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Both the advice and the services of a financial broker can be invaluable in enabling a manager or owner to develop a business while they explore the financial loans and investments necessary for growth.

Financial brokers deal with a range of business activities that include acquisition funding, property development finance, commercial mortgages, business loans, asset finance, refinancing, factoring and management buy-outs. Their scope of advice extends from sole traders to blue chip corporations. Knowing the areas a financial broker specialises in is important for matching them to a specific company’s requirements.

Bank or Financial Broker?

Advice from a bank is likely to be limited to its own brand and may not be the most economical means of achieving business growth requirements. Financial brokers can advise independently on products and services with less complex transactions and lower interest rates from a range of lenders. There may also be more flexibility to suit a client’s business model.

In selecting a financial broker, criteria to consider include:

•    How long has the financial broker been established?
•    Is the financial broker knowledgeable and experienced in broking?
•    How knowledgeable is the broker about products, services, interest rates and lines of credit?
•    Are current clients benefiting from the broker’s negotiation skills and strategic service?

Benefits of Employing a Financial Broker

A financial broker handles current business needs and plans for future requirements. Having a broker to deal with business finance saves time, which translates into cost-savings.

Advantageous activities undertaken by a financial broker include presenting business value to creditors without accounting for company credit history, negotiating better outcomes on the company’s behalf; building strong relationships with lenders, creditors and brokers; using business operational knowledge and funding mechanisms to identify a variety of financial products and managing the complexity of business solutions with contingency planning.

Please note that all companies, such as broker Touch Financial Factoring, have a different list of requirements.  Therefore, the information listed below is a summary of the most common requirements and does not apply to all factoring companies.

Although invoice financing is used by many companies, factoring is not always suitable for all businesses, especially if the business in question relies heavily on a personal relationships with their clients.

Invoice factoring allows the factors to be impose their own credit limits on the business’s customers and many companies may not appreciate the different approach to the collection of outstanding debts.  Therefore, many businesses often prefer invoice discounting rather than factoring.  The lenders role during Invoice discounting will only be a financial one, however the company in question will still have to collect its own debts and repay the factor.

Companies and brokers such as Touch Financial Factoring, are often open to agreeing different approaches with individual customers, which can save a business a lot of time and stress regarding the collection of payments.  A factor is also able to help with conducting business overseas, this is referred to as export factoring.

Companies selling products and services to other businesses, on credit, which excludes retailers and cash traders, use invoice discounting services as a form of borrowing to improve their cash flow. The minimum annual turnover of companies able to take advantage of invoice discounting is usually around £500,000.

How Invoice Discounting Works

The company hands over invoice collection responsibility to an established lender, who in turn gives the company a percentage of the invoice value as a cash advance. The lender goes on to collect the invoice payments on the company’s behalf, at which point additional funding is released. The more unpaid invoices are passed to the lender, as sales increase, the more money the lender collects. Cash flow levels are recalculated regularly and more funds are made available to the company.

Small Business Selective Invoice Discounting

Smaller firms can benefit from selective invoice discounting for specific customers. Fees are usually higher for this service, but smaller businesses gain greater flexibility, particularly during seasonal trading and when dealing with large single orders.

Invoice Discounting Benefits

Businesses benefit enormously, by gaining immediate access to cash previously tied up in unpaid invoices. While the company enhances its cash flow, it still retains responsibility for credit control and the administration of its debtors list, thus maintaining direct contact with its customers. Debt factoring companies support businesses in need of cash flow within 24 hours, both nationally and internationally and also provide credit management and insurance. The amount that can be borrowed is only limited by the volume of sales and it really is a viable alternative to a bank overdraft.

Disadvantages of Invoice Discounting

Invoice discounting companies make their money by charging an interest rate that is a percentage above the Bank of England base rate. This means that businesses using their services will experience a fall in their profit margins, a factor they should take account of before signing up.

Businesses interested in entering into an invoice finance arrangement have to choose between recourse and non-recourse financing. Factoring brokers like Touch Financial, that offer this type of arrangement may or may not take on the burden of bad debts. This is the primary difference between recourse and non-recourse financing.

In the case of a recourse financing arrangement, any bad debts become the responsibility of the client company. If the customer does not pay by a set date, the company must repay the factor.

In a non-recourse financing arrangement, the bad debts become the responsibility of the factor. If the customer fails to pay, it is the factor that loses out.

Benefits and Risks

Business owners who are trying to decide between non-recourse and recourse invoice finance arrangements need to understand all of the benefits and risks. First, the recourse option is typically cheaper. Factoring brokers, such as Touch financial factoring, reward the client company for the reduced risk by offering a more affordable rate.

Non-recourse factoring is more expensive, because the factor makes a charge to cover the increased level of risk. This can still be beneficial, however, because the company receives cash at the beginning of the process and does not have to concern itself with possible bad debts, all risk having been transferred to factor.

Making the Choice

Both recourse and non-recourse financing bring cash into the company quickly, but there is more risk with the recourse financing option. Companies with a strong and reliable customer base may feel the risk is acceptable, while those with potentially doubtful customers may prefer the higher upfront cost of the non-recourse option.

Discount invoicing allows companies to leverage unpaid invoices into cash flow through the services of factoring companies like Touch financial. In addition, discount invoicing services can greatly benefit business relationships.

Medium to large-sized companies try invoice discount services to discretely get business customers to pay their invoices on time and avoid default. Having to negotiate payments with customers can result in poor business relationships that may negatively impact future prospects. Discount invoicing services can solve this dilemma by advocating invoice collection on behalf of companies with direct payment to the business.  However, in some cases full factoring services may be more appropriate.

Discount invoicing and factoring enable businesses to focus on nurturing customer relationships while using advanced cash flow to facilitate growth, rather than having additional expenditure on debt collection and legal fees. Financial factoring firms charge a fee with percentage above the Bank of England base rate for advanced funds. Savings and improved business relationships with customers may make it well worth the cost.

Banking and financial institutions offer new business loans to entrepreneurs developing business start-ups.   These loans are often brand-specific with set interest rates and complex terms. Researching funding options for new businesses and seeking independent advice can save time and money in the long run.

Independent Advice for Start-up Funding

Independent financial advisers registered with the Financial Services Authority (FSA) and financial brokers, such as Touch financial, provide independent advice to existing companies and entrepreneurs seeking business start-up funding. Financial brokers have leverage with lenders and are knowledgeable on a range of products, interest rates and credit lines with diverse lenders.

Independent advice covers new and existing government grants and funding schemes for new businesses and alternative ways of raising finance, such as invoice discounting or financial factoring. These products are usually offered by factoring companies and are suitable for businesses selling products and services to other businesses. Typical firms using financial factoring are printers, couriers, wholesalers, manufacturers and construction.

The Factoring Alternative

A small company looking to raise funds for business development may benefit from invoice factoring.  Factoring services provide advance payments on unpaid invoices, which are handled by the factoring company. It takes over the credit control and sales ledger functions, so that the small business receives the funding advances needed as business is generated and invoices are paid. These small businesses are able to grow without having to concern themselves with invoice payment collection and 30 to 90 day terms impeding development.

Companies often find themselves in need of a business finance solution to help get through a slow period or cover a large purchase. There are numerous options available for today’s senior managers to consider. From invoice financing to traditional business loans, choosing the right one is essential to growing a successful company.

Factors to Consider

When a company is comparing different business finance options, the key factors to consider are the cost of the financing, the interest rate, the repayment terms and the penalties that may be incurred should repayments be missed. By understanding the cost involved with the financing, both upfront and future, the company can make an informed decision on how best to proceed.

Sometimes, financing with a low interest rate will have hidden costs involved, such as a fee to set up the financing or high penalties for failure to pay back what is owed. Other types of financing, such as invoice financing, involve the company concerned giving up a future income source in return for an immediate injection of cash. The best option is one that is both affordable and convenient.

The UK government is committed to encouraging UK entrepreneurs and businesses to access financial advice through Business Link for start-ups, regarding business loans to promote growth.

The financial advice sought may be concerning new business loans or funding channels. Besides current government support for SMEs seeking business finance, such as the Enterprise Finance Guarantee (EFG) and Enterprise Capital Funds (ECF), further new government business finance schemes are soon to be launched. They include The National Loan Guarantee Scheme (NLGS), Business Finance Partnership (BFP) and Seed Enterprise Business Scheme (SEIS)

Lower-Cost Business Loans for SMEs

The NLGS has been established to offer direct lending at reduced cost to small businesses through government-guaranteed funding that enables participating banks to raise £20 billion. The purpose of this scheme is to fund small businesses lacking access to capital markets through lower-cost business loans.

Diverse Funding Channels for Mid-Sized Companies

The BFP will be run by HM Treasury and is aimed at medium-sized companies requiring access to more diverse funding channels, including non-banking lending. Options in private sector investment, co-investment and managed funds will be explored. Medium-sized businesses are expected to benefit from diverse financing that increases the supply of capital.

Income Tax Relief and Capital Gains Tax Exemption

From April 2012, anyone investing in shares of qualifying companies will receive 50 percent income tax relief.  The cumulative investment limit for companies is £150,000 under SEIS. Assets disposed of during 2012-2013 and gains invested through SEIS will attract capital gains tax exemption. A Capital Gains Tax holiday is also available for companies investing through SEIS.

Companies that need additional finance have more than one source of funding available. Business loans are available through banks, but there are other resources as well. Finding the right solution involves careful research and time spent analysing the company’s specific requirements.

Government Loans

Companies looking for business loans often check out their bank first, but this is not always the best solution for business financing. In addition to the banks, the government offers some financing in the way of grants and loans. These can be difficult to obtain, but are available to qualifying businesses.

Private Grants

Some private organisations also offer grants to businesses. These investors obviously expect to see something in return for their money, such as a financial interest in the company. Private investors benefit businesses in that they often do not require a payment in cash, but rather through a stake in the company’s assets.

Invoice Factoring

Invoice financial factoring through a factoring broker is another option. This uses future invoices as a funding source to provide immediate cash for the business. This is an affordable solution for companies that have future invoices to draw from.

Invoice factoring is a method businesses can use to ensure that money is received quickly once they have completed work for their commercial customers.  It is essentially a way of raising funds to help maintain or improve cash flow levels. 

Sometimes, although various transactions might have been completed, it might take some time for an invoice to be settled after it is raised.  The business will not, therefore, immediately have the funds from these transactions to settle their own expenses or to invest in future business.  This can be a common difficulty for businesses, when debtors do not pay in a timely manner.

To help overcome such problems, invoice factoring services are available, which means that the invoice is passed to a third party that will immediately release a fixed percentage of the funds owed, as a loan to the business.  In due course, the full payment will be collected from the customer on behalf of the business. 

Once the lender, or factor receives the funds, they will then pay the outstanding balance of the invoice to the business, less their charges.  This means the business will receive slightly less money overall, but have use of it for a longer period of time.  This can be a great advantage to a business struggling with cash flow, either on an ongoing basis or as a short-term solution.

There are various different factoring companies available, with Touch Financial being the UK’s largest invoice finance broker offering access to a wide range of financing options.