By Brad MacLiver
Authorship and profile at Google
When a VT pharmacy is considering selling a cash flow instrument such as the pharmacy’s receivables, or a pharmacy business note, the price the pharmacy owner in Vermont receives will reflect how much time is involved before the Buyer/Investor/Funder of the cash flow instrument will recoup his principal investment and the desired rate of return the Investor needs to make it desirable to take the risk of buying the pharmacies cash flow instrument.
To entice an Investor to shift the risk of holding the cash flow instrument from theVermont
If the pharmacy owner inVermont
Time Value of Money:
The concept of cash being more valuable to have a dollar today instead of tomorrow is based on the Time Value of Money (TVM). Most business people are aware of the TVM and how it is fundamental to both personal and corporate decision making, but to make sure we are on the same page, we will cover the basics of TVM.
TVM assumes that money earns interest over time. Therefore, as the cliché says time is money, and because of this we can compare money at different points in time that have different values and call them equal.
An example: If $1000.00 today earns 10% interest, it will be worth $1100.00 at the same time next year. Therefore, $1000.00 today = $1100.00 next year = $2593.74 ten years from now.
Within the same reasoning the reverse is true. An investor will not pay $1.00 today for a dollar that won’t be collected until next year, or 10 years from now. Today’s dollar will be discounted to reflect risk, inflation, the strength of the economy, etc.
Along with interest rates and principal amounts, a cash flow instruments such as Pharmacy Business Notes in VT, are originated with a certain time period. The TVM can be looked at, as if it were on a sliding scale. The earlier in time the Note is paid off, the smaller the amount becomes. When the Note is paid early, you don’t get to collect the compounded interest amount, which would have accumulated if you had waited the full time period. The Note has already been written and the terms set. Unlike a loan where the rate of return needed to cover the risk is added to the loan amount. An investor cannot go back to the buyer of your business and change the terms of the note. Therefore, the investor looks at the portion of the note, which is going to be purchased and subtracts the rate of return needed to justify the risk. This is called Discounting. The amount of the discount is contingent on the risk.
Example:
If you sell something for a $1000.00 with 9% interest, equal payments received over a 7 year period, you would expect to receive $1828.04. However, should the note be paid in full in 2 years you will only have collected $1188.10. You are not collecting the other $639.94 because you are no longer risking anything (you are not earning it). If you want an investor to advance you the $1828.04, you will no longer have any risk because you have transferred it to the Investor. To compensate the Investor for accepting the risk of holding the note, the Investor will discount the note, and pay you an amount equivalent to the time and risk involved.
The price you receive when selling your note will be the discounted rate according to the basic TVM principals minus the amount that allows an investor to justify the risk.
If a note is a length of 3, or more years, it might be beneficial for you to sell just a portion of the note. Because payments from a month in the 10th year holds less value than payments collected this year, it would benefit you to sell only the number of months that you need to obtain the cash that meets your current financial needs. You are always able to sell more payments at a later date if you need additional funds. Determine how much cash you really need and then calculate the number of months we will purchase to meet your needs.
Although it involves a much shorter period of time, understanding discount rates is the same when selling aVermont
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Authorship and profile at Google
When a VT pharmacy is considering selling a cash flow instrument such as the pharmacy’s receivables, or a pharmacy business note, the price the pharmacy owner in Vermont receives will reflect how much time is involved before the Buyer/Investor/Funder of the cash flow instrument will recoup his principal investment and the desired rate of return the Investor needs to make it desirable to take the risk of buying the pharmacies cash flow instrument.
To entice an Investor to shift the risk of holding the cash flow instrument from the
If the pharmacy owner in
Time Value of Money:
The concept of cash being more valuable to have a dollar today instead of tomorrow is based on the Time Value of Money (TVM). Most business people are aware of the TVM and how it is fundamental to both personal and corporate decision making, but to make sure we are on the same page, we will cover the basics of TVM.
TVM assumes that money earns interest over time. Therefore, as the cliché says time is money, and because of this we can compare money at different points in time that have different values and call them equal.
An example: If $1000.00 today earns 10% interest, it will be worth $1100.00 at the same time next year. Therefore, $1000.00 today = $1100.00 next year = $2593.74 ten years from now.
Within the same reasoning the reverse is true. An investor will not pay $1.00 today for a dollar that won’t be collected until next year, or 10 years from now. Today’s dollar will be discounted to reflect risk, inflation, the strength of the economy, etc.
Along with interest rates and principal amounts, a cash flow instruments such as Pharmacy Business Notes in VT, are originated with a certain time period. The TVM can be looked at, as if it were on a sliding scale. The earlier in time the Note is paid off, the smaller the amount becomes. When the Note is paid early, you don’t get to collect the compounded interest amount, which would have accumulated if you had waited the full time period. The Note has already been written and the terms set. Unlike a loan where the rate of return needed to cover the risk is added to the loan amount. An investor cannot go back to the buyer of your business and change the terms of the note. Therefore, the investor looks at the portion of the note, which is going to be purchased and subtracts the rate of return needed to justify the risk. This is called Discounting. The amount of the discount is contingent on the risk.
Example:
If you sell something for a $1000.00 with 9% interest, equal payments received over a 7 year period, you would expect to receive $1828.04. However, should the note be paid in full in 2 years you will only have collected $1188.10. You are not collecting the other $639.94 because you are no longer risking anything (you are not earning it). If you want an investor to advance you the $1828.04, you will no longer have any risk because you have transferred it to the Investor. To compensate the Investor for accepting the risk of holding the note, the Investor will discount the note, and pay you an amount equivalent to the time and risk involved.
The price you receive when selling your note will be the discounted rate according to the basic TVM principals minus the amount that allows an investor to justify the risk.
If a note is a length of 3, or more years, it might be beneficial for you to sell just a portion of the note. Because payments from a month in the 10th year holds less value than payments collected this year, it would benefit you to sell only the number of months that you need to obtain the cash that meets your current financial needs. You are always able to sell more payments at a later date if you need additional funds. Determine how much cash you really need and then calculate the number of months we will purchase to meet your needs.
Although it involves a much shorter period of time, understanding discount rates is the same when selling a
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