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One advantage of applying for secured business loans is that it is easier for a lender to say ‘yes’ if there is guaranteed collateral for the funds they lend. Another advantage is that it is possible to borrow larger sums of money than is generally the case with an unsecured loan. Touch Financial business loans are also more likely to be available over a longer time period.

Business loans requiring security include those that use invoice discounting services; those that use invoice finance – including factoring; funds provided that are backed by the value of assets, and commercial mortgages.

Invoice discounting normally requires businesses to have an annual turnover in excess of £500,000, so this option is generally not suitable for the smaller companies or micro-businesses. Loans secured using invoice finance are based on using the value of outstanding invoices due to a company, or its accounts receivable, as collateral. These are available to, and often suitable for, smaller companies, providing turnover is in the region of £50,000 per annum.

Commercial Mortgages

A commercial mortgage is another type of secured business loan and operates similar to mortgage on a home or other personal property. If a business plans to buy a new asset – for example land or property – the loan can be secured on what the business purchases. Just like buying a house, however, this is a long-term financial arrangement, so may not be flexible enough in every case to meet changing business needs.

Tips When Arranging Loans

Always read the small print in a mortgage agreement, to check if there are any penalties for early repayment or making changes to the terms and conditions. Besides reading the small print, always check that the quote is for the APR, which is the full annual cost of a loan after fees, and not just a flat or linear rate. Finally, consider whether the level of security is appropriate to the amount of a loan. Is it worth securing a loan for £3,000 on a property worth £150,000 for example? Would the property be lost if a repayment difficulty arose? Taking financial advice before proceeding with a business loan arrangement should assist with avoiding any pitfalls.

Invoice finance is a route to funding cash flow where the billing capacity of a business is the key to releasing funds. There are two main methods to choose from: invoice discounting and factoring.

Invoice Discounting

This type of invoice finance service balances the value of invoices against the cash needs of the business. Basically, a lender agrees to release funds to a business based on the value of outstanding invoices – usually on a percentage basis. The business retains full control of the sales ledger and may make arrangements for insurance or other protection against bad debts. The use of invoice discounting can be confidential, so that the customers of the business do not have to know such a system is in place. Some businesses fear such knowledge would signal financial difficulties and prefer the arrangement to remain private.

Factoring

Whilst a similar arrangement is put in place for factoring – again the lender agrees to release an agreed amount of the value of outstanding invoices to the business – the difference here is that the lender takes control of the sales ledger. Smaller companies find that this can be of benefit in the pursuit of outstanding debts, as these become the province of the lender, whose third-party status provides additional influence or gravitas.

Invoice financing is a method of increasing cashflow by ‘selling’ your outstanding invoices to a lender, who will then give you an injection of some 80-90% of the value of those invoices. There are two types of invoice finance, factoring and invoice discounting. The difference between the two is that with factoring, the lender collects the debts for you, whereas invoice discounting is anonymous, as you collect the debts yourself.

Which Invoice Finance Option Should I Choose?

Invoice discounting and factoring are designed for two different types of client. Invoice discounting is for larger companies that have their own financial departments and well-established credit control and sales ledger systems. Factoring is usually used by smaller businesses that wish to outsource their entire sales ledger functions; the lender effectively becomes your credit control department. 

Invoice Finance Versus Other Methods of Financing

Invoice financing is one of several options available to businesses; others include asset-based lending, loans and overdrafts. The Royal Bank of Scotland’s website offers a detailed comparison chart that shows the advantages and disadvantages of each method. In short, you should use invoice financing when your company provides goods and services to other businesses and is not paid in cash. In addition, the lender will usually require strong proof of debt in the form of delivery notes and/or timesheets. Asset based lending is for larger companies whose capital is tied up in tangible assets, such as plant, machinery or property. Loans and overdrafts are best for established companies with a good credit history, though invoice financing is beginning to eclipse these more traditional methods of financing in popularity.

Cash flow is the lifeblood of any business. It is the fuel and food enabling the business to persist and grow. But cash flow does not always run smoothly, invoice settlement is often subject to normal business terms, imposing delays of 30, 60, 90 or even 120 days. A business may have considerable development costs that eat cash ahead of consistent sales income. There are a number of good reasons cash flow can be a problem.

Invoice financing is the umbrella term for a range of solutions to business cash flow difficulties offered by banks and finance houses. In simple terms, business to business invoices can be turned into short term business loans worth up to 85-90% of the invoice total. 

There are three separate types of arrangement under the banner of invoice financing, invoice discounting, factoring, and asset based lending. These three options are tailored to meet different requirements of businesses looking to accelerate their cash flow, and incur some fees and interest on the monies advanced.

In simple terms, invoice discounting provides cash within 24 hours of submitting an invoice to the finance house. The borrowing business must have sound sales ledger and credit control mechanisms. 

Factoring is much the same except that it is aimed at smaller businesses, with the finance company taking over collection and debt recovery, freeing management time for other matters.

Asset based lending is aligned with the needs and potential of larger companies by taking physical assets into consideration, so releasing cash tied up in capital for immediate use.

Businesses that have been registered to pay VAT will be required to have a VAT inspection at some time within the first three years of their registration. If you become a ‘late payer’ or ‘payment defaulter’, it is likely that your company will be visited more frequently. This article offers information on what to what to expect from a VAT inspection.

Customs and Excise officers will visit your company premises, expecting to be given full access to all its financial records. They will also want to discuss how you manage your VAT accounting system, so you should be prepared to provide records of and explain the following:

Your Business Premises

VAT officers are likely to check out the business premises, to be sure that they are fit for purpose. They will also want to see how you run your business and how it operates.

Business Records and Documentation

It is important to have all of your business records and documentation organised in folders and filing systems, so that you can access the information easily. Having all your financial records up to date and filed effectively will make life easier for both you and the VAT inspectors.

The specific documents you should have readily to hand include:

•    Sales invoices.
•    Purchase invoices.
•    Credit notes, both purchase and sales.
•    Delivery notes.
•    Till receipts.
•    Import and export documentation.
•    Bank statements.
•    Annual accounts.
•    VAT returns and supporting documentation.

In the global economy, international trade and sales are paramount to a country’s stability and a company goal of financial solvency. International trade carries an inherent risk because it can be difficult to collect money owed from a customer thousands of miles away.

Some invoice factoring companies offer financial services for international sales. Generally there is a contract between the factoring company in the host nation and a partner abroad whose responsibility it is to collect payment from a customer while avoiding problems arising from differences in customs, time zones, language and laws.

Businesses who engage in international sales must carefully weigh the method of payment and decide which type of currency they will accept as payment. With invoice factoring and invoice discounting, there is no difference to either the business or the factoring agent in terms of process and credit limits with regards to currency.

If a customer is insistent upon using their currency as a rate of exchange, factoring companies will adjust or lower advancements to reflect any fluctuations in value. Fees charged may be higher than for domestic sales because of volatility in a country’s economic levels or currency.

Factoring companies who are knowledgeable in international trades may require a credit protection insurance policy and only advance funds for sales over £100,000 to other European countries while setting a minimum of £500,000 in trade to overseas countries. The total amount of sales can factor in both domestic and international trade as a baseline for accounts receivable.

Debt factoring is a process by which a business sells its accounts receivable at a discount to what is commonly known as a factor. The factoring company that buys the accounts then collects the debts that are outstanding, directly from the business’s customers. The factor retains all the payments it has collected.

There are a number of benefits to debt factoring. First and foremost, the business receives the money it is owed much more quickly than it otherwise would and is therefore able to improve its cashflow. A healthy cashflow is vital for reducing financial risk and maximising the potential for growth. A further significant benefit is that time and money are saved by the company, as it no longer has to concern itself with employing staff to deal with credit control, as this becomes the responsibility of the factor.

There are also a number of disadvantages to debt factoring, the main one being that the accounts receivables are bought at a discounted rate. Therefore, although the client company will be able to keep cash flowing efficiently, in the long run, it will have lost a small percentage of its income. A further point to consider is that as the factor takes over debt collection on the client company’s behalf, there is a loss of personal contact with its customers. This may damage customer relationships over the longer term. Such relationships are important for all businesses, be they big or small, so it is essential that ways be found to maintain good lines of communication. 

Invoice discounting is an effective method of gaining almost instant access to money owed to your company, which can then be reinvested. It involves drawing money against outstanding sales invoices, but unlike invoice factoring and asset based lending your company retains control of the administration of its debtors list. As with invoice factoring and asset based lending, invoice discounting is a great way to drastically improve cashflow. 

What Businesses are Eligible for Invoice Discounting?

Unfortunately, invoice discounting is not available to all businesses and is only suitable for those that sell their services or products, on credit, to other companies. Additionally, it is usually only available to businesses that have a proven financial track record and an annual turnover of at least £500,000. As a result of these requirements, your business is likely to be required to undergo vigorous checks, which means there is likely to be a delay on the cash available to you, at least initially.
 
How Does Invoice Discounting Work?

Invoice discounting companies charge a percentage of the value of invoices you assign to them. On receipt of the invoices, the discounter releases the agreed funds to you and you decide how much to withdraw. Your company then collects the money owed by the customer, as normal and as it is received, it is used to reduce the balance you owe the discounter. 

As more invoices are issued, the value of funds available increases correspondingly. The balancing account will therefore rise and fall as invoices are assigned, funds are withdrawn and your customers pay off the money they owe.

It is a common problem in the business world for cash flow to be insufficient to supply enough capital to reinvest into the business.  This is often a result of invoices not being paid instantly and therefore tying up much needed cash.  Invoice discounting can be the solution to this problem, helping businesses to release funds quicker than when waiting for an invoice to be paid by a client.

Invoice discounting is fundamentally a system of short term borrowing from a financial company.  A business will use unpaid invoices as collateral for a loan, gaining a percentage of the total sum as soon as the invoice is sent, with the repayments consequently being provided by the invoiced client.

Unlike debt factoring, invoice discounting leaves all sales ledger and accounts responsibility in the hands of the business. For this reason the company loaning the money will usually make a financial risk assessment.  This will involve looking into the borrower’s methods of procuring payment, making sure they are satisfied that the debt will be obtained.  This financial risk assessment will be an ongoing process, as the invoice discounting company will need to continually assess the methods of acquiring payment, making sure that they are of the standard required.

For companies that don’t have an appropriate system for procuring payment of invoices, a service such as debt factoring may be the more viable option.  In this case, the financial company can provide support for chasing payments as well as loaning capital.

Asset based lending is, in basic terms, the loaning of money secured by an asset.  Using an asset as collateral for a loan will result in the asset being taken if the loan is not paid.  For businesses wanting to increase cash flow, asset based lending is often a viable option to raise the capital needed to further the business.

This does not however have to be the only option available to help companies that are in need of more cash to inject into the business.  A system called debt factoring is another option that a company can choose in order to free up cash.  By using a debt factoring company, a business can take out a short-term loan that is secured against an unpaid sales invoice.  The factoring company pays a percentage of this invoice to the business as soon as it is written and then continues to acquire payment of the invoice on the business’ behalf.

This process is a very efficient way of releasing money that would otherwise be tied up for some time, giving the business more opportunity to invest it back into the company and at a quicker rate.  This process is often seen as more favourable than asset based lending or a business overdraft, as it is more manageable and doesn’t have an upper limit to the total monetary sum of the invoices you can borrow money against.