the financial company to prove that they have earned a legitimate commission but waiting for payment. The company would pay a major portion of the commission to the broker after deducting some fees for the service, and the broker would receive the cash almost immediately. In the process, the delay in receiving payment, which was the cause of the problem, vanishes and brokers are happy to enjoy their earning that gives them an opportunity to use their own money for the business. The arrangement paves the way for easing the financial difficulties of brokers who are unable to avail the traditional financial support that other businesses enjoy.
By looking at the arrangement, you would find striking similarities with the method of bill discounting in which the sale invoice is sold to some financier for payment. In bill discounting, the finance company receives the payment according to the credit terms of the seller and for brokers; they get about a month’s time to pay back the advance they receive from the financial company.
That the scheme focuses on advance payment and not loan with high interest makes a difference to brokers.
Ross is known as the Pambansang Blogger ng Pilipinas - An Information and Communication Technology (ICT) Professional by profession and a Social Media Evangelist by heart.
