When is factoring not factoring? Know the difference and don’t pay the price for not knowing!

I had an interesting meeting with my friendly man from HSBC yesterday and one of the things discussed was factoring (invoice financing). I asked him what was the point in paying for factoring if the factoring company was going to come back to you for payment if your client refused to pay up after say 90 days!?!!? He explained that essentially there are two types of factoring – Recourse factoring and Non-Recourse factoring.

So what does all this mean? Well it might surprise you to learn that most factoring companies either offer one or the other – rarely both.

Recourse Factoring
With this method if the debtor (your client) does not pay the invoice, recourse factoring allows the factoring company to come back to the seller (you) for payment. The risk of insolvency does not transfer to the factoring company when an invoice is purchased. If a client refuses or is unable to pay the invoice (due to bankruptcy), you (the seller) must buy back the unpaid invoice or exchange it with another receivable of equal or greater value. Since Recourse Factoring offers the least amount of risk to the factoring company, then this factoring agreement offers the lowest fees.

Non Recourse Factoring
With this method, the risk of insolvency and non-payment is completely transferred to the factoring company. If the client goes bankrupt or refuses to pay the invoice (for whatever reason), the factoring company cannot come back to you for payment. This method of factoring carries more risk for the factoring company and therefore factoring fees are higher.

Most factoring companies only offer Recourse Factoring and do not offer Non Recourse as an option. However my man at HSBC reliably informs me that they offer Non Recourse factoring so this probably explains why so many of my clients say that HSBC is expensive in comparison to others. But to my way of thinking what’s the point in having a factoring agreement if you are then going to be held liable for non payment of invoice?

About the author: Paul Stanford http://www.paulstanford.co.uk/blog  has provided practical advice to hundreds of entrepreneurs for the past 5 years helping them to successfully start-up, transform and sell their businesses. Get in touch to see how his business http://www.4momentum.co.uk can help do the same for you. You have full permission to reprint this article provided this box is kept unchanged.

Copyright 2008 Paul Stanford

Posted by: Paul Stanford

Private investment – making your business more attractive

Much has been written lately about the potential benefits of investment from private investors for small businesses. So I’m not going to go into these but I do want to tell you how you can potentially make your business more attractive to a potential private investor from a taxation perspective

Clearly you have to have done your homework and present a solid business plan which is backed up by realistic financial forecasts, appropriate research and considered assumptions. You also need to be able to deliver a good pitch to potential investors.  But you can also make your business more attractive by making it a more tax efficient proposition for your investor.

So how do you go about this? Well one way is to register it for EIS (Enterprise Investment Scheme). This is a process that you do with HMRC – it costs you nothing but could make a real difference to your investor. Essentially a business that has EIS will mean that an investor will get 20% tax relief on his investment (up to a maximum of £500,000 pa) provided the shares are held for at least three years.  In addition, EIS offers investors capital gains tax deferral and 100% inheritance tax relief. 

Hopefully you can see that if an investor is looking to invest in a business then he is likely to invest in the one that has EIS over the one that doesn’t, assuming both businesses are of equal standing in other respects.

Paul Stanford is a Director of 4Momentum http://www.4momentum.co.uk. 4Momentum provides business advisory services to small businesses, charities and social enterprises primarily in Sussex. Services include advice on starting a business, growing and transforming a business and selling a business. Clients typically contract 4Momentum for short periods of an hour to long term consultancy over many months for advice on subjects such as mentoring, business planning, sales and marketing advice, bidding for contracts, raising finance and general business advice. Paul is approved by the UK Government to deliver business advice on their behalf through Business Link and is a member of the Institute of Business Consultants. Visit his blog at http://www.paulstanford.co.uk/blog

Copyright 2008 Paul Stanford

Posted by: Paul Stanford

Raising Finance

There comes a point in most businesses where the need arises to raise some funding. Whether that be to start a brand new venture, buy new equipment or purchase another company the chances are that it will be stressful and if you get it wrong then you will be paying for it dearly over many years and worse still may lose your home and your marriage!

So what is the best way to raise finance? Well that depends on your circumstances and what you want to raise the finance for. With today’s economic climate you won’t be surprised to hear that the banks don’t like taking on much risk. So you will likely be asked to put up some form of personal guarantee or PG for short. Well this is OK isn’t it? After all your business idea isn’t going to fail and you have a limited company so what’s the risk with a PG? Well whilst your business idea may be brilliant there may also be factors outside of your control that prevent it from being the success that you had hoped for. Plus although you may have the protection of a limited liability company, you have given the bank a PG which effectively by-passes the limited liability of the company. In other words if you can’t pay then the bank will come to you for payment. That will normally mean a claim on your home. Your wife will likely not be best pleased to learn that her beloved home is having to be sold to pay the PG. All doom and gloom you might say. Well there is a glimmer of hope. There is something called the Small Firms Loan Guarantee Scheme or SFLG(S) for short! Essentially 75% of the risk is underwritten by the Government so you only have to find security for the remaining 25%. Meaning that if you borrowed £100k and things didn’t go to plan then you are only personally liable for £25k. The SFLG is administered by most major banks but I prefer to use a specialist provider such as Envestors www.envestors.co.uk as, apart from other benefits, they have the contacts and it’s the same old story of not what you know but who you know. In addition they will also explore other avenues of funding for you ranging from simple loans to private equity investment. As always terms and conditions apply but it’s worth giving it a try and if you don’t ask then you definitely won’t get!

Paul Stanford is a Director of 4Momentum http://www.4momentum.co.uk. 4Momentum provides business advisory services to small businesses, charities and social enterprises primarily in Sussex. Services include advice on starting a business, growing and transforming a business and selling a business. Clients typically contract 4Momentum for short periods of an hour to long term consultancy over many months for advice on subjects such as mentoring, business planning, sales and marketing advice, bidding for contracts, raising finance and general business advice. Paul is approved by the UK Government to deliver business advice on their behalf through Business Link and is a member of the Institute of Business Consultants. Visit his blog at http://www.paulstanford.co.uk/blog

Copyright 2008 Paul Stanford

For a business, whether they are a start up business or an established business cash acts as their lifeline; it is the one aspect that allows a business to survive. The amount of cash that a business has at its disposal often demonstrates the health of a business. A business, especially a start-up business would be able to survive for a while without sales or profit but without cash it will fail.

In order to give your business the best possible chance you need to have sufficient control over the cash flow that is going into and out of your business. You obviously want to have more cash going into your business than out of your business but to ensure that this is the case you need to have a good grasp of the cashflow that your business has. You need to have a good idea of your cashflow if you are thinking about expanding or if you wish to borrow some extra money. To aid this estimate of your cashflow it is a good idea to keep your receipts as they will demonstrate examples of some of your expenditure.

An important aspect to remember is that there is a difference between cash and profit. In order for a business to make a profit it needs to produce and deliver goods or services to customers before you actually make a profit so if you don’t have the cash to do this then you technically won’t have a business left to run. If you want more evidence of these just look at the facts; the reason that most businesses fail is poor cash management that has led to a business not being able to afford to carry on and poor cash flow is the reason that the majority of start-up businesses don’t make it past their first year.

Some examples of the cashflow that will be coming into your business include the following:

• The payment for goods/services from your customers
• Any bank loans that you may have taken out
• The interest that you collect on savings and investments
• An increased bank overdraft or loan

Some examples of the cash that will be coming out of your business include the following:

• The purchase of any stock, raw materials or tools that your business needs
• Your staff wages, property rent and all of your daily operating expenses
• Any repayments of loans that your business may have
• Any dividend payments
• Income tax, corporation tax, VAT and other taxes
• Reduced overdraft facilities

In order to have a good cashflow within your business you need to ensure that your pattern of income and your business spending habits allows you to have cash available as well as being able to pay the bills on time. Cashflow depends on the timing and amounts of money flowing into and out of the business each week and month.

In order to help you with your cashflow management it is a good idea to keep an up-to-date record of all of your cash so that you can see exactly what is coming in and going out of your business. By doing this you can find ways of potentially improving the cashflow of your business.

Helen is the web master of Angel Start-ups, specialists in all aspects of business finance, which includes Cashflow Management.

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Raising finance is a constant headache that I am told about whenever I see my clients and is for most small businesses whether that be starting off afresh or trying to grow to the next stage of development. For those of you that have ever tried to raise finance for such occasions you will find that you are likely to be asked to put up a personal guarantee – or PG for short. PGs typically take the form of the equity in one’s home – but what if you don’t have any or don’t have enough? Where does that leave your fantastic business opportunity??? Well there may be an answer in the form of the Small Firms Loan Guarantee Scheme (or SFLG or sometimes referred to as SFLGS) which helps to overcome this by providing lenders with a government guarantee against default in certain circumstances.

The SFLG is a joint venture between the Department for Business, Enterprise and Regulatory Reform (BERR) and a number of participating lenders. For a list of SFLG participating lenders visit the BERR website http://www.berr.gov.uk/bbf/enterprise-smes/info-business-owners/access-to-finance/sflg/page37617.html - Opens in a new window. Participating lenders administer the eligibility criteria and make all commercial decisions regarding borrowing.

The main features and criteria of the scheme are:

a guarantee to the lender covering 75 per cent of the loan amount, for which the borrower pays a 2 per cent premium on the outstanding balance of the loan, payable to BERR
the ability to guarantee loans of up to £250,000 and with terms of up to ten years
availability to qualifying UK businesses with an annual turnover of up to £5.6million
availability to businesses in most sectors and for most business purposes, although there are some restrictions
The scheme was changed slightly by our friend Mr Darling in his first budget earlier this year to make it easier for businesses to access the finance avaialble under this scheme. Only trouble is that many of the lenders aren’t aware of this because “head office” hasn’t told them and hasn’t sent them the new stationery with the new criteria! Just so you know – one of the main changes to the scheme was regarding the length of time a company can be trading and still be eligible. This used to be a maximum of 5 years but this restriction has been removed and any age of business is elegible. So if your bank manager tells you that you aren’t eligible then refer him to the relevant section in HM TReasury’s budget report. Details are

The full report is available to download from HM Treasury at http://www.hm-treasury.gov.uk/budget/budget_08/report/bud_bud08_repindex.cfm

then click on “Complete Budget 2008 report” to download. You will find this excerpt on page 43 of the report.

Access to finance

3.7 Budget 2008 announces an access to finance package to ensure that small and growing firms have access to the resources they need: a temporary 20 per cent increase in the funds available through the Small Firms Loan Guarantee (SFLG); •• extending eligibility for SFLG to businesses with growth aspirations over five years old;