Business Finance Options 

Bank Finance - Overdraft, Business Loans, Commercial Mortgages,

Development Finance, Investment Mortgages, Professional Indemnity Loans,

Enterprise Finance Guarantee.

Invoice Discounting & Factoring.  

Asset Finance - Hire Purchase, Leasing, Sale & Leaseback.

 

 

Bank Finance

Overdraft. Repayable on demand and can be called-in at any time.

Banks give all sorts of names to Business Loans - flexible business loan, standard business loans, commercial mortgages etc, but basically the product they have is a loan of money on a secured or unsecured basis. At OTB we have extensive knowledge on how banks work and the facilities they can offer and specialise in re-banking situations.

Most bank overdrafts are linked to the bank's base rate but loans can be linked to base, libor (normally 3 month libor - LIBOR is the rate at which banks lend money to each other) or a fixed or SWAP rate.

What interest rate margin will you get? Well it depends on a number of factors, but ultimately a bank is looking for a far better return on monies advanced than has been the case in the recent past.

Whether you are base rate linked, libor linked, fixed or with a swap arrangement there will always be a cost of funds to which your margin is added.

A number of banks use a debt pricing calculator. This will take into account such things as your sector of operation, trading performance, the security held and often the conduct of your current account has an important part to play in arriving at the margin figure.

What do we mean by conduct? Conduct means, whether the account fluctuates fully from debit into credit each month, whether there is any hardcore (a permanent overdrawn position), if there have been any excesses over an agreed overdraft limit and/or debit balances are deteriorating. The ability to control the way your account looks and runs - say by timing of creditor payments - may help the margin you pay on your borrowings.

Some banks will review interest rates on loans every 3 years. Others agree a rate for the term of the loan. It is as well to check.

Also check the default rate if you are unable to meet a payment or you fail to meet a covenant as this will undoubtedly push the rate higher.

Do not forget a broken fixed/SWAP rate commitment may result in a penalty payment.

Care also with bank arrangement fees - there can be a significant difference between the banks. Some banks are also now charging on development finance, a fee based on Gross Development Value (GDV) - that can be very expensive.

For any type of bank finance question, please feel free to contact us. We know the right bank/s to approach with a lending proposal and how to position a proposal for the best chance of success.

Enterprise Finance Guarantee Loans - known as EFG. This is the loan offering where the government guarantees 75% of new funding to eligible businesses who do not have adequate security to secure conventional borrowing. It effectively replaces the suspended small firms loan guarantee scheme (SFLG).

The enterprise finance guarantee is a guarantee facility for small businesses intended primarily to improve the availability of working capital through term loans and the consolidation of overdrafts. It will also support lending for business growth and development in cases where a sound proposition may otherwise be declined due to a lack of security.

The guarantee will cover the following types of lending:

  • new term loans (with terms of between one and ten years)
  • existing lending where lenders might not otherwise refinance the debt
  • conversion of part or all of an existing utilised overdraft into a term loan in order to release    capacity in the overdraft to meet working capital requirements (conditional on the lender  being prepared to continue to provide an overdraft and the serviceability of both the term loan  and the overdraft).

The guarantee will fund:

  •  working capital
  •  investment by businesses seeking to grow or develop

In addition to regular capital and interest payments to your lender, and any arrangement fee which they may charge, a premium is payable to the administering Government department.

The premium is equivalent to 2% per annum on the outstanding balance of the loan, assessed and collected quarterly in advance throughout the life of the loan.

Delivery of the enterprise finance guarantee, including the decision as to whether or not it is appropriate to use it in connection with any specific lending transaction, is fully delegated to the participating lenders. There is no automatic entitlement to receive a guaranteed loan and nor is there any pre-qualification process for it.

All the major banks and some smaller SFLG lenders are lenders under enterprise finance guarantee - there are some exceptions.

Value

Up to 1.3 billion of new bank lending will be guaranteed by the government.

  • Eligible businesses are able to borrow between £1,000 and £1,000,000 when this would not otherwise have been possible.

Eligibility

Small businesses in the UK with an annual turnover of up to £25 million are eligible.

Loans for most businesses purposes to businesses in most sectors are eligible. The principal exclusions relate to businesses in the agriculture, coal, and steel sectors, and to the financing of individual export orders. The lender will advise if any of these restrictions affect the business when they consider the loan application.

Evaluation

Businesses will need to provide all the information normally required by a lender in connection with a loan application, which will generally involve completing the application form and providing supporting information, typically including:

  • current business plan, including details of the purpose for which the loan is required and details of other investment in and financial commitments of the business
  • financial projections
  • historic trading figures
  • statutory and management accounts
  • information on any other publicly funded support received by your business within the past three years

Invoice Discounting (ID) & Factoring

Supplied by the banks and independent organisations where eligible debtors are discounted and funds are provided immediately at an agreed percentage - typically 80/85% but for some sectors up to 90%. Higher funding can be available via an overpayment facility if additional security is on offer.

Invoice discounting is mainly undertaken on a confidential basis ie your customers do not know that their debt is being discounted. The business continues to manage its own sales ledger collections - it is business as usual, but you receive the money tied-up in invoices far quicker than waiting for your customer to pay!

Factoring - the finance organisation often manages the debtor collections (but not in all cases) and customers are aware of the existence of the factoring organisation.

ID and factoring will cost more than an overdraft but it will release more from debtors than a bank would normally allow on an overdraft

For the facility, you pay a discount rate - a margin over base or libor. Take care here, as some of the niche lenders operate with their own base rate.

You also pay a service fee as a % of turnover where with ID this will be less than factoring as less work is involved. A minimum service fee is payable.

Not all businesses are right for ID. Anything contractual is difficult for obvious reasons. Also when invoices are raised on applications discounters prefer invoices raised on confirmed valuations. There are, however, some funders who specialise in such circumstances.

Some agreements look for a minimum term of 12 months with say 3 months notice to end. Others only require 28 days to end and have no minimum term, so can be used as short term financing if required.

Asset Finance

An important type of funding for businesses, which specifically links to the asset and the repayment is over a period.

Valuable working capital is not tied-up in asset funding other than the deposit that is often necessary.

The various options available include:

  •  hire/lease purchase

Requires the payment of an initial deposit followed by the repayment of the outstanding balance over a fixed period. Instalments can be structured to match the business's anticipated cash flows. The inclusion of a final increased "balloon" payment can further reduce the monthly instalments.

  •  hire purchase - variable rate

A hire purchase agreement where the interest is calculated by reference to an agreed margin, normally over the finance house base rate. It has the benefit that variations in interest rates during the agreement are reflected in the interest charges.

  •  finance lease

With two operational periods, a finance lease is highly flexible. During the primary period payments are structured to cover the whole finance cost of the asset. In the secondary period the lease can be extended indefinitely for a small annual rental. When the time for disposal arrives the customer receives the sale proceeds less a small administration fee.

  •  operating lease

A form of off-balance sheet financing offering the lowest rentals of any finance scheme. By basing the agreement on the asset's estimated depreciation over the lease period rentals are kept to a minimum.

  •  contract hire

Similar to an operating lease, contract hire includes a repair and maintenance contract for the life of the lease. Contract hire is as close as possible to a fixed price, all-in monthly payment package.

  •  sale and leaseback

A refinancing option of an asset that enables a cash injection into the business eg the re-financing of  say a printing press, engineering equipment, vehicles etc which is then leased back over an agreed lease period.

There are other types of finance available which include, private loans, business angel funding, venture capital - this list is not exhaustive. What type of finance your business requires needs careful consideration, so please give us a no obligation call to explore matters further.

Telephone 01451 822768 or 07708 164799.