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Archive for August, 2009

Finance in a recession

Wednesday, August 12th, 2009

The difference between this recession and the last one is that businesses have a much wider option of finance products than they previously had. In particular there are dozens of factoring and invoice discounting businesses providing bespoke funding options.

Not only has factoring continued to thrive in the recession many Managing Directors and Finance Directors are turning to the Crown to obtain payment holidays with PAYE and VAT. Any additioanl cash flow  benefit will greatly enhance chances of survival in these difficult times.

In some cases it may be necessary to restructure the business via a pr-packaged administration. Again there are so many options available to directors than there were 10 or 20 years ago.

Six months the finance  market was in turmoil as many funders were reluctant to extend finance and some funders particularly the foreign owned funders pulled out of the market completely.

On a positive note providing the deal stacks up there are many business financing options available to businesses. There are still adequately funded factoring and invoice discounting business still open for business. Many of these lessor known funders can still provide support for businesses which are basically sound but have come up against financial difficulties  not previously experienced. These are the businesses which the banks have been struggling to assist.

The sooner a we are advised of a problem the sooner we can explore the options and provide a recovery solution.

Financing A Prepack

Monday, August 10th, 2009

A prepack other wise known as a phoenix is whereby a business goes into administration with the intention of the directors purchasing  the assets ofthe business in a newly formed limited company.   Not all finance companies will fund prepacks so it is important that all ones ducks are in line before a business pushes the button.

It is important to have the right factoring or invoice discounting company in place. As banks more often than not will not finance prepacks  it may be advisable to replace the bank owned finance company with a friendlier  and more accommodating finance company. This may only work when there are no other bank borrowings. If an overdraft is in place consideration must be taken into account if notice is given to quit a factring facility as undoubtedly the bank will call in the overdraft facility.

If there are no other facilities complicating proceedings the new factoring company will replace the inflexible factoring company. AS they wll be the main debentyre holder they can appoint the administrator of your choice, fund the new co and collect in full the debtors of the old co. Seamless!

Perhaps not. Any hire purchase and finance lease deals must be taken into condsideration. It may be possible to rewrite any hire purchase or finance lease deals into the new co however not all finance companies will novate the agreements into the new. XL Business Finance has experince of helping customers replace such finance agreemnts.

Financing A Prepack

Monday, August 10th, 2009

A prepack is otherwise known as a phoenix. A business goes into administration and the directors purchase the assets off the administrator in a prearranged agreement. Not all finance companies will finance a prepack so it is important to get the best possible advice and have all the new finance facilities in place. A good corporate insolvency firm will provide experience and guidance as to the best way forward however when it comes to arranging the new finance facilities XL Business Finance can provide some help and experience of our own.

Depending on the factoring or invoice discounting company  it may be advisable to replace the existing factoring company with a more flexible funder. As it is the factoring company that more often than not appoint the administrator it is important that the factoring company appoints the administrator which will assist with the prepack. A bank appointed administrator may lead to events not going the correct way. It is also important to take into consideration any  other bank facilities which may be called in if a customer tries to change factoring companies. This will have an affect on personal guarantees. We have seen instances where procedure were carried out against the advice of the administrator, notice was given to the existing bank owned factoring company and the bank called in a substantial overdraft . As you can imagine things got a bit messy.

Guide to Refinancing

Friday, August 7th, 2009

XL Business Finance is one of the leading specialists in refinancing plant machinery and existing equipment. Refinancing existing equipment is completely different from traditional equipment finance and here are a few tips to explain and make the process a lot easier.

1. Identify why there is a need to raise additional cash

2. Provide a list of equipment and machinery to be refinanced. The age , manufacturer, model will be required as a minimum. Provide any other information which may help to increase the refinance value such as any extras, original cost, condition and usage.

3. If the equipment is the equipment subject to any finance agreements settlement figures will be required.

4. Are the existing finance agreements hire purchase or finance lease as it will make a difference to the settlement procedure and  VAT treatment?

5. Are there any debenture holders? If a business has a bank overdraft or uses factoring or invoice discounting they will have a charge over the book debts and a floating charge over the assets. A debenture waiver will be required to release the assets and it is important to that the relevant funder is approached early in the decision making process.

6. Is there a Landlord? If there is a landlords waiver will be required before the equipment is refinanced. A landlords waiver will prevent the landlord from distraining against the equipment in the event of non payment of rent. It will also give the finance company a period of time to sell the equipment. A landlords waiver is usually  90 or 180 days and the longer the period the bigger the valuation.

7. WE will obtain a desk valuation. This gives us an indication of the value of all the equipment to be refinanced. XL business finance will use our expertise to get  the best possible valuation. Depending on the type of equipment we will obtain different valuations from professional valuers, dealers and various finance companies.

8. Personal guarantees. These are not always essential although it will help obtain a higher loan to value. Sometimes a limited personal guarantee can be taken

9. Directors warranty. A warranty confirms the goods are free from encumbrance  and ensures the goods are returned to finance company in the event of any default situation

10. Collating paperwork . Coordinating the paperwork is important to ensure the transaction is seamless from start to finish and ensures funds are drawn down as quickly as possible.

Payroll Finance

Thursday, August 6th, 2009

Word on the street is that payroll finance is going to make a comeback. Payroll finance was the short lived funding solution that provided the equivalent of  two months gross payroll on a revolving credit facility.

Until recently there were two funders in the market providing payroll finance. Wageroller was the first company to stop trading and more recently Smartflow went into administration.  Payroll finance albeit an expensive finance solution providing a working capital solution for businesses which maybe couldn’t obtain working capital via the more traditional funding facilities such as overdrafts, invoice discounting or factoring. The facility was ideal for businesses which worked on a contract basis such as construction companies. It was also very popular with private schools and also PLCs.   

The advantages to the customer of payroll funding was that the facility was totally unsecured and no personal guarantees were required. In addition the funders were providing a finance product which was deemed to be a service and as such it was classed as a trade creditor. This would have been of particular benefit to PLCs or businesses with onerous banking covenants because the facility would not have affected any banking facilities.

If the product does make a come back it will be interesting in what guise it will take  and what will be different that will make it succeed  where it did not do before.

Financing Digital Equipment

Thursday, August 6th, 2009

Digital Equipment can be described as being a soft asset. In the view of any finance company wrongly or rightly digital equipment is perceived as having very little value from a security point of view. Therefore most finance companies will take a very different approach when underwriting a deal. Unless a business has a very strong balance sheet , has been long established and is very profitable most high street banks and finance companies will not finance digital equipment. In other words they view it as unsecured lending and in the current economic climate it is difficult to get finance agreed on this basis.

However there are a couple of specialist funders that as a rule of thumb will advance to the business £10,000 for every director that is a home owner. In most cases personal guarantees will be required from eack of the directors. The finance companies are calling all the shots at the moment and due to the lack of funds available in the market for every potential customer saying they will not provide personal guarantees there are probably a dozen or so saying they will give personal guarantees. 

Alternatively it may be possible to refinance existing equipment to provide additional security to the finance company. XL business Finance is a speacilist in this area and asset secure deals can be structured to purchase high tech equipment. If there is still a shortfall in finance it is possible to do a deal by taking a charge over property. Specialist funders can do these deals very quickly. They don’t need business plans and projections as the banks will do. A deal can be put together as quick as it takes to obtain an authority from the first mortgagor.

Stocking Finance

Wednesday, August 5th, 2009

Enquiries regarding stocking finance seem to be on the up. As businesses find the high street funders more and more difficult to deal with, managing directors and finance directors are continually looking for innovative ways to help with cash flow. Stocking finance is a facility normally used in conjunction with a factoring or invoice discounting facility however in cirtain circumstances it can also be funded on a stand alone basis. Not all funders do proper stocking agreements and here’s why! 

Most factoring or invoice discounting companies will tell you they can fund stock. They will only do it in conjunction with a factoring or invoice discounting facility. In addition these finance companies will only fund stock as an overpayment up to amount equal to 100% of the debtor book. For example if  a business is obtaining prepayments at 80% and the debtor book is at £100k a typical factoring or invoice discounting facility will generate £80k against the value of the invoices. The maximum amount they will be able to generate from stock is therefore £20k being the difference between the total debtor book and the prepayment amount. More often than not stocking finance can not be obtained on a revolving credit basis and the intitial loan is normally clawed back over 12 months from when the advance was made. A factoring company will use this overpayment secured against the stock to win new business or help the business with a one off project.

There are however a few funders that provide a true revolving credit facility secure against stock.  These funders are few and far between but they doexist. Depending on the turnover, profitability and length of time the business has been trading will determine which funder we will recommended.

We also know of one funder that can potentially finance stock on a stand alone basis however as you can imagine the business would need to be well established and profitable. It may be possible to get 30p in the pound however as min facilities would be in the region of £300k a stock value of around £1m would be required.

Lloyds Blame HBOS for £4bn Losses

Wednesday, August 5th, 2009

Apparently the LLoyds banking group has made a pre tax loss of £4billion in the first six months trading of this year. This is the result of Lloyds taking over HBOS where an unprecedented amount of risk taking led to its failure and ultimate bail out by the tax payer.

I bet LLoyds wish they hadn’t bothered now. More interestingly  if the bad debts of HBOS are stripped out, LLyods would have made a operating profit of £6bn. It makes you wonder what sort of cretins were running HBOS so that £10bn of bad debts have effectively been written off in the first 6 months of this year.

The outlook is that LLoyds will right of more bad debts in the second half of this year, but thankfully not as many. The long term outlook is that LLoyds are predicting a recovery in 2010.

Up until the credit crunch we saw many risky deals being done not only by HBOS but by other prime lenders as well. Not only were these deals being done in the traditional banking sector, very risky deals were being done on equipment finance. We were seeing some hire purchase and finance lease deals being agreed which in our opinion it would be unlikely a second or third tier funder would approve.

Not only that, once a deal was agreed no account of the risk was taken into consideration and the deals were being priced too cheaply. Bank and asset finance is a risk reward business and financial institutions have an obligation to balance their portfolio in terms of risk and pricing. It appears the banks have learnt their lesson and for the time being rates will continue to be priced accordingly.

Obtaining a Commercial Mortagage in a Prepack

Tuesday, August 4th, 2009

Obtaining a commercial mortgage in a prepack could be an opportunity to purchase your own business premises for a significantly reduced amount. A prepack is effectively a pre organised administration. The day after a business goes into administration the directors purchase the old business off the administrator via a new company in a prearranged deal.

Although high street banks and finance companies often take a dim view of such transactions in our view it is provides the business with a clean break and the opportunity to to clear out the dead wood. Unfortunately there will always be casualties however surely a new business trading has got to be better than no business trading at all.

It is certainly possible for a the phoenix company to trade without doing an immediate deal on the property. In fact we have seen deals negotiated with the former bankers whereby the business pays a monthly rent at a much reduced amount compared to the monthly mortgage. In these difficult times commercial properties are being valued much lower than they were 12-18 months ago. Most of the lenders are keen to get some cash in the door so the situation enables the new phoenix company to make a cheeky offer. We are currently seeing businesses purchasing their own commercial property from the administrator for a much reduced amount. Although the high street banks are unlikely to finance the property in the new co there are still one or two building societies and second tier funders providing commercial mortgages. No mortgage lender will provide a facility against the value of the property. In all cases serviceability and cash flow  must be proven.

Barclays profits up to Nearly £3bn

Monday, August 3rd, 2009

Although Barclays has announced pre tax profits in their first six months trading profits in retail banking nearly halved. The profits in question mainly came from the banks investment arm which has seen profits double in the first six months of this year compared with the first six months of last year. Barclays investment arm has been attracting corporate investments as they have been shying away from part nationalised banks.

The question is, do these figures suggest an improvement in the banking sector and provide an indication we are on the road to recovery? In our opinion probably not. The fact is profits in the retail sector are half the amount they were this time last year. And it is the retails sector that we are interested in as this is the sector which lends to the SME market. In our opinion credit is still being restricted to the SME market and Business Financing is still difficult to obtain. The banks are dammed if they do and dammed if they don’t. On one hand they are being told to start lending to the business sector. On the other hand we are in this mess because of their irresponsible lending. WE are in the middle of the worst recession since donkeys ago so is it no wonder.