Transactional funding for startups – everything you need to know
This article covers the arising questions, such as how to apply for transactional funding to startups, benefits of transactional funding & more.
When there is a need for quick startup funding, a hard money lender or private money lender can provide transactional funding to an investor if they have a pre-existing and well-documented end buyer. The investor uses transactional funding to purchase an asset and sell it to an end buyer with a profit. The end-buyer should be prepared to purchase an asset from the investor as soon as they get it from the original seller. The money from the end buyer is used to repay the transactional funding loan.
Transactional funding can give startup funding as long as the investor facilitates both transactions simultaneously and the lender can verify crucial details before disbursing the funds. This article covers the arising questions, such as how to apply for transactional funding to startups, transactional funding examples, benefits of transactional funding & more.
Transactional funding and startups
Transactional funding quickly established itself as one of the most reliable sources of capital for real estate wholesalers. However, it is an excellent way to generate startup funding if funding rounds do not generate enough. A short-term lending option is useful when investors want to seize an opportunity quickly without using their funds. In just a decade, transactional lending has risen through the ranks of capital financing, assisting an entire generation of wholesalers in securing deals they would otherwise have had to pass on.
What is Transactional funding?
Transactional funding is a borrowing method in which a startup borrows short-term capital to complete a transaction. So they get funds to purchase an asset, sell it with a profit, and pay back the loan quickly. Transactional funding is called ABC funding, flash funding, same-day funding, or one-day bridge loans.
Typically, the lender will make a hard-money loan to the investor for 100% of the required capital for as little as 24 hours. No credit check or down payment is required, but the investor must have an end buyer before acquiring transaction funding.
Same-day funding is popular among investors who want to achieve liquidity on a short-term basis. For a fee, transaction funding lenders are willing to finance such a transaction due to the short term of the loan, and there is a waiting end-buyer.
How does transaction funding work for a startup?
Transactional funding is commonly used in real estate investing, but the concept could also be used for startup funding. A startup essentially leverages two parties’ interests and acts as a facilitator to bring the transaction to fruition. Transactional funding makes a transaction between people for resources.
Here, relationships are essential—an investor or the startup must act as an intermediary, finding a suitable buyer/end investor and convincing the seller to release the asset. It is critical to have relationships with venture capitalists, private lenders, or financial institutions willing to lend or invest the funds.
When do investors get qualified for transactional funding?
Qualifying for transactional funding is not the same as getting approved for other types of traditional lending. Funding requests are authorized or denied based on the deal’s strength, not the investor’s credit score or income.
An investor must provide the lender with signed and executed contracts from the seller and, most importantly, the end buyer to qualify for hard money. Hard money lenders want to see that both the seller (A) and the end buyer (C) are committed and ready to go.
This type of loan doesn’t need traditional underwriting; the funding can be completed in a day or two. A transactional loan does not require an investor to provide proof of employment, credit verification, personal collateral, or appraisals.
Example of Transactional funding
An asset has piqued an investor’s interest and has an end buyer lined up to buy it. “A” is the original seller of the asset, the investor or the startup here is “B” and the end buyer is “C”.
The investor must complete a double closing—an A-B transaction followed by the B-C contract. B uses borrowing funds from hard money lenders to make the first transaction. A agrees to sell the property for $250,000 in a short sale. B and C signed a contract stating that C would pay $300,000 for the property.
B must coordinate both sales to occur on the same day. If the simultaneous closings go well, the B will profit $50,000.
This example excludes closing costs, commissions, and transactional funding fees. The deduction of the closing cost for buying and selling the asset and the transaction loan will reduce the profit from $50,000. However, all the profits are made without investing their own money.
Where can startups get transactional funding?
There are two sources for startups to get transactional funding, which are as follows:
- Short term loans – A hard-money loan is another type of short-term funding source. A hard money loan is financed by the value of an asset given in exchange for the loan amount. Because a private lender provides hard money loans, loan terms and fees will vary. Transactional funding lenders, on the other hand, typically give lenders six months to repay these loans. As a result, you’ll have a little more breathing room if you need it to finalize your property sale.
- Money lending companies – Other lending sources, such as private lenders, could also provide transactional funding. However, these could include family members, friends, and other investors because private lending is primarily unregulated. Different interest rates and loan fees may apply to you.
Pros and cons of transactional funding
Before getting into transactional funding for your startup, there are some advantages and disadvantages to take note of:
Pros of Transactional funding
Here are some key considerations for prospective investors to better understand the forces working for and against transactional lending.
- Early Closing – Because transactional funding can be approved and closed in a few days, it is commonly referred to as “flash funding”. It allows access to the best deals and the most significant profits.
- No experience required – Transactional funding does not require qualifyings like a conventional or hard money loan. You won’t be compelled to provide proof of your income, how much money you have in the bank, or even whether you have a job. You don’t even need a valuation. You only need a qualified end buyer to whom you will sell the asset.
- Act as a cash buyer – Because of the speed of transactional funding and the lack of underwriting requirements, you can act as a cash buyer to increase demand for greater discounts when making offers on assets. This provides a decisive advantage over your competition and allows you to make a more extensive spread on each asset at a lower retail price, so they sell faster.
- Provide 100% financing – Transactional funding covers the purchase price plus closing costs, allowing for true no-money-down transactions.
- Lower risk – Access to a decent transaction-oriented lender avoids the risks of holding or speculating on the appreciation.
- Affordable – If you’ve ever used conventional hard money lenders, they charge hefty junk fees that eat your profits and make or break a deal. Transactional funding is significantly less expensive, allowing you to keep more money on the table and in your bank account.
Cons of transactional funding
Apart from its advantages, transactional funding also has some disadvantages, which are as follows:
- Requires a ready end Buyer – Typically, investors must have an end buyer lined up to receive transactional funding for real estate deals.
- Requires a Qualified end-buyer – Not only will wholesalers require an end buyer, but they will also require one who has already qualified for financing.
- Irreversible Loan Programs – Transactional funding cannot be compared to all loan programs with quick turnaround times associated with double closings.
- Additional Fees & Expenses – If the deal doesn’t close in the agreed-upon timeframe, additional fees and interest can get expensive.
How much does transactional funding usually cost?
The costs of a transactional funding loan can vary depending on the loan amount, the term length, and the lender’s perception of the deal’s risk. A typical fee structure for transactional funding ranges from 1% to 2.5% of the loan, but it can cost more if the term is extended or other risks are present. It all comes down to what the lender and borrower agree on. A transactional lender expects to be repaid within 1 to 3 days (sometimes up to a week), though some lenders offer extended transactional loans for up to 360 days.
Need help to get qualified for startup funding rounds?
Transactional funding may or may not be suitable for quick funding for your startup. The process provides many advantages; however, the need for a qualified end-buyer is crucial. Qualifying for startup funding rounds can eliminate the need to generate quick startup funding with transactional funding. In startup funding rounds, investors often look for a valuation report to understand the potential of your company. Get a business valuation with Eqvista to qualify for startup funding rounds. Our 409a valuation experts use a combination of methods to give a thorough valuation report to prepare you for the funding round. Consult us today for a business valuation report.