I read your column last week on
factoring. I am looking at a short term loan with my bank but don't really
want to wait for months to secure the debt and go through endless
contrived hoops. I saw from your column that you could borrow against
invoices or even sell them off to raise money, so I thought a factoring
loan might work for me. Any thoughts?
I think I mentioned that factoring might be a more expensive option. If
the companies that owe you money are a good debt, why bother with
factoring as you know you will definitely be paid. You could simply opt
for a confidential invoice discounting arrangement where you effectively
borrow against your book debt (those who owe you money). This will raise
the capital quickly and if you decide you want to pay the loan off earlier
you can do so at a much lower cost than the cost of repaying a factoring
agreement, which will have greater operational and risk costs 'factored'
into it.
Remember to go for confidential invoice discounting as opposed to ordinary
invoice discounting, as with the latter your customers will know you have
entered into this agreement, and would send out the wrong messages i.e.
you might be in cash flow trouble.
You normally need a turnover of over £500,000 but many companies are more
flexible than they used to be and are more focused on lending against
quality with a good secure payback.
The company offering you the invoice discounting will typically review
your sales ledger, the track record of your business and then offer you
the ability to draw down up to 80% of unpaid invoices.
It's a bit like a bank overdraft in many ways although the invoice
discounter will normally require a debenture over your book debts.
You'll pay normal interest payments and expect to pay a fee of c1% to set
up. A business finance broker will be able to assess the invoice discount
companies available and locate the best price for you.
Depending on how much you want to borrow another option to consider is a
bridging loan. A bridging loan is normally a short term loan which is then
secured on land or a property to bridge a financial gap. Examples of this
are where you are selling one house and buying another but haven't sold
the first one. Because you need to move quickly bridging finance comes
into its own due to the speed.
There are two types of bridging loans. A closed bridging loan is used when
the sale of your house is guaranteed and an open is used when it is not.
By leaving the bridging loan open you are able to keep the debt until the
sale pulls through. Bridging loans can last from a day to a year but you
would usually expect one to last for around three months.
Interest is charged monthly and is not cheap. Actually, it's expensive. In
this situation if your credit situation allowed it, you could raise
sufficient capital against the invoices to create a deposit big enough to
raise a normal mortgage against the second house which would be much
cheaper than the cost of a bridging loan.
Expect to pay an arrangement fee of between 0.5% to 1.5% of the loan and a
range of other fees such as contrived admin fees, solicitor's fees,
valuation fees and lender fees.
Normally however a bridging loan is used when people are wanting to move
quickly, buy a property at auction for example or even buy a property that
a normal lender wouldn't consider i.e. a defective property. A builder
might use a bridging loan then renovate and take care of any defective
issues before remortgaging with a normal mainstream lender.
You might expect your normal banks to offer bridging but the niche and
more flexible arrangements are normally off the high street but once again
your business finance broker would be able to assist with that and find
the most suitable price and offer.
Expect to be offered between 65% to 75% loan to value.
Don't really consider a bridging loan unless you are pretty sure you will
be repaying the debt, as I have seen businesses crippled in the past with
monthly interest for a year only to be hit with an exit fee. As I said
last week, there are many methods to raise the business finance you need
so be sure to get independent advice from a broker.
About Peter McGahan and Worldwide Financial Planning:
Peter McGahan is the Managing Director of Worldwide Financial Planning -
FT Award winning Independent Financial Advisers. Peter writes for many
national and local press publications and is widely respected as an expert
in personal finance.
Worldwide Financial Planning specialise in the provision of expert
one-to-one advice in the areas of Mortgage, Business Finance, Investment,
Pension and Retirement Planning and Inheritance Tax.
Peter McGahan is an Independent Financial Adviser and the Managing
Director of Worldwide Financial Planning Ltd who are authorised and
regulated by the Financial Services Authority. 'The FSA does not regulate
Credit Cards, Will Writing and some forms of mortgage and Inheritance Tax
Planning.' Information given is for general guidance only, and specific
advice should be taken before acting on any suggestions made. The above
represents the personal opinions of Peter McGahan. All information is
based on our understanding of current tax practices, which are subject to
change. The value of shares and investments can go down as well as up.
Article Source: http://EzineArticles.com/?expert=Peter_McGahan
