Getting Your Commercial Finances in Order

In commercial finance, factoring has become extremely popular and in some cases it tends to replace the traditional bank overdraft type of finance. In factoring, the bank takes over the collection of the business' unpaid invoices. For each invoice factored the bank pays to the business a fixed percentage of the invoice value. This has the advantage of improving cash flow by realising funds immediately.

In factoring, the bank may also be prepared to maintain a full sales ledger and credit control service for the business that is factoring. The banks are usually only interested in ‘clean’ debt. If an invoice is subsequently disputed it is handed back to the business to settle, and the bank will reclaim the monies paid to the business in respect of the invoice.

While Invoice discounting is similar to factoring, but the only thing is that it does not include the sales ledger or credit control function that remains with the business. The customers receiving the invoices are not therefore usually aware that the invoice discounting arrangements exists.

As far as leasing or hire purchase arrangements are concerned they are the best method available today for enabling businesses to acquire a variety of assets such as plant, machinery and vehicles. The arrangements can greatly assist the cash flow, as they do not require the large down payment normally expected with the acquisition of such assets. Furthermore such schemes can often have considerable tax advantages for the business.

However, Bank loans are the most common and are available to cover medium to long term finance requirements involving capital expenditure. The Banks will often take steps to protect the amount they have lent by taking security from the borrower. This will usually involve a fixed charge over land and fixed assets owned by the borrower. Assets subject to a fixed charge cannot be sold without the bank's consent. Indeed if the borrower defaults on the loan repayments, the bank has power to sell the charged assets and recover the outstanding amounts under the loan. A fixed charge is therefore like a mortgage.

If the borrower is a limited company the banks may go further by requiring a floating charge in addition to a fixed charge and asking the directors to give personal guarantees.

Whilst a commercial loan is the most flexible option, though it's not always the cheapest and leasing or factoring may be more viable; however, a commercial loan will provide you the flexibility to structure the repayments to suit your business needs.

Your loan will be structured as either a variable rate that can fluctuate with any changes to the base rate, or a fixed rate, which will remain steady for the term of the loan and provide stability.

The benefits of obtaining a commercial loan is that you retain ownership of the business and any equipment you purchase with the loan and these loans can be used for almost any purpose and interest payments are tax deductible.