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The financial
concepts--the time value of money and risk--are two of the major concepts
that determine the cost of capital.
The first concept
states that a dollar is worth more now than a dollar in the future,
even after making adjustments for inflation.
For example, if you
have an asset that will give you $1,000 in three years and you sell that
asset for $900 today rather than waiting three years to get it.
Wouldn’t you rather have the $900 now to invest, to start a
business, or even payoff old debts that may be at a high interest rate?
With the $900 in your pocket now, you could earn much more than the
$100 cost for waiting for the full $1,000 three years hence.
The
difference between the $1,000 and the $900 is called the discount, which in
this instance would be $100. All
cash flow assets are purchased at a discount.
That is how funding sources, such as Capital Funding of America,
derive what the return will on the on the money paid to you.
The discount rate will affect what you are paid due to many
variables, including how far in the future your payments are scheduled to be
received.
The
farther into the future an individual payment is to be received from the
purchaser, the less you will receive for that payment.
The reasoning is that the purchaser of your payments must receive a
return for its capital for each day that the payment is not received from
the payor, the one making the payments under the cash flow asset instrument.
The more days until a payment is received by the purchaser, the less
the purchaser can pay you for the acquisition of your asset in order to
maintain a certain yield.
The
second aspect that affects the purchase price of cash flow assets is
risk--that is-- will the purchaser receive all of the payments, and will
they be paid in a timely fashion. Please
remember that the creditworthiness of your payor, (the one responsible for
making the payments to you), determines the risk factor of your cash
flow asset instrument.
Commercial
mortgages and equipment leases are also written with the same concepts, but
the discounting of cash flow assets and the length of time over which the
purchaser is repaid often is a difficult premise for sellers to grasp for
these types of transactions.
For more information, call 1-800-322-5985, or use this link to our CONTACT US page.
