Whilst high street banks offer businesses and individuals loans and overdraft facilities, these may not be the best form of finance to support your business.

Overdraft

An overdraft enables you to spend more money than is in your account, but will attract fees and interest. An arranged overdraft, as the name suggests, is one which has been agreed in advance with your bank. unarranged overdraft is one which has not been approved by your bank and will attract a higher level of fees and interest.

Secured Loan

As the name suggests, this is a loan against which the borrower puts up some form of collateral against default. A prime example of this in a personal situation is a mortgage where the lender takes a first charge over the property until the mortgage has been paid off.

For businesses, loans might be secured against the business premises, vehicles or other assets, or indeed the director(s) could out their personal residence as security. It is not unusual for a secured business loan to also require a personal guarantee from the directors. The issue with this is that, in the event of default due to a business problem, the lender is then able to pursue a claim against the personal guarantee even if the business on default is a limited company.

Unsecured Loan

An unsecured loan will be advanced based on the credit rating of the individual or business applying for it. This is obviously preferable to the borrower that does not want to put up assets as collateral but it is more risky for the lender and as such might carry a higher interest rate.

Invoice finance – Disclosed & Confidential

Possibly the biggest challenge that many businesses face is managing cashflow, particularly in challenging economic environments, where invoices tend to remain unpaid for longer periods.

Typically, invoice financing will enable your business to receive payment of up to 90% of the invoice at the time the invoice is raised, with the balance, after fees, paid once the invoice has been settled. The finance company will manage the collections, dealing direct with your customers, which suits many smaller businesses that do not have big cash reserves, or the time to chase payments. Such a facility can be arranged to cover all sales invoices, or you might prefer a selective invoice finance facility, where, as the title suggests, you are able to decide which invoices you wish to raise funds against. This is particularly attractive to smaller businesses and is generally easier to arrange and offers far greater flexibility to finance invoices only when it is necessary to meet you cash flow requirements.

There are two types of invoice finance – disclosed and confidential. With disclosed finance the business’s customers are instructed to pay the invoice finance provider directly and so are aware that this type of finance is being used.

Conversely, with confidential invoice finance the clients are not made aware of the finance. A business should consider whether clients may be concerned that invoice finance is being used before deciding on whether to opt for disclosed or confidential.

Invoice Factoring – Disclosed & Undisclosed

Invoice factoring is similar to invoice finance in the way it works – both disclosed and confidential – but the primary difference is that with invoice factoring the business sells its unpaid invoices to a third party (the factor) who then collects payments from the customers. A business should think carefully about using invoice factoring because, having given up control of the payment collection process, the subsequent collection by the factor might have a detrimental effect on the relationship of the client. Typically fees for factoring are higher as well, possibly as much as 15% against 3-5% for invoice finance.

Asset Finance

Asset finance enables you to acquire business assets such as equipment, machinery and vehicles without having to pay for them upfront. It can also allow you to release cash from the value in assets you already own, by using them as security against a business loan from an asset finance lender. Such finance enables the costs of assets to spread over a longer period, so assisting with cash flow.

Trade Finance

Trade finance, also known as export finance, is a set of techniques or financial instruments used to mitigate the risks inherent in international trade to ensure payment to exporters while assuring the delivery of goods and services to importers. Trade finance can be utilised to cover expenses including purchase, warehousing and shipping of the goods for export; it can also help mitigate the risks of overseas trade including movements in foreign exchange rate and non-payment by the importer.

Property Finance

There are several different finance products relating to domestic property transactions. These include bridge financing acquisitions, renovations and/or disposals; second charge mortgages on your existing property to release cash for any number of reasons.

Commercial property acquisitions can be arranged using specialised brokers who are experienced with commercial mortgages for acquiring business premises, buy to let portfolios, refinancing of existing commercial loans and arranging finance for property developments of all types.

There is no ‘one size fits all’ when it comes to property and so it is worthwhile looking to specialists rather than relying on traditional funding sources.

NOTE: Kingpin Advisory are not regulated to provide financial advice which is why we work with a network of advisers that are regulated to provide such advice.