Will a factoring loan work for me?Posted on: 06 September 2010 by Mark O'haire
Independent financial advisor Peter McGahan analyses the options available to customers looking for a short-term loan.
"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.
By Peter McGahan
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Peter McGahan is an Independent Financial Adviser and Managing Director of Worldwide Financial Planning. Worldwide has won 16 Financial Times awards in the last four years. Peter has also been named the top media IFA of the year by Unbiased.co.uk in 2009.
Peter comments regularly in major journals such as the Mail on Sunday, Irish News and Sunday Times and is a weekly columnist for FT Adviser. He has also appeared on Working Lunch and the Today programme. In addition he is an expert on international tax matters for a range of international publications.
Worldwide Financial Planning Ltd 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 understanding of current tax practices, which are subject to change. The value of shares and investments can go down as well as up.
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