I read your column last week about factoring. I’m looking for a short-term loan with my bank, but I really don’t want to wait months to secure the debt and jump through endless artificial hoops. I saw in your column that you could borrow against invoices or even sell them to raise money, so I thought a factoring loan might work for me. Any ideas?
I think I mentioned that factoring could be a more expensive option. If the companies that owe you money are good debt, why bother factoring when you know you will definitely get paid? You can simply opt for a confidential bill discounting agreement where you effectively borrow against your book debt (those who owe you money). This will build capital quickly and if you decide you want to pay off the loan sooner, you can do so at a much lower cost than paying for a factoring deal, which will have higher ‘factored’ risk and operating costs.
Remember to opt for confidential invoice discounting instead of regular invoice discounting, as with the latter your clients will know that you have signed this agreement and it would send the wrong messages, ie you could have cash flow problems.
You typically need a turnover of over £500,000, but many companies are more flexible than they used to be and more focused on lending against quality with a good secure repayment.
The company that offers you the invoice discount will usually review your sales book, your business history and then offer you the possibility of withdrawing up to 80% of the unpaid invoices.
It’s a bit like a bank overdraft in many ways, although the bill discounter will usually require an obligation on your book debts.
You’ll pay normal interest payments and expect to pay a c1% fee to set up. A trade finance broker will be able to evaluate available bill discounting companies and locate the best price for you.
Depending on how much you want to borrow, another option to consider is a bridging loan. A bridge loan is typically a short-term loan that is then secured on land or property to bridge a financial gap. Examples of this are when you sell a house and buy another but have not sold the first one. Because you need to move quickly, bridging finance becomes important because of speed.
There are two types of bridging loans. A closed bridge loan is used when the sale of your home is guaranteed and an open one when it is not. By leaving the bridging loan open, you can keep the debt until the sale goes through. Bridge loans can last anywhere from a day to a year, but one is usually expected to last around three months.
Interest is charged monthly and is not cheap. Actually, it is expensive. In this situation, if your credit situation allowed, you could raise enough equity against the bills to create a deposit large enough to take out a normal mortgage against the second home, which would be much cheaper than the cost of a bridging loan.
Expect to pay an arrangement fee of between 0.5% and 1.5% of the loan and a variety of other fees, such as artificial administrative fees, attorney fees, appraisal fees, and lender fees.
However, a bridging loan is typically used when people want to move quickly, buy a property at auction, for example, or even buy a property that a normal lender would not consider, i.e. a defective property. A builder can use a bridge loan and then renew and take care of any faulty issues before remortgaging with a regular conventional lender.
You might expect your normal banks to offer bridges, but the more flexible niche and arrangements are normally off the high street, but again your trade finance broker could help you with that and find the most suitable price and offer. .
Expect to be offered between 65% and 75% loan to value.
Don’t really consider a bridging loan unless you’re pretty sure you’ll pay off the debt, as I’ve seen businesses stall in the past on monthly interest for a year just to get an exit fee. As I said last week, there are many methods of obtaining the business financing you need, so be sure to get independent advice from a broker.