Finance Encyclopedia | First National Finance Ltd

Most businesses face cash flow problems at some point, and find themselves having to secure short-term finance in order to stay afloat. Invoice factoring is a practice that has become more popular in recent years and is a great way of getting the cash you need when debtors are taking their time paying you.

Simply put, you sell your accounts receivable i.e. outstanding invoices on to a third party, and get an instant cash injection to alleviate some of the immediate pressure. The invoices are sold at a discounted price, so before you consider invoice factoring you should weigh up the advantages of getting less than you are owed versus getting the money immediately.

If your business has had some financial problems in the past and your credit standing is less than perfect, invoice factoring is a good option. Because the lender is getting a realisable asset, the decision is not based on your ability to repay, as it would be with a loan. And when there is less of a risk involved, the transaction can usually be made with minimum fuss and hassle, something worth bearing in mind if you need the cash quickly.

Having said that no financial transaction is totally risk free for a lender, and as they take the full responsibility for the debt, they will be the ones bearing the brunt if the debtor fails to pay. This will be a contributing factor when lenders are deciding how much they are prepared to give you for the invoices. The more likely they are to recover the full amount, the more money they will be prepared to give you.

The transaction usually involves two stages. In the first stage you will be paid an advance by the lender, also known as the ‘factor’. This will be an agreed percentage of the total amount of your outstanding invoices. When the debtor has settled the invoice you’ll get the remainder of your agreed amount less the factor’s fee. The longer the debtor takes to settle, the less you will ultimately get back from the factor.

If you have some debtors who are notoriously bad at settling, invoice factoring might not be the most cost effective option for you. However, if you know that the invoices will be settled within a reasonable period of time, it’s a great way of getting some instant cash to help your business through a rough patch.

The popularity of buy-to-let properties has increased hugely over the past ten years or so. Many people saw the benefit of investing in a second property to provide a steady income for retirement, and the number of buy-to-let mortgages in the UK jumped from around 28,700 in 1998 to 701,900 in 2005.

In response to this, many lenders began putting together packages that were aimed specifically at landlords, and buy-to-let finance became a loan category in itself. High street banks initially held the lion’s share of the market, however there are now a number of specialist lenders offering buy-to-let finance, and many offer more competitive deals than the equivalent mortgages offered by the banks.

If you’re thinking about investing in a second ‘nest egg’ property, with a little time spent hunting around the internet, you’ll find a huge number of lenders who would be only too happy to hear from you. As with any loan, your credit history will have a bearing on how much they will be prepared to offer you, especially in the current market. However, if you have a less than perfect credit rating, don’t despair – you will still come across some lenders who will be prepared to consider your application for buy-to-let finance. Just bear in mind that the interest rates will be a lot higher than if you were the ‘ideal’ candidate.

Like a regular mortgage, you’ll need a deposit and the amount lenders will be prepared to give you will depend on more than your guarantee of rental income. Your other financial commitments will be taken into consideration, for example the mortgage on your own home and any other outstanding debts. Lenders will need to know that if for some reason your tenants don’t pay their rent, you will still be able to make the repayments on your buy-to-let mortgage.

To make sure you get the best deal possible, approach a number of different lenders and carefully compare their terms. Remember, the lender who is prepared to offer you the most money may not be offering the best deal, so take your time before you make any commitment.

The current property slump in the UK has resulted in some tough times for property developers, and many have begun to look overseas for opportunities. Although the current downturn has been pretty much global, not every country has been as badly hit as the UK and investment opportunities are always springing up in emerging economies in the former Eastern Bloc. This presents an ideal opportunity for developers – land is still relatively cheap and only likely to go up in value. Anyone who can raise the cash will almost certainly be able to make a profit on any land or property bought right now.

If you would like to get involved in property developing abroad, but don’t have the capital you need right now, international development finance could be the answer. One of the most obvious sectors for growth is tourism. As more and more countries see the benefits of marketing their sunshine, scenery, and friendly people to rain-soaked Britons, the need for hotels, apartments and villas increases. In recent years countries like Croatia and the Czech Republic have become hugely popular with tourists and international development finance has ensured that the standard of accommodation available mirrors that of wealthier parts of Europe. In addition to tourism, the growth of industry and services means new factories and offices will always be needed, again providing opportunities a-plenty for the canny investor.

International development finance is usually arranged through specialist lenders and supplied by both private investors and occasionally banks. The terms of the loan will vary depending on the lender and what it is you plan to do with the cash. Finance can usually be secured for everything from small-scale developments to huge multi-million pound builds that will take a number of years to complete. Some lenders will be happy to lend you 100% of the cash you need to cover both purchase and development costs, while some will expect you to be able to put up some capital yourself. It will very much depend on the project and your track record in this area. If you are a first time developer you may find it harder to get the finance you need and will have to provide a good deal of supporting evidence to prove that your plan is profitable.

As with all other loans, when you’re looking for international development finance, it’s important to do some research and hunt around to make sure you’re getting the best deal possible. There are plenty to choose from these days, just make sure you go with someone who shares your vision and is offering terms you can live with.

After rent and payroll, the biggest expense for any business is usually paying for the assets and equipment needed to run it. Assets can include everything from plant and machinery, to technology to haulage (including vans, trucks and cars) and generally speaking it makes better financial sense to make regular monthly payments and lease the assets rather than purchase them outright.

This type of arrangement is known as asset finance. It’s a great way of getting the equipment you need to run your business without putting too much pressure on your cash flow, and has become more and more popular in recent times as many businesses struggle to stay afloat. There are lots of different types of asset finance available, so before you make any decisions about which arrangement to opt for, talk your needs through with your lender. They will be able to come up with a package that’s just right for your business and budget.

If you run a courier service or any other type of company that involves a fleet, a good way of injecting some cash into the business is by arranging a type of asset finance known as ‘sale and leaseback’. This means that the lender will buy your entire fleet and then lease it back to you for an agreed monthly fee. You get full use of the vehicles plus a nice cash injection that will allow you to focus on other aspects of your business, for example expansion or a big marketing push.

Another straightforward option is hire purchase, which most people will be familiar with. This is a simple payment facility, whereby you make regular monthly payments and eventually own the asset. You can usually choose between fixed or variable interest options, and the interest can be offset against profits.

Other types of asset finance include contract hire, contract purchase, finance lease and operating lease. Before you make any decisions about what type of finance is right for your company, you should do some research and perhaps talk things through with your accountant as well as the lender you are thinking of arranging the finance with. Specialist lenders and brokers will have lots of experience putting packages together to suit a wide range of companies, so they will be able to come up with a deal that’s just right for you too.

No matter what your business is, there will come a time when you need to buy or lease equipment. For most smaller, office based businesses, equipment will include things like desks, PCs, printers, photocopiers and telephony, all fairly standard and easily purchased from any number of suppliers. However some companies have more specific requirements and, after property, equipment will be the biggest investment the company will make.

Where the cost of equipment runs into millions it usually makes sense to lease rather than make an outright purchase. This is known as equipment financing and is a great way of securing the tools you need to operate without putting too much pressure on your cash flow or dipping into capital reserves.  Equipment finance can usually be secured for first time purchases when you’re starting up in business, or if you need to replace or upgrade your current assets.

Unlike other types of business loan, which usually require detailed and lengthy applications, equipment finance is pretty easy to organise. As the equipment itself is used as collateral in the loan, the risks to the lender aren’t as great and most will be prepared to arrange equipment finance even if the company has a less than ideal credit rating. This makes it a very attractive option if you need to upgrade or buy new equipment in a hurry and don’t have the time to wait around for lengthy loan approvals. There are a number of specialist lenders operating in the market at the moment and most will be quite happy to tailor an arrangement that suits your particular business. As long as the company is in a fairly stable position at the time of applying you shouldn’t have too many problems securing the finance you need.

You know your business better than anyone else so lenders will usually leave it up to you to make the arrangements with your chosen supplier. You can deal with them as though you were paying cash, which ensures that you get equipment that suits your needs and is right for your business. You will probably have to give your lender details of the supplier in order for them to check the supplier’s solvency and reliability, but if you choose a supplier that you have an established record with this should speed up the process.

Agreements for equipment finance will usually last between two and ten years depending on the equipment being leased. And, as with most financial arrangements for businesses, the terms of the agreement will depend on your company’s specific circumstances. This is why it’s a good idea to check out a number of specialist lenders and be happy that you’ve got a deal that’s right for your company and your company’s cash flow.

Commercial mortgages are long term loans that are secured to buy business property or, occasionally to buy a business itself. They are similar to residential mortgages in that the premises acts as a security on the loan, however the repayment terms are slightly different in order to cater for the specific needs of a business. Most lenders will require a deposit of 20% – 30% and the repayment terms can be as short as one month, while other terms may be as long as 40 years.

The interest rates for commercial mortgages will vary from lender to lender and they will assess your company’s history as well as how it is likely to do in the future before giving you a quote. At First National Finance Ltd we shop around and spend time investigating all your options to allow you make a decision about which lender to go with. It’s important to take your time with your application and provide as much information as possible about your projected turn-over, particularly if the company is young and you are borrowing for the first time. It’s more difficult to assess a company’s creditworthiness than it is to assess that of an individual borrower, so give your potential lender every opportunity to say yes!

If you’re looking for a commercial mortgage in order to buy a property or a premises then the lender will usually want to know what you’re planning to do with the property. They may place some restrictions on its use and may not lend at all for certain business concerns. The underwriting terms for commercial mortgages can be quite complicated, so it’s important that you understand fully what you’re getting into and what your liabilities are should the business default on repayments. It’s a good idea to seek legal advice before entering into any agreement with a lender so you know exactly where you stand.

There are lots of specialist lenders offering commercial mortgages in the market today and they will be very experienced in negotiating this type of business loan. Before you approach any of them, do your research, have a good application prepared and don’t just go with the first commercial mortgage you’re offered. It’s a big decision for any business and you’ll want to be sure you’re with a lender who understands your business needs and is prepared to work with you.

Of all the expenses a business has, payroll is the least flexible and the one that can put the most pressure on cash flow. At the end of the day, employees have to be paid regardless of how tight things may be and they’re unlikely to stick around for very long if they’re not paid on time.

If you’re having cash flow problems and are having a hard time getting your debtors to pay their invoices, you may well find yourself under a lot of pressure come payday. However, there are a number of ways of alleviating this pressure and one of them involves arranging a special finance agreement known as payroll finance to cover the cost of wages.

Simply put, a payroll finance provider will lend you the cash you need to cover the wages bill for a month or two and will expect you to repay the full amount with interest over an agreed period of time. Securing finance like this when you’re hoping to expand or purchase new equipment can be a very attractive option as it frees up cash for other expenses and ensures that the business continues to grow.

Payroll finance is usually relatively easy to organise, and, as it’s an unsecured loan, there is little paperwork or hassle involved. As with all loans, however, lenders will have certain criteria that you will need to meet in order to be considered. Generally they will look at the company’s current financial standing and profitability.

Payroll finance as a solution to cash flow problems has its advantages and disadvantages. On the one hand, it won’t affect other borrowing and you can usually secure it in tandem with other loans. And generally speaking, you’ll be entering into a rolling agreement with the lender so it’s not just a once off loan. This means you have peace of mind knowing the wages will be covered when you could really do with the capital for other things.

On the other hand you will have to pay interest and fees which themselves are a drain on your cash flow. There will also be a monthly fee to pay, which can be anything from £250 to £350 per month. You might also find that the lender will want you to borrow a minimum amount, which may not be entirely helpful if you’re trying to keep borrowing and interest charges to a minimum.

Ultimately you need to decide whether there are other financing options that might suit the company better. However, if you need to get through a couple of months with some extra capital at your disposal, payroll finance deals are definitely worth exploring.

Most businesses providing commercial goods or services have to offer credit terms to their customers. In order to encourage the placing of further orders, businesses usually invoice with a payment period of 30 days. However, some statistics have shown that the average period of invoice settling is actually closer to 60 days, which can cause financial problems, particularly for a small business. Any business without a significant cash reserve must maintain cash-flow in order to continue growth, and in some cases survive altogether, meaning that any delay in receiving payment can put a business on shaky financial ground. This is where debtor finance comes in – a wide range of financial services offered to businesses to help them overcome this type of situation.

There are many different types of debtor finance available, including invoice discounting, invoice factoring, invoice finance, asset finance and cash-flow finance, but all are based on the value of a business’s accounts receivables – their outstanding invoices. Some types of debtor finance involve the actual sale of accounts receivable assets, whereas in other arrangements, the business simply borrows against the value of their outstanding receivables. Providers often have different security terms for lending, with some requiring the accounts receivables ledger to be supported by collateral assets, a charge or mortgage, or personal guarantees from company directors. Generally speaking, company real estate is not taken as security, although some specialised lenders may require this for particular packages.

The advantage of debtor finance over regular borrowing is that it is based upon the value of accounts receivables – a company asset – rather than the company’s credit worthiness. This means that increases in company sales will directly increase most of the debtor finance credit lines available to them, providing the company with an ongoing source of capital to fund further growth.

Generally speaking, debtor finance is paid in two stages – the ‘advance’, and the ‘retention’ or ‘reserve’. The ‘advance’ is paid at the beginning of the transaction between company and debtor finance provider, and usually ranges from 70-90% of the value of the accounts receivable ledger used in the transaction. The remaining amount – the ‘retention’ or ‘reserve’ – is paid to the company once the relevant invoices have been settled by the company’s customers.

Most debtor finance providers charge a fee for their services, and will often charge interest based on the length of time it takes the business’s customers to settle invoices. Depending on the type of debtor finance provided, lenders will also sometimes take a chunk of the receivables’ value in payment, or receive a discount on the receivables value if invoices are sold to them outright. Some types are confidential, whereas others are disclosed to the customers of the company receiving finance.

If your business is experiencing cash-flow problems, debtor finance is an avenue worth exploring. With many different types of finance available, you can be sure that there will be a package to suit your company’s needs.

When a property developer begins a new build or renovation project, they will often need to acquire capital to fund the project. In these cases, established property developers will look to obtain commercial development finance in the form of a development loan. This finance is secured against the land itself, or the derelict property that will be redeveloped. Often, commercial development finance for ventures like this will be put in place over a number of stages – an initial loan to purchase the land or building, with further loans to fund the construction and/or renovation phases of the project.

Although a property developer will often need to have a proven track record in their field to obtain commercial development finance, lenders provide a range of packages to suit anything from the renovation of a small derelict property through to construction of a large industrial or commercial complex. Commercial development finance is perfect for small-scale property developers and self-employed builders or renovators who require finance for short term projects – generally new builds or renovation projects which either sell for profit on completion, or are let to tenants for a fee. Commercial development finance is also often available for more speculative projects, where land is purchased with a view to gaining planning permission. If planning permission is granted, the developer may immediately resell the land for profit or obtain further finance to begin development themselves.

Development loans can range from around £50,000 through to £5,000,000, with repayment periods of anything from 3 to 24 months. However, these figures vary from lender to lender, and often depend on the size of the project and the track record of the developer. Funds are normally released in stages to suit development progress and the needs of the developer. Commercial development finance will usually cover 100% of the land purchase price and/or development costs, although the loan will often be calculated against the value of the land, property or Gross Development Value (GDV), rather than the purchase price itself. Many lenders will finance projects both in the UK and overseas, although the development will often need to be contractually pre-sold or pre-let before finance can be secured.

Although commercial development finance is sometimes available from high street banks, most developers approach specialist lenders for their funding. If your property development business has a new project that requires finance, First National Finance Ltd can put in the leg work to find the lender willing to help you realise your vision.

A bridging loan is, as the name would suggest, a type of interim loan that individual or commercial borrowers take out while they are trying to secure more permanent finance. They are short-term loans that are repaid over a period of two weeks to three years, depending on the amount and the needs of the borrower. Generally speaking, they are easier to arrange than a mortgage as lenders do not require the same level of detailed information and documentation.

Most people take out bridging loans when they need to inject some capital into a business or if they’re trying to close property deals quickly and without complication. For example, a couple buying a new house might take out a bridging loan to secure the property they have their eye on until their own house is sold. As anyone who has ever been involved in a property chain will know, there is nothing as disappointing as losing your dream home because you haven’t managed to sell your own house in time and therefore haven’t been able to come up with the finance. In this instance a bridging loan is the perfect solution and takes a lot of the pressure off. If you apply for a bridging loan in these circumstances, you’ll usually be expected to repay the loan in full once your property has been sold.

Because of the nature of these loans and the fact that they are only intended to ‘tide you over’ so to speak, the interest rates do tend to be a little higher than those of standard bank loans. You can expect to pay between 12% and 15% in interest, which is why it’s best to repay the loan as quickly as you can and opt for the shortest repayment period offered to you by the lender. If you have taken out a bridging loan before and repaid it without any problem, you will probably be offered a better rate the second time around. This is because you have proved yourself to be a good risk and the lender knows that you are not likely to default on the repayments.

It’s unlikely that you’ll get a bridging loan from your local bank as banks do not like to speculate in this way, particularly where property is concerned. However a number of specialist lenders offer these types of loans and they have increased in popularity in recent years. If you’re looking for a bridging loan your best bet is to do some research and make sure you feel comfortable that the deal on offer is right for you. If so, a bridging loan could be just what you need to tide you over until you can secure more permanent finance.