iQep: Insurance & Finance

To keep money simply sitting around is financial folly for any business. Companies have long known that short-term business loans, enabling them to invest profits are preferable to setting aside money for short-term cashflow problems. However, in today’s challenging financial climate, business loans of any kind can be difficult to find, particularly new ones and new businesses are often plagued by cashflow problems.

The health of a business is dependent on either having a steady cashflow from accounts receivables or being able to tap into a line of credit on a regular basis. Banks and other financial institutions have become progressively more reluctant to lend money. Additionally, they are inclined to charge higher interest rates as a protection against default. What invoice financing does is allay a lending institution’s fear by allowing them to buy invoices in much the same way banks have been buying and selling mortgages.

The lender or factor, assumes the responsibility for collecting monies due, after first paying the company 80 percent or above, upfront. The remainder of the monies are, after the lender recoups their fees and charges, given to the company once the debt is collected. There are multiple advantages to this method of financing over traditional business loans. The expense of billing and collecting are transferred to the lender/factor that then has the collectable invoices as collateral. For the business, opportunities can be taken with the knowledge of when and how much money will be available.

Finally, instead of repeatedly applying for loans, companies who use invoice finance in lieu of conventional business loans are able to take advantage of an ongoing line of credit. A perpetual source of finance is established, which means that money needed for daily operations is always available and profits can safely be invested for the future.

Perhaps the most common form of business loans are overdrafts and bank loans.  An overdraft is related to a business bank account and allows the bank’s customer to borrow funds, over and above the money contained in the account, to an agreed limit.  Most banks will consider extending an overdraft to business customers with a good track record of making repayments or being in credit.

A bank loan, on the other hand, is usually a separate sum of money that is borrowed for a set time period, with a repayment schedule that is fixed.  Interest rates on bank loans can also be fixed or variable.  To warrant a bank loan, businesses are expected to have a clear repayment plan detailed in their business plan; the bank will also want to know if there are any other financial commitments, such as other debts, business loans or an overdraft.

When approaching a bank or other lender, be sure to have the information they will want to see, including audited accounts, bank statements, plus fully costed indications of current and projected levels of trade.  Include cash flow forecasts to demonstrate sound business planning.

Most business owners who are considering taking out a loan think first of all of making approaches to banks, building societies or other established financial institutions.  Whilst this is only natural, there are a number of other sources of advice and help and a number of different approaches to finding finance.  There is government funding, for example, which is offered to companies fulfilling certain criteria and can be a combination of grants and loans.  Funds are offered for a whole range of purposes, including renovations, new equipment, marketing, training or staff recruitment.

In fact, the UK government and European Union have created a funding programme valued at £2 billion in order to offer finance to new and established small businesses.  Amongst the business loans available are low-interest or no-interest loans and government guaranteed loans.

Low-interest or No-interest Loans

There are two national and eight regional loan schemes in this category.  As the scheme title suggests, these loans can be very good value and offer highly competitive rates.  Frequently, they are offered unsecured, so a guarantee or other collateral is not needed.  There are specific loans for young entrepreneurs and for women and they are directed at a variety of different industries and a number of geographical areas.  The range of finance available is from £1,500 to £10 million.

Government Guaranteed Loans

There are six national and eight regional loan schemes in this category, in the range £5,000 to £250,000.  The Enterprise Finance Guarantee Scheme helps small businesses to access business loans from private lenders by providing a government guarantee, which reduces the risk associated with lending money to small businesses.  This is particularly appropriate for companies that want to expand by moving into export markets.  One advantage of the scheme is that there are virtually no premiums to pay for the ‘insurance’ provided by the government and no additional security is required.

When a business needs to increase immediate cash flow, it has several options. There are standard loans, but these often don’t cover expenses on a regular basis. The other option is business finance loans, also known as invoicing financing. This leaves you with two options, including invoice discounting and factoring. Both provide a way to use money from unpaid invoices to grow the business now instead of later.

It is important for businesses to look at their current financial situation before choosing a business finance solution – these solutions are not just for the short term. They also help create better financial management and credit protection in the long term.

Choosing The Right Business Finance Solution

Invoice factoring is the more cost effective of the two available types. Factoring allows a third party to handle your invoices and debt collecting for you. It is also available for smaller businesses as well as medium sized and large companies. With an option to remove liability for unpaid debts, factoring is a perfect all round solution. Businesses should consider the fees involved. You will not receive the full invoice amounts. The factor keeps a set percentage, which varies greatly with factoring companies, but is usually at least 5%.

Invoice discounting works similar to factoring except you maintain your sales ledger and handle debt collection. You borrow against a set percentage of your invoices. The discounter keeps a set percentage of this amount. You also pay an interest fee until the borrowed amount is paid in full.

Loans are a fact of life for most business owners. Capital is needed to make investments and improve the earning power of a company so a means of getting hold of greater capital before investments have paid off is essential. Banks provide much of the financing for business and the first financial move of many start-ups is to look into loans for their new business. Almost all banks offer a business loan service.

Loans are a well understood financial service and are available in many forms. Most people will be familiar with the idea of a mortgage, where money is loaned according to the value of a house and repaid over many years with a certain amount of interest added. The customer benefits by being able to invest a large sum above their current spending power and the bank benefits by a long term return on their investment. Business loans work in exactly the same way, except such loans usually have a much shorter repayment cycle.

Business loans are often negotiated with banks to suit the specific circumstances of the company. Interest rates depend on the bank’s perceived level of risk with the investment so a higher risk loan commands a higher interest rate. This ensures that the bank covers its costs on average, despite some clients who may default.

With the recent dive in credit, many small businesses have found financing more difficult to source. Thanks to government targets under project Merlin, banks are now aiming to make funding more available to small companies by lowering interest rates. This is very good news for those looking to source new business loans.

Before any business can start trading, it has to cover its start-up costs so that it actually has goods or services to offer. These can take the form of the staffing, hiring, property rental, equipment and transportation fees involved in getting the business off the ground. Though all businesses need to cover their costs, not all forms of business finance are ideal for all companies, so make sure to choose carefully.

The most common form of financing involves taking a loan from a bank. Virtually all banks offer specialised business loans intended specifically for this purpose. Loans can have a wide range of repayment schedules depending on the amount borrowed and the specific circumstances of the business in question. To get a bank business loan requires a certain amount of trust from the bank. No bank wants to loan money, only to have the business default on their loan and become debtors. Neither party benefits from this in the long run. Banks will want proof that the company will be able to pay back the loan plus interest, which means a convincing business model and evidence of past performance. First time start-ups will generally take out much smaller loans than established companies, so less evidence is needed.

A popular newer method of financing involves adding value to company invoices in order to get hold of a steady flow of cash. This method is popularly known as invoice factoring or invoice discounting and lets companies’ access cash before transactions are completed. Factoring companies include Touch Financial, which offers a high advance rate for more instant cash.