Transactional Funding: How Startups Can Use It

By: ROS Team

Share the Post:

Many investors and wholesalers that require a short-term loan to finance their property transactions might have heard of transactional funding. However, it is necessary to know the benefits and hazards involved before using this type of financing source.

In this post, we’ll take a closer look at transactional finance – what it is, how it works, and how this kind of funding can be beneficial if used to purchase your next investment property.

What is Transactional Funding?

Transactional funding is a quick, straight-to-the-point loan that allows wholesalers and investors to buy a property using other people’s money and zero of their own.

Investors can borrow transactional capital, which is any sale outside the partnership’s normal course of operations, to complete real estate deals on a short-term basis.

Because it is regularly used in back-to-back closings, this sort of money is also known as “flash funding” or “same-day funding.”

Wholesalers and real estate investors who wish to buy property without having to bring any money to the table will sometimes employ a transactional funding scheme. This is because transactional funding lenders usually lend to investors for a short term as long as they can confirm they have a qualified end buyer who is willing to buy the property.

If transactional financing is done correctly, a wholesaler or an investor can make a big profit without ever having to use their personal funds.

Explaining Transactional Funding With Example

Let’s assume that an investor buys a house in New York for $300,000 and then sells it to an end buyer for 350k. They take out some quick cash from the transactional loan. So they can get on with their life, leaving everything else up in smoke! The process only takes 2 days which means that by day 3 you could have made over 40K – all without having put any of your own money into this deal or even being involved at all beforehand.

How Does Transactional Funding Work?

Transactional funding works by providing a short-term loan to a business in order to help it cover its expenses until it can generate its own revenue. This type of funding is typically used by businesses that have a high risk of defaulting on their loans. As it allows them to continue operating while they work to improve their credit score or find other sources of funding.

Transactional Funding Work

How Much Does Transactional Funding Cost?

The cost of transactional funding can vary depending on the provider and the amount of money being borrowed. Generally, providers will charge a fee for the use of their funds, as well as an interest rate on the loan. The total cost of the loan will be based on these two factors.

However, investors should expect lenders to charge between 2% and 12% of the total amount. For example, if you require a $500,000 loan, you may be required to pay between $10,000 and $60,000 in order to complete the transactional funding process.

A Brief History Of Transactional Funding

Before the financial crisis in 2008, transactional funding was used on an intermediary basis, which meant that a real estate investor could sign a contract to buy property at a low price. Sign another contract to sell the same property at a higher price, and then use the buyer’s money to finance the first transaction.

However, more rigid rules are now required in every real estate transaction. So the real estate investor or wholesaler must use their own cash to buy property from the original seller before selling the property to another buyer. Investors and wholesalers utilize transactional funding to purchase the property and then use the buyer’s funds to pay off the loan.

A Transactional Funding Scenario: How Does It Happen?

If you are interested in transactional funding but have never taken part in the process. It is important to understand how it works.

Transactional Funding Scenario

Below is an example of a Transactional Funding Scenario to help guide you:

  • Investor B signs a contract to buy a $200,000 property from Seller A.
  • On the same day Investor B buys the property from Seller A, Buyer C inks a deal to buy Seller A’s property from Investor B for $225,000.
  • Investor B verifies Buyer C’s funding letter to the lender for transactional funding approval.
  • Investor B is approved for a loan and utilizes the transactional fund to buy the property from Seller A on the day of payment settlement.
  • Investor B sells the property to Buyer C later that day.
  • Investor B utilizes the money earned from selling the property to pay back the lender and can keep any money left over as a profit.

 

The transactional funding scenario above is an example of a typical transaction. Although not every transaction is done in exactly this way, it provides an example of the overall expectation.

How Startups Can Use Transactional Funding?

Transactional funding is a great way for startups to get the cash they need to get their business off the ground. It can help them to pay for supplies, equipment, and other expenses related to getting their business up and running. Transactional funding can also help startups to get their products or services to market more quickly.

Other Options For Transactional Funding

Pros and Cons of Real Estate Investors’ Transactional Loans

As a real estate investor, transactional financing in property sales offers various benefits. As with any loan, though, there are also certain drawbacks you’ll need to consider when weighing your loan options. To that end, we have listed them for your reference below:

Advantages

  • Limited Risk: Wholesale buyers’ or real estate investors’ risk is minimized through this approach. Since these loans often provide up to 100% funding, wholesale buyers and real estate investors don’t have to worry about using any of their own money in these transactions. They don’t even have to worry about financing an earnest cash deposit.
  • Supporting Documentation: Every transactional loan usually comes with supporting documents such as a signed and executed B-C contract and a Lender Title Insurance Policy. Also, unlike a standard loan that requires verification of the borrower’s income and credit score. The only proof needed for a transactional loan is the final buyer’s letter.

Disadvantages

  • Closing Costs: Transactional loan funds have a closing cost for the real estate investor. These charges are typically deducted from any sales earnings at closing. You may also collect some of this cost by charging the buyer a transfer fee in exchange for finding the property.
  • Timing Matters: The other important factor to consider is that schedule is often important with these transactions. Since transaction funders give short-term loans, real estate investors must move swiftly to close their deal with the second buyer once the loan is available. Otherwise, they run the risk of not having the necessary funds to pay off the loan and might have to pay it off using another method.

 

Transactional loans are usually due within 14 days. However, in some situations, the loan may be due within as little as 48 hours. Extended transactional funding may be requested, which may give borrowers up to one year to pay off the loan.

What Are The Other Options For Transactional Funding?

It is important to assess the benefits and potential pitfalls before utilizing transactional financing or extending transactional funding. If you have considered using this type of financing and have determined that the risks are too high, there are alternative loan types that exist.

1. Hard Money Loans

Another short-term funding source is called a hard-money loan. A hard money loan is funded by the worth of an asset that’s provided in exchange for the loan amount. In general, investment in real estate will act as this asset.

Since hard money loans come from a private lender, the loan terms and fees will vary. However, transactional funding lenders usually give lenders approximately 6 months to repay these loans. Thus providing you with a little more breathing room should you need it to finalize your property sale.

2. Joint Venture Capital

In a joint-venture capital (JVC) relationship, the parties work together to provide funding and other resources to a company. The key advantage of a JVC relationship is that it provides companies with access to the resources of both investors. Which can lead to a faster path to growth. In addition, a JVC can help reduce the risk for both parties involved.

For startups, a JVC can provide them with the necessary capital to get started and help them grow their business. For investors, a JVC can give them access to new opportunities and help them diversify their investment portfolio.

3. Other Lending Company

You may seek funds from other lending sources, including private lenders. These might include your family, friends, and other investors. Be warned, however, that since private lending is primarily unregulated, you may be subject to different interest rates and loan fees.

4. Home Equity Lines of Credit

A home equity line of credit (HELOC) is a type of loan in which the borrower uses the equity in their home as collateral. Home equity is the difference between the current market value of a home and the amount of money still owed on the mortgage.

HELOCs are a popular alternative to transactional funding because they offer borrowers a lower interest rate and a longer repayment period. Borrowers can also typically deduct the interest payments on HELOCs from their taxable income.

If you are considering a HELOC, it is important to shop around for the best deal. Be sure to compare the interest rate, fees, and terms of different lenders.

5. Bank Loans

The last alternative to transactional funding is bank loans. Bank loans are typically unsecured, which means you don’t have to put up any collateral to obtain the loan. This can be a great option if you don’t have any assets to use as collateral. Additionally, bank loans typically have lower interest rates than credit cards. This can be a great option if you need to borrow a large sum of money and want to keep your interest rates low.

Is Transactional Funding Right For You?

Transactional funding may be the answer to how you fund back-to-back property purchases. Especially if you want to invest in real estate or make a wholesale property deal. But, like with other types of financing, transactional loans carry an inherent risk. Make sure to use the above information, including any additional risk assessments, to assess whether your next investment should be financed through a transactional financing program.

Transactional Fundings – FAQs

Am I Eligible for Transactional Funding?

In order to be eligible for transactional funding, you must be a motivated seller with proof of representation from a business entity and have an end-buyer who is ready to close the deal immediately. Furthermore, your business must also be a legitimate company with a valid tax ID number and you must have a good credit score.

What Is Transactional Funding For Wholesaling Real Estate?

Transaction funding for wholesaling real estate is a way for investors to get into the real estate market without having to purchase a property. Transaction funding is when an investor provides money to a real estate wholesaler in order to buy a property. The investor then becomes the owner of the property and the wholesaler becomes the middleman, or broker, between the seller and the investor.

How Do You Use Transactional Funding?

Transactional funding is a way to finance short-term needs. It involves borrowing money for a specific purpose, such as working capital or inventory and then repaying the loan quickly. The interest rates are usually higher than those for traditional loans. But the terms are also shorter, making it a good option for businesses that need quick access to cash.

What Is Extended Transactional Funding?

Extended transactional funding is a financing technique used by companies to provide additional liquidity. It involves borrowing money against the company’s existing receivables, or invoices that are owed to the company. The borrowed money is used to finance the company’s operations until the receivables are collected.

Who Uses Transactional Funding?

Transaction Funding is used by a variety of businesses, including small businesses, to help with day-to-day expenses and operations. Transaction Funding can help businesses cover the costs of inventory, payroll, and other necessary expenses.

How Long Does Transactional Financing Last?

There is no definitive answer to this question as the term ‘transactional funding’ can be used to describe a variety of different financial arrangements. In general, though, transactional funding refers to short-term loans or lines of credit that are used to finance a specific transaction or project. These loans are typically repaid within a few hours or days, depending on the terms of the agreement.

Can I Use Transactional Funding to Purchase a Home?

Yes, you can use transactional funding to purchase a home. Transactional funding is a type of short-term lending that can be used for a variety of purposes, including real estate transactions. It can be an effective way to get the money you need to buy a home quickly and without having to go through a traditional lending process.