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Factoring and Invoice Discounting
Think of factoring as a form of short-term loan
secured with your accounts receivables.
Factoring has become extremely popular in recent
years and is in some cases tended to replace the
traditional bank overdraft type of finance. As
with all methods of financing it needs to be carefully
considered when looking at the possibilities for
your business:
Extremely useful in improving cash flow.
In factoring, the bank takes over the collection
of the business' unpaid invoices. For each
invoice factored the bank pays to the business
a fixed percentage of the invoice value. This
has the advantage of improving cash flow by
realising funds immediately.
The bank may also
be prepared to maintain a full sales ledger
and credit control service for the business
that is factoring.
The banks are usually only interested in "clean" debt.
If an invoice is subsequently disputed it is handed
back to the business to settle, and the bank will
reclaim the monies paid to the business in respect
of the invoice.
Invoice discounting is similar to factoring, but
does not include the sales ledger or credit control
function that remains with the business.
The customers receiving the invoices are not therefore
usually aware that the invoice discounting arrangements
exists.
Leasing and Asset Finance
Hire purchase or leasing arrangements are extremely
flexible methods of enabling businesses to acquire
a variety of assets such as plant, machinery
and vehicles. The arrangements can greatly assist
the cash flow, as they do not require the large
down payment normally expected with the acquisition
of such assets.
Furthermore such schemes can
often have considerable tax advantages for the
business. The tax implications of this form of
finance should be carefully and thoroughly considered
with your accountant at an early stage.
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Bank Loans
Bank loans are available to cover medium to long
term finance requirements involving capital expenditure.
Sometimes a substantial amount of the borrowing
is held back from the regular repayments (to
keep them down) but is repaid in one lump sum
at the end of the term. This is known as a "balloon
payment".
interest
rates on term loans may be fixed or variable.
The Bank is not able to call in a term loan
before the end of the term unless the borrower
has defaulted in making a repayment or is otherwise
in breach of the lending arrangements.
Borrowers must also bear in mind that the Banks
make additional charges for arranging the loan
and also for effecting any security.
The Banks will often take steps to protect the
amount they have lent by taking security from
the borrower. This will usually involve a fixed
charge over land and fixed assets owned by the
borrower. Assets subject to a fixed charge cannot
be sold without the bank's consent. Indeed if
the borrower defaults on the loan repayments,
the bank has power to sell the charged assets
and recover the outstanding amounts under the
loan. A fixed charge is therefore like a mortgage.
If the borrower is a limited company the banks
may go further by requiring a floating charge
in addition to a fixed charge and asking the directors
to give personal guarantees.
A floating charge literally "floats" over
a specified type of asset of the company (usually
stock) and does not prevent the borrower from selling
or otherwise dealing with those assets. The consent
of the bank is not required.
As noted above, the directors may also be required
to give personal guarantees to the bank in connection
with the loan. This makes them personally liable
up to the amount of the guarantee. It is essential
therefore that directors take legal advice in
connection with the guarantee and ensure that
the guarantee is limited to a sensible amount
(where possible).
Bank mortgages are available and can be arranged
for property purchases or improvements.
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