TBA Corporate Finance

What is Factoring?
Businesses can raise upto 90% of the value of their unpaid invoices the moment the invoices are raised providing liquidity to the business.
The factoring company will then collect the invoices on your behalf allowing the business owners to concentrate on the day to day running of the business.

How does Factoring work?
- Invoices are raised and an agreed, prepayment is then made by the lender to your bank account
- The lender will then collect the payment on your behalf and then pass the remaining balance back to you less any fees that are payable
- The majority of lenders have online access so that you can view your account with them at anytime
- Factoring is suitable for businesses who are looking to grow and who do not have the time or inclination to employ their own credit control team

Invoice discounting allows the business owner to raise working capital against the outstanding invoices on the sales ledger.

This is a far more flexible solution than the traditional types of business finance but to the flexible nature of the product. As sales increase the funding grows in line with the growth of the business.

How does it work?
- You supply your goods or services and you invoice your clients as usual
- You get paid up to 90% of the value of each invoice the instant you raise them.
- You maintain control over managing collections. When your client settles the invoice you get the remaining balance less an agreed fee.

Asset based lending (ABL) blends invoice finance with funds released against other business assets, such as stock, property, plant and machinery, providing additional capital than invoice finance alone.

ABL is an excellent option for businesses looking to finance a management buy-out/buy-in, a merger or an acquisition.  Alternatively the extra funds can be used as a contingency, providing additional working capital as and when required.

ABL is primarily aimed at larger companies that have a turnover in excess of £10m with existing assets including invoices, inventory or property.

ABL enables you to raise between £2m and £35m, ideal for businesses looking to release working capital to expand, restructure or refinance.

A bank overdraft is a temporary facility extended by a bank to businesses to withdraw funds from their account in excess of the balance. This facility is provided by the bank for a fee and interest is charged on the excess amount that is withdrawn for the length of the time.

An overdraft facility allows the facility holder to withdraw money from the account despite having no balance. There is usually a limit on the amount that can be overdrawn from the account. The overdraft limit is usually set by the bank based on the amount of working capital and credit worthiness of the facility taker.

Advantages of a Bank Overdraft
A bank overdraft is usually the best for businesses with greater movement of cash flow in a given time frame.  An overdraft can help reset a skipped cycle of rotation of cash flow. In other words, if sales proceeds and purchases result in a flow of money in and out many times during a week/month; an overdraft facility allows managing cash flow gaps that might arise due to timing mismatch.

It also ensures timely payments and avoidance of late payment penalties as payments can be made even if there is lack of sufficient balance in the account.

It requires less paperwork that would usually be required in long-term loans as overdraft facility is easy to avail.

An overdraft facility has the advantage of flexibility as one may take it at any time, for any amount (up to the limit allotted), and for even as less as one or two days.

The interest is calculated only on the amount of funds used. This allows for greater savings in the interest cost compared to a normal loan taken at a fixed interest rate. While in other loans, interest is paid even if the money remains unused. In this case, the charging of interest starts with the payments you make, but it stops instantly when there are receipts.

Disadvantages of a Bank Overdraft
An overdraft facility comes at a cost. The cost is usually higher than the other sources of borrowing. Also, if one goes above or exceeds the overdraft limit, the charges could be much higher.

An overdraft facility is a temporary loan and undergoes regular revisit by the bank. Hence, it runs a risk of a decrease in the limit or withdrawal of the limit. The withdrawal of limit may happen usually when company financials may represent poor performance; hence, the facility may be withdrawn especially when the company may require it the most.

A bank overdraft facility may at times be secured against inventory or other collaterals like shares, life insurance policies etc. The company may run a risk of those assets being seized if it fails to meet payments.

At times, availability of an overdraft facility may make the company less strict on the collection of debtors’ payment. In other words, a company may not be too much on their feet to collect payments from debtors, as immediate payment outflows can be managed by an overdraft facility.

In summary
An overdraft is a temporary facility obtained by businesses  to meet their ultra-short term cash shortage/requirement. This facility comes with a high cost and should be used as a stop-gap management of funds or as an emergency activity rather than a routine funding activity. Higher dependence on overdraft for working capital financing indicates poor working capital management and a liquidity constraint faced by the business.  Only temporary working capital should be financed by a bank overdraft. The permanent working capital should be financed by long-term loans having lower interest rates.