FORWARD SALE FUNDING
A forward sale of a client's assets can be quickly arranged and funded if the client with in-ground assets or other commodities has an investment grade buyer that will contract to purchase the asset and guarantee repayment for the purchase. This is perhaps the quickest and least expensive method of financing in ground assets or commodities.
A client enters into a sales agreement with a purchaser of its assets. A bank then discounts the agreement, generally at a rate of about 5% per year (sometime as low as about 3% or as high as about 7% depending on the strength of the buyer's credit). The client receives the contract price less the discount immediately from the funding bank. The client's sole obligation is to deliver the product over the term of the contract for which it has already been paid. The buyer has an obligation to guarantee repayment to the bank at the end of the contract term, which generally can be from one to five years.
The buyer's obligation to repay must, however, be unconditional, even if for any reason at all the contract has not been fulfilled by the client. The benefit to the buyer is that it begins to receive the product at the beginning of the contract and does not have to pay anything until a date certain at the end – in effect an interest free line of credit. The buyer can protect itself by taking a security interest or lien position in the client's company.
Because the lending bank relies entirely on the credit strength of the buyer, there is minimal due diligence done on the client and the transaction by the bank. Transactions can be generally completed in under thirty days, with the actual funding portion taking no more than three days. The buyer must, however, have an investment grade credit rating for the lending bank to agree to fund. A 3% success fee is charges at funding, and a transaction fee of 25,000 Pounds Sterling is charged by the transaction facilitator.