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Archive for July, 2009

Refusal to release assets from all assets debenture

Tuesday, July 21st, 2009

XL Business Finance was recently approached to look at a substantial refinancing deal for a large outside catering business. The equipment to be refinanced was mainly commercial vehicles converted into specialist catering units. Therefore the assets were not every finance company’s cup of tea.

However not wishing to give up we secured a finance facility with one of our asset based finance companies. You might think job done but oh no. As part of the documentation process a debenture waiver must be obtained from any funders holding a debenture. This would normally be the bank if there is an overdraft or loan in place or it can be from their existing invoice discounting company. Or it can be both.

Any funder having an all assets debenture has an automatic legal title over any assets in the business so the asset refinancing company must get the equipment released from the debenture via a debenture waiver. More often than not it is the banks which can cause issues but imagine our surprise when the non bank owned invoice discounting company would not release the assts from the debenture.

They refused not because the kit was needed as part of their security but because they were reluctant from a dubious legal point of view. This particular invoice discounting company must have racked a large legal bill of several thousand pounds not to mention the legal costs from the customer’s point of view. In our opinion it was totally unnecessary.

The result was the refinance was delayed by a number of months and we are now in the process of switching the customer to a new and more flexible invoice discounting company. Any refinance of existing equipment should be straight forward at documentation stage and if you have had any similar problems we are here to help.

Hire Purchase or Finance Lease?

Tuesday, July 21st, 2009

We often get asked which is the best way to finance capital equipment. In short the answer can be subjective and we will always refer you to your own accountant. However we can provide you with the differences which will probably point you in the right direction.

A hire purchase and finance lease facility are both ways of funding capital expenditure requirement however they are structured in slightly different ways and have slightly different tax treatment.

With a hire purchase facility all the VAT must be paid up front with a deposit of usually 10% of the net amount. At the end of the agreement and with payment of the final payment an option to purchase fee is paid and legal title passes to the customer. The equipment is shown as an asset in the companys balance sheet from the onset of the hire purchase agreement with a corresponding liability for the finance agreement. Capital allowances are claimed on a reducing balance basis.

With a finance lease the equipment is still shown as an asset and liability in the balance sheet however there are several fundamental differences. Firstly the VAT is spread over the term of the agreement and paid with the monthly rentals. Therefore from a cash flow point of view finance lease can work better for some customers. Instead of claiming capital allowances the monthly rental is offset against the profit and loss account therefore the full benefit from a tax point of view is claimed over the exact period of the lease. This can be advantageous if the equipment being funded is high tech and will need to be replaced at he end of the agreement. However at the end of the agreement the finance lease will go into secondary rentals which are equivalent to one months rental being paid on an annual basis. Alternatively the kit can be sold and the customer retains typically 95% of the sale proceeds. The remaining 5% is paid to the finance company along with the VAT

Independent or Bank Owned Factoring Company

Monday, July 20th, 2009

There are many factors which need to be taken into consideration when choosing a new factoring company. The most important of which is whether an independent factoring company or a bank owned factoring company is the preffered route. An independent company which is non bank owned traditionally tend to be more flexible than banks.  Independents don’t have the same financial constraints as the banks as they are able to make their own rules and regulations. In addition many of the sales guys working for independents are very senior and experienced and are able to agree deals instantly up to a certain size. This potential quick turnaround in the decision making process can also is a factor in choosing a funder.

As a rule of thumb we would recommend an independent for a full factoring facility.  It is more likely that an independent will chase your customers more frequently. Some banks will only phone the top few customers. Certain independents will chase the entire customer base. Obviously this will have an implication on cost and is the reason why it may appear cheaper to use factoring with a bank. However it must be remembered that factoring is a value added service and the cheapest is not always the best.

However if you are looking for a straight forward invoice discounting it is sometimes difficult to argue that the independents are better than the banks. At this point other factors also need to be taken into consideration. The length of time the business has been trading, is it a new start , is there any contractual  element to the debt, is any international trade finance required, is their additional stocking finance required etc etc

 

Overdraft withdrawn when switching to factoring/invoice discounting

Monday, July 20th, 2009

If you are considering switching to a factoring or invoice discounting facility it is worth considering the implications this may have on any available overdraft facility.  It is more likely than not that a bank will have taken an all assets debenture against the company. This means that their security is the debtor book of the company. Therefore when considering an alternative cash flow product there must be enough flexibility in the headroom of the factoring or invoice discounting facility to fully repay the overdraft and provide additional working capital. Any bank informed of a customers intantion to use a factoring facility in my experience will require the overdraft repaying in full. Remember an overdraft facility is repayable on demand.

I have also seen customers being caught out wanting  to switch a factoring facility away from a bank to another independent factoring company. They have forgotten or not realised the bank has an all assets debenture registered against the business to secure a small overdraft. Before the customer can switch the overdraft will need to be paid off but it can often be the  customer doesn’t have the headroom to repay the overdraft. Sometimes it may be possible to get a small over payment from the new factoring company or it may even be possible to refinance existing equipment to repay the overdraft and provide additional working capital.

commercial mortgages

Friday, July 17th, 2009

Probably worth mentioning a few words on commercial mortgages. All the banks are telling you that they are open for business. What a load of codswallop. In reality there are a very few banks skimming the cream of the deals. The banks that are lending are only lending to their own customers providing you have a large deposit, profitable and have a very strong balance sheet.  The government owned banks are lending a bit but i’m sure they dont really want to be lending.  There are all kind of rumours going around as to why they are not lending. Is it because they need the money from the govermenment to strengthen their balance sheets or is it becuase they are playing on the bond makets as someone suggested to me recently? Probably because we are in a recession and they dont want to.

The chances of getting a commercial mortgage from a bank other than the one you bank with are next to nothing. If your business is strong enough to raise the eyebrows of another bank be prepared to have to move your banking arrangements lock stock and barrel in order to get the funding. The most important aspect of the transaction will be the serviceability of the transaction. Even if there is a very low loan to value it doesn’t automatically mean an application will be accepted.

Even the near prime and sub prime  unders that once upon a time would lend up to 80% of the valuation are closely scrutinising the serviceability of the transaction. How times have changed!

Declined Finance?

Friday, July 17th, 2009

In my opinion leasing comapanies are continuuing to tighten their underwriting criteria. Every week we receive an email from a finance company saying they have pulled out of financing this sort of equipment or don’t want to finance businesses in that industry sector. Providing you have been trading for more than 3 years, you have a very strong balance sheet, you are very profitable and your accounting information is bang up to date you should have no problem obtaing a hire purchase facility or a finance lease facility, however it is no guarantee. Leasing companies are  paying particular attention to sercieability so it is now necessary to provide 3 months recent bank statements as part of the underwriting process. If you are one of the lucky ones you will get a nice interest rate and nice terms. This is good old balance sheet lending. Happy days!

Unfortunately there seems to be more bussinesses struggling to obtain finance than businesses getting clean acceptances. Until recently here were a handfull of funders that positioned themslves just below the high street funders taking a commercial view on the deals that did not appeal to these high street lenders.

The bad news is that the near prime funders have nearly all disappeared due to their inability to obtain funding themselves on the wholesale market. The asset based lenders will do deals however they nearlly all want to be asset secure. Therefore if you are buying a piece of kit costing £250k and they perceive the forced sale value at £125k they will require an additional £125k worth of  security. This can be in the form of unencumbered kit or can be equity in commercial or residential property. It may even be possible to refinance equipment and machinery coming to the end of a lease or hire purchase agrement.

If no addional security is available many businesses are finding themselves caught between a rock and a hard stone.

Business Financing

Wednesday, July 15th, 2009

It appears the banks are still very tight when it comes to agreeing business loans. Wether it is a commercial mortgage, asset finance or an overdraft for working capital they are still looking for reasons to decline a deal rather than looking for the reasons to do a deal. Further more they appear to be looking after their own. customers. Many of the high street  banks had separate divisions offering hire purchase, leasing, factoring and invoice discounting. As the credit crunch has dried up the available funds, the market has restricted massively in terms of available funding options. The banks that are lending are lending to their own customers. They need to be blue chip, profitable and have a very good relationship with their existing bankers.  In other words they are cherry picking their deals. In addition the margins they are commanding are far higher than was being offered before the credit crunch.

As an independent finance broker we have seen the available funders reduce on a month by month basis. There are now only a handful of funders available in the market place. If a customer is blue chip most types of capital investments can still be financed via a high street finance company. We call these sorts of transaction balance sheet lending. However if you cannot get funding via the high street, things become slightly more complicated. The second and third tier funders that would traditionally take a commercial view on a business are only doing deals on an asset secure basis. Therefore any new purchases need to be funded by taking additional plant and machinery as security or if that is not available we are increasingly doing deals by taking second charges over property

Invoice Finance

Wednesday, July 15th, 2009

Over the years invoice financing has grown in popularity. Once upon a time it was deemed the finance product of last resort however nowadays it is one of the first facilities that professional and business advisors recommended to their clients. The main reason why businesses go bust is that they run out of cash. A bank overdraft may not give the appropriate amount of cashflow to operate a business at the correct level.

More and more businesses are turning to invoice finance as a means to boost their financial flexibilty and use either factoring or invoice discounting to generate much needed cashflow.

Despite the goverment in their attemts to boost liquidity in the banking market traditional forms of bank based funding remains tight and difficult to obtain. Even the much publicised governement backed EFG funding scheme is having little affect. The good news is that many business owners are discovering that many alternative credible forms of finance are available other than the banks loans and overdrafts.

Mainly due to a lack of understanding of invoice financing these alternative forms of finance have been off the radar for many businsses. There is sometimes a perception in the market that factoring or invoice discounting can be costly and out of reach for many businesses. Factoring can be obtained for a business with turnover as low as £100,000. Costs to run a full factoring facility start from a few hundred pounds per month. There are two parts to the charges. First there is the cost for borrowing the money which is comparable to a bank overdraft. The second element of the charge is the cost for operating the facility which may include provision of credit checks on your customers, credit control and chasing late and overdue payemnts. Compare this with the cost of employing a full time credit controller or the time and cost of the owner manager chasing the debts themselves this can constitute pretty good vale for money.

Payroll Finance

Tuesday, July 14th, 2009

Payroll Finance sounded too good to be true. Unfortunately that is exactly the case. Smartflow Payroll Finance is now in administration. Although an unsecured payroll finance facility appeared very attractive perhaps it was always destined to fail or is it another victim of the credit crunch?

Payroll funding provided a finance facility with up to two months of a businesses gross payroll. For example if the gross payroll was £100k a facility of up to £200k may have been possible. On the basis no personal guarantees were required from the directors the facility provided a viable alternative  to bank overdrafts. It also provided an alternative for busineses that were unable to use factoring or invoice discounting facilities as a means to fund its working capital requirements. Furthermore as Smartflow was providing a service they were in fact a trade creditor and as such it did not affect any of a customers banking covenants.

As with any of these specilaist funders Smartflow will have gone into the market to borrow funds and lend them to their customers at higher rates. Therefore the rates were expensive, howver as the facilities were unsecured they were certainly not excessive. It is my guess the high rates attracted the poorer covenants and it would only take one or two deals to fall over and the rest his history.

The problem now is that the demise of Smartflow potentially leaves many customers with a funding gap. XL Business Finance, as a specilaist independent broker has been busy helping customers restructure their finances. In extreme cases we have recommended that advice be taken from a corporate recovery specilaist who  can help with any VAT and PAYE arrears which may have occurred. Refinancing existing machinery is always an option but is only workable if there is value in the equipment. Alternatively funding via the Enterprise Finance Guarantee (EFG) scheme may be possible. Obviously factoring or invoice discounting is always an option. Even if you have been told you are not eligible it is always worth contacting us because there are many specilist funders capable of doing deals the high street banks dont want to fund.

Prestige Vehicle Finance

Friday, July 10th, 2009

XL Business Finance was recently approached by a prestige vehicle dealer who had been struggling to obtain finance for one of his clients. His usual sourses of finance were struggling to obtain the necessary funding. As an independent finance broker we were able to approach the finance market and find business finance via a specilaist prestige vehicle funder. As a result the owner and director is now driving around in his spanking brand new Ferrari. The same business has just ordered a pimped up Porsche cayenne to be financed via the same funder.

The finance comapny we used was a small not so well known privately owned finance company. Although the customer was very profitable, had a grade one credit rating and a muti million pound net worth, suprisingingly the high street finance companies and banks did not want to finance these vehicles. In addition a very substantial deposit was avialable from the customer.

The stance from the balance sheet lenders on prestige vehcle funding at the moment is that they just dont want to do it. It appears that they will not finance fund luxury items which are not core to the main business activity. This is most unfair as it is just another example of the banks and high street finance companies restricting cash and compouding the credit crunch. The bankers are having their wings and bonusses clipped so why should anyone be driving around in a nice car if they can’t. Kill Joys!

It also adversely affecting the residual value of prestige vehicles as little finance is available rsulting in the plummiting values! Vehicle finance options.