Loans in Kind

A Resource for Businessmen Undergoing Cash Difficulties

By Yolanda Sandy

Business Reporter - La Opinion Newspaper

Los Angeles, Monday, October 25, 2004

Getting 1.4 million in a matter of days didn’t seem to be an easy task for Marcos Silva, president of California Airsales, an Inglewood based airplane parts distributor.

Silva faced a problem often experienced by entrepreneurs: working capital and inventory funds are inaccessible in a timely fashion even though their companies have good access to credit.

“I needed to increase the size of my inventory quickly to be able to cope with the spike in demand; I risked losing my customers” said Silva, explaining that timing was his major deterrent to go to a bank for a business loan.

“The paperwork can take weeks”, the entrepreneur explained. However, he accomplished his objectives in three days by using the services of Inventory Capital Group; an LA-based company.

ICG provides loans, but in kind rather than in money, and according to Todd Kesselman, the company’s president, ICG’s criteria to attend to loan petitions are different than most traditional lenders that evaluate potential clients’ loan applications by analyzing their balance sheets. ICG is more interested in its potential clients’ business proposal.

“99% of our clients are non-bankable” said Kesselman, who further pointed out that many good businessmen have a very poor credit history because they have risked all their personal wealth into their business.

Besides his own experience as an entrepreneur, Kesselman worked for years as a bankruptcy consultant.

“By witnessing so many bad situations, I was able to understand the common mistakes that took many businessmen down, and also how to avoid them”, said the expert – adding that the second most important reason – after making a profit – for his opening ICG, is to be able to help fellow entrepreneurs when banks and other financial institutions won’t.

Kesselman also pointed out that, contrary to joint ventures, venture capital and angel investments, his financing method does not imply giving away control of the company.

“Our role is to disappear once our client has been able to pay us back the merchandise we financed”, said Kesselman, who also mentioned that his company is the only one he knows about that does provides this type of service.

PO financing is the most similar form of financing to ICG’s method – in which a loan is made for the borrower to buy merchandise he or she will later sell to a pre-specified buyer.

Sharon Evans, President of Business Resource Group, a non-for-profit business support organization, indicated that in general, inventory loans are very expensive.

“Interest rates for this type of loan are usually between 6-8% above Prime. For that reason, we usually recommend our clients get a line of credit which implies a much lower interest rate”, she said.

Nevertheless, ICG does not provide funding, rather, it provides the merchandise and its costs are a percentage of sales margins.

“It’s an increase of between 5%-10% over the margins that the entrepreneur gets” explained Kesselman, emphasizing that his services are not recommended for transactions with low profit margins. The businessman added that the most proper ventures are those that operate with profit margins of 40% to 50%.

“Sometimes though, the discounts we achieve for large volume purchases allows for the borrower to pay for part or the total cost of our services” added Kesselman.

The SBA lends up to $259k for working capital, and also offers export credit lines in which it guarantees up to 90% of the capital, with a limit of $1mm.

“Nevertheless, if the money is needed urgently, it is better to apply for a so called “express loan” offered by many banks, which usually provide an answer in a matter of days” recommended an SBA official.

Tedd Koo, a consultant for LA’s Center Bank explained that a loan to purchase merchandise for export might take between two to three weeks to get approved, and interests will vary according to the economic conditions of the company.

“It’ like credit card limits, which are calculated in function of the cardholders credit history” informed Koo, who added that the borrowing company must also present tax filings for the last two-to-three years.

In regards to the usual paperwork needed to obtain a loan, Kesselman indicated that ICG’s due diligence process is another one of its differentiation points against traditional lenders, and that the paperwork needed to obtain a loan from ICG is usually substituted by a conversation and a visit to the company.

“We don’t ask for a business plan; rather, we try to evaluate the company’s potential beyond what can be seen from analyzing paperwork”, explained Kesselman, adding that the merchandise funded by ICG are kept at third-party facilities, such as industrial warehouses which charge a fee for the use of their space.

“With retail operations, I do not have control over how much of the inventory has been sold,” said Kesselman, who also added that large retail operations usually own warehouses and generally don’t have inventory funding problems.

“Our services are not designed to be a permanent help for the entrepreneur. Rather, we offer help at crucial stages when companies are expanding” manifested Kesselman, pointing out that once companies have taken the “jump” or fixed a difficult situation, it is desirable that they don’t apply for ICG’s services again. “That would show symptoms of bad cash flow management” concluded Kesselman.

Translated from Spanish from La Opinion Newspaper:

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