Which Commercial Finane News Archive

In the current economic climate, adequate business banking facilities are proving very difficult for many business owners to acquire. Many business banking overdraft facilities are being removed or refused and others converted to term loans by business banking managers.

Although business banking is proving an issue for many business owners, business banking does not have to be the primary form of business finance. With the right business finance structure, business banking facilities may only be required for transactional purposes. It may be possible to source business finance from alternative sources including:

• Alternative Business Loan Providers
• Asset Finance
• Pension Driven Business Funding
• Invoice/Factoring Facilities

If you require business finance and your business banking facilities cannot adequately meet your needs, please contact us and speak to one of our advisors.

A business overdraft facility is arguably the most flexible business funding mechanism; a business overdraft can aid cash flow requirements brought about by a host of sources including debtors and industry seasonality. However, companies are now finding it harder to obtain a business overdraft facility.

Business overdraft facilities have been harder to keep in place, let alone source during the credit crunch and recession. Many banks are requiring that business overdrafts are converted to term loans and that the business overdraft is either removed completely, or, a new business overdraft limit is set at a nominal amount.

The change in the banks attitude towards business overdrafts has caused many companies difficulty. The flexibility of a business overdraft to deal with cash flow issues is diminished as lower borrowing limits are applied and the conversion of business overdrafts to term loans causes an additional monthly cash flow constraint. This is set against a backdrop of cost push inflation, with rising costs; companies have an immediate need for business funding and business overdraft facilities.

It does not appear that the situation affecting the availability of business overdrafts is going to change in the short term. Two of the main factors affecting the availability of business overdrafts going forward will be:

• Credit Scoring – the banks are tightening the risk profiles, making it harder to obtain a business overdraft and they are also increasing charges, making a business overdraft more expensive at a time of an historically low base rate.

• Money Supply – It has also been muted that money supply will fall in 2012, effecting the availability of not only business overdrafts but all funding facilities.

These two factors alone could potentially be enough to cripple businesses fighting to make it through the recession, if it means a reduction or loss of a much needed business overdraft facility.

There are however alternatives to a business overdraft, for the right business it may be possible to remove the requirement for third party business funding altogether. For more information, please contact us.

In the current economic climate, many start up businesses are seeking alternatives to the banks for commercial funding. Start up businesses are finding it increasing difficult to secure business banking overdraft facilities and business loan facilities. For banks to consider providing a business overdraft facility to start up businesses, many need to show up to 18 months successful trading before being considered for a business overdraft or business loan facility.

To counteract this, many start up business owner directors will invest personal monies into their business in the form of directors loans. Savings and remortgage monies are common sources of directors loans. Also, directors personal credit scores often enable personal borrowings through unsecured loans and credit cards, or, friends and family may lend their own money. However, as with any investment, risk and reward play their part, especially in the current economic climate. These funds are in the main left unsecured within the business.

If a start up business fails with directors loans outstanding, the liability is to the owner directors personal interaction with their business, a calculated risk at the time of investment. The issue in the current economic climate comes when owner directors borrow to invest in their start up business. The risk of failure is not only in losing the investment but the requirement to repay the borrowing. There will be a requirement to find an income, maintain a standard of living and repay the borrowings of a failed business after tax and national insurance has been paid on new income. This can leave a costly long term liability on individuals and affect the standard of living of their immediate family.

For start up businesses there are facilities available able to provide working capital. For start up businesses where debtor books build quickly, invoice discounting facilities can be attainable through banks and other third party providers. Debtor finance can help maintain cash flow without the need for directors to risk personal assets.

For start up business owners wishing to maintain financial independence and control of their business, self investment via a creditor protected trust can be a powerful business funding mechanism. Utilising pension assets in the form of a Small Self Administered Scheme enables owner directors of start up businesses to provide commercial funding. This can negate the requirement for bank funding or personal borrowing to finance the business, whilst requiring the commercial security a third party commercial lender would require.

Many start up businesses are seeking alternatives to the banks, for more information on how to provide working capital without traditional third party funding, please contact us.

Small businesses are finding it increasingly difficult to raise cash flow finance. With banks reducing the availability of business overdraft facilities, converting many existing business overdraft facilities to term loans, small businesses are looking for alternatives to provide cash flow finance.

The traditional alternatives to a business overdraft and the cash flow finance products the banks are imposing are Invoice Discounting and Factoring facilities. Invoice Discounting and Factoring can prove extremely beneficial, however, they can also prove extremely costly. Service charges, interest charges and transaction charges can inflate the annual costs to between 15% and 20% of the invoice discounting or factoring facility.

With the banks moving increasing numbers of small businesses into Invoice Discounting and Factoring facilities, what are the alternative cash flow finance options available to small business owners to help reduce the cost of borrowing?

Many small business owners have taken opportunity to self fund. In a banking climate that is not inspiring confidence in those seeking business finance, an increasing number of owner directors utilising pension funds for cash flow finance. The major advantage of utilising pensions for business funding for any reason, including cash flow finance, is that this business funding mechanism can provide business owners with financial independence.

Key benefits are:

The ability to invest and/or loan pension assets to your business. This can take place alongside traditional pension investments such as shares and bonds.

Creditor protect business assets through the interaction of your pension with your business. No personal guarantees are required with this form of business funding.

Create on ongoing flexible business funding mechanism which can provide long term business funding solutions to your business.

Operate your business independently from third party business funding providers. Give your business greater autonomy in business funding decisions.

Mobilising pension assets for business funding purposes provides a powerful business funding mechanism and greater control over pension investments, which can lead exponential growth of pension funds.

For advice on how your pension funding can be utilised as a business funding mechanism, please contact us.

Increasingly small to medium businesses are finding it hard to obtain business funding. The first point of call for most businesses is the bank and their business overdraft, however, as businesses are finding out, the banks appetite for lending in the form of a business overdraft is changing.

Government has made it clear that it is important that the banks provide business funding during these times of austerity and one would assume that a business overdraft facility would be a key business funding mechanism for cash flow purposes.

What has become clear to small and medium business is that the banks do not share the same appetite for lending that the government would have us believe. Put simply, the banks have learnt the hard way that they could not maintain their lending practices. They have subsequently reduced their exposure to risk which has had a major effect on the availability of funds for business overdrafts and business loans.

Much of the new lending to business in the form of business overdrafts and business loans has been to businesses classified as low risk, with some businesses having their business overdraft increased without the requirement, enabling the banks to meet their business funding targets set by government.

For those businesses not meeting the risk profiles necessary to achieve favourable terms with the bank, business overdraft facilities are only being maintained after the provision of higher levels of security such as personal guarantees and charges over domestic property. In some cases, where extra security cannot be provided business overdrafts are being pulled, business owners are being forced into costly business loan and asset based business lending.

Businesses owners, historically trusting the banks to provide business funding facilities are now seeking alternatives, the realisation that in times of austerity more responsibility has to be taken to gain business funding if businesses are going to make it through these tough times. There are alternatives and there are alternative providers.

Business overdraft facilities are being replaced with asset based finance, banks are moving towards invoice discounting facilities rather than business overdrafts. The charges associated with these invoice discounting facilities provided by the banks are high and increasing. Alternative providers will not only compete on cost, but may also bring an understanding of constraints associated to your industry.

Business loan facilities are also proving very costly, the Bank of England base rate is at an all time low, yet there has been no significant decrease in interest charges associated with business loans. On top of this set up charges and ongoing fees are increasing, along with the level of business and personal security required to back the business loan facility. The alternative to a traditional business loan facility is the mobilisation of pension funds. The Small Self Administered Scheme (SSAS) can provide business loans as an alternative investment to the markets. Interest charges are set within HMRC guidelines and no personal security is required, long term, this business funding mechanism may provide a business with financial independence.

For more information and advice on the alternatives to the banks, please contact us.

As all business owners and entrepreneurs know, the availability of working capital is pivotal to businesses making it through the current economic turmoil. All sectors of industry have concerns due to the current lack in availability of funds for working capital. Cash flow constraints are hitting many companies with debtors holding out on payment for precisely the same reason, cash flow.

What is stifling the availability of working capital is the unwillingness of banks to lend. Since the nationalisation of some of the UK’s major banks, businesses have found it harder to raise funds for working capital. Whilst the banks have reported to government that the required and publicised levels of business funding have been made available, as they were required too, the reality is very different. The banks have made working capital facilities available through the provision of business overdrafts and business loans. However, they made these working capital facilities available to risk free clients, companies unlikely ever to require the working capital, ensuring that the banks position was protected as they were not increasing their exposure.

Whilst the banks have been structuring their lending in this way, business owners have had to look elsewhere for facilities providing working capital. Where working capital facilities have been made available to ‘riskier clients’ in the current climate, the cost and charging structures of working capital facilities have been increased, along with the requirement of increased security and personal guarantees.

It appears that the way companies borrow for working capital purposes has now changed, the banks are changing their lending models, reducing their lending in the form of business overdraft facilities in favour of term business loans and implementing a lending model closer to that of European and US business lending.

As a result, many business owners are looking for alternative methods of providing working capital. The cost of facilities, security required and in many cases the banks refusal to lend are changing the way in which business funding is structured.

Many directors are increasing directors’ loan accounts to provide working capital, utilising savings, credit cards and personal loans can be a quick resolution to a working capital requirement. However, directors loan accounts are in the main unsecured, definitely the case if the bank has a debenture in place. The risk in the current economic climate is the lack of creditor protection to this form of working capital funding. To replace directors loans accounts lost upon business failure, business owners need to factor in future income taxation requirements in replacing personal savings lost or repaying personal borrowing.

Throughout the banking crisis there has been an increase in business owners utilising pension funds to provide working capital. Small Self Administered Schemes (SSAS) and Self Invested Personal Pensions (SIPPS) are able to interact on a commercial basis with businesses, they have the ability to provide working capital and purchase intellectual and commercial property. In many cases negating the requirement for traditional business overdrafts and business loans and providing creditor protection to business assets afforded by a pension trust.

For more information regarding the availability of working capital, please contact us.