Understanding The Offer Letter
When that factoring or invoice discounting offer letter hits your doormat or your e-mail account, it may seem that the answer to your cash flow worries has finally arrived. However, in a very competitive market, with more than 90 (very different) providers of receivables finance, it is more important than ever to look beyond the headline figures on your offer letter.
First, before examining the detail of the offer letter, a golden rule. If you have only one offer on the table, get another one. It is far too easy, especially as a first-time buyer, to take the path of least resistance and sign up with your clearing bank factor. Depending on your requirements, this might be an appropriate choice. However, talk to your suppliers and customers and find out who they use.
Get as much feedback as possible from people using factoring or invoice discounting before going ahead. Getting into a relationship with the wrong provider of finance (clearing bank or independent), as we will discover, could mean the start of a very unhappy funding relationship.
An offer letter should ideally cover the following four points:
1, the level of funding;
2, the cost of the facility;
3, the security requirements; and
4, the termination conditions.
Offer letters are not standard and there can be vast differences in the amount of information given about the above points. So it is important that an informed decision can be made on a like for like basis when comparing offer letters. Probably the most important figure for any potential client of a factoring or invoice discounting company is the prepayment level – the amount of money you will receive against your sales ledger. It is very easy to quote in an offer letter that funding will be up to 85% to 90% of approved debtors. But the real level of funding will also vary according to credit limits, concentration limits, refer limits, export accounts and recourse periods.
The aforementioned limitations should appear in the offer letter, although it is also useful to clarify how operational considerations such as the verification levels required of invoices, treatment of contra accounts, a delay in providing proof of deliveries as well as a disputed invoice would affect the level of funding provided.
It is very important to understand how any restrictions are applied or managed within a facility as at some point during the facility you will need to rely on the flexibility of your lender. This may come in the form of an overpayment against your approved debtor figure to meet wage payment or your client manager looking at the payment history you have with a debtor rather than the credit limit that the computer throws out.
Unfortunately, the deciding factor for many first time buyers of receivables finance is the cost of the facility. While the cost should always be an important consideration, what you get for your money is even more important. If you have never used factoring or invoice discounting before, the two most important costs with which you will be presented are the discount charge and the service fee.
Discount charge
The discount charge is the easiest figure of an offer letter to compare, as it is simply the interest charged on the money borrowed against the facility. It is normally expressed as a percentage over a clearing bank base borrowing rate. It is always worth confirming that the bank base borrowing rate is not subject to a minimum which may be higher than the Bank of England base rate.
Service fee
The service fee for factoring relates to the charge for managing the sales ledger and essentially is calculated on the projected workload on the account – the number of customers, number of invoices, level of credit and debit notes and so on. The service fee for invoice discounting is the cost of providing the facility – access to funding against your outstanding invoices. Both service fees are typically charged as a percentage of gross turnover (including VAT) and normally underpinned by a minimum annual service charge which may be applied if projected turnover levels are not met.
Other charges
The other charges that will affect the overall cost of the facility and so need to be considered when comparing offers are as follows. Re-factoring charges are generally applied when the debt ages past the agreed recourse period. This charge is normally applied as a percentage of the value of debt assigned and charged monthly until the debt is repaid. This may also limit funding as the aged amount may be recovered from current availability.
Transactional charges also need to be considered, for example, the cost of requesting a BACS or CHAPS payment from a lender will vary, as will the level of trust account charges applied for monies received into a trust account. An important charge that is sometimes overlooked, especially if the borrowing level is high, are the number of clearing days taken before debtor funds are applied to credit balances, as the discount charge will continue to be charged for this period.
At take-on of the debts, at the start of the facility, the service fee will normally be charged as a percentage of the balance taken on. There may also be a one-off arrangement fee and most lenders will charge a documentation fee. Many lenders will also require some form of audit during the course of the facility and it should be clarified if this is included as part of the service fee or if it is an additional charge.
Security requirements will vary greatly between lenders and can often be a deciding factor for an owner-manager on which lender they choose. If available, the majority of lenders will take an all asset debenture over the company or, asminimum, will insist on a waiver from any other lenders over the book debts.
Personal security from the directors may also be required to support the facility and this is standard if there has been a previous failure or if the financials of the business are particularly weak. Depending on the perceived risk of the lender then this may need to be supported by way of a second charge on a property or by taking security over other assets. If a formal or limited personal guarantee is not available then a lender will look for an indemnity or warranty which essentially entitles them to enforce a personal guarantee if there has been a breach of the agreement due to fraud.
The last area of an offer letter probably needs as much consideration as all the others together. For a first-time buyer the terms for termination of a facility are very important and often overlooked in the rush to sign-up. Most agreements will be for a minimum of 12 months with a three to six month notice period.
So once you start a facility it is foreseeable that you may be locked in anywhere from 15 to 18 months. This is fine if you are satisfied with the facility and things are running smoothly, but what if things are not? It may be difficult to leave before the agreed period without paying the annual minimum charge. It is important to read the factoring agreement as some may mean that if notice is not given on the anniversary of the agreement then the lender is entitled to another year’s annual minimum fee.
The market for factoring and invoice discounting is becoming increasingly competitive. Offer letters are not standard and will all be presented in slightly different ways. Comparing invoice discounting offers is easier than factoring ones as facilities are becoming more commoditised and driven by price. For factoring offers, choosing who will be chasing your sales ledger has to be taken into consideration as well as understanding the mechanics of the funding being offered, the security required and the termination period.
It is important to remember that the offer letter should help you make your decision or shortlist a potential number of providers. Once a shortlist of funders has been arrived at, it is always worth talking to some of their existing clients and asking about flexibility and service levels. If all things seem equal between several offer letters, it is a good idea to visit the lender’s offices and meet the operations team who will be running your account once the salesperson has finished their job.
Remember, once you have signed the offer letter there will normally still have to be due diligence undertaken before the formal offer is made and the facility starts. More and more lenders require a commitment fee to move forward to this stage, which should be refundable if there is a material change in the formal offer from the in-principle offer.
If you are happy with the final offer, legal agreements can be signed. But remember that the legal agreement always prevails over the offer letter and, as with most legal agreements, the devil is always in the detail.
John Mce writes articles for Hilton-Baird http://www.hiltonbaird.co.uk who offer free independent advice and have helped over 2,000 UK businesses raise extra capital.
Online Auto Loans – The Easy Way to Apply
The internet is a great place to find the right lender for obtaining a loan. One can apply online by filling out a simple application and submitting it with just a few clicks of the mouse. Online loans, also known as e-loans, are just one more way to make your search for money to finance your purchase easy and convenient.
Online loans offer the following advantages:
1)The greatest advantage of online loans is that you can apply for it from almost anywhere as long as you have a computer or a laptop.
2)Online loan application forms are generally simple in their structure and are user friendly.
3)They are secure, have a no obligation feature and are free of charge.
4)Online loan applications are highly confidential. Internet hackers cannot simply enter a website and steal your personal information. Most lenders have extensive privacy policies and go the extra mile to protect your privacy.
5)Most websites provide loan calculators which helps the borrower to determine the amount of loan he or she would be eligible for and the repayment amount. The borrower can apply different criteria to determine suitability.
6)The borrower can compare a product offered by different lenders to determine which lender is most competitive.
Matters to be considered while applying for online loans:
1)Your credit rating has a very crucial bearing on your ability to borrow and the interest rate. It is always prudent to check your credit score before applying. A high credit score will result in a more favorable interest rate. A low credit score can provide you with a loan, however, the interest rate will be much higher as you pose a greater credit risk to the lender.
2)Comparison shopping should be resorted to in order to find the right lender.
3)Obtaining a pre-approval on your loan application for big ticket purchases, such as a home or a car, would put you on a strong footing while negotiating with the seller. A pre-approved application has the following advantages: the approval is granted for a specific period during which the interest rate at the time of the application does not change even if the market rates fluctuate during the period, the amount available for the purchase and the repayment amounts are known even before you begin the buying process.
Online loan process:
The online loans process works in the following manner:
1)The first step is to fill out the online application form.
2)The lender reviews your creditworthiness and assesses your financial net worth.
3)Based upon the review, the application is either approved or denied.
4)Hard copy of loan contract is sent to the borrower.
5)Documentary evidence maybe called for to support claims made on the application form.
Market players in the online loans market:
1)Loan brokers: These are agents representing several lenders. They do not lend money.
2)Direct lenders: They offer you loans directly. These are financial institutions that lend you the money.
Sean Patrick is an automotive finance specialist with over 5 years experience in the Auto Finance world. Currently he is working with the company Car Loan Today. You may view his web site and tips here:
http://www.carloantoday.ca
Problems With A Fledgling Business
I had been running my first business for almost a year; things seemed to be going well although my bank account looked decidedly unhealthy. I was chuffed that that my business had made a year without going down the pan. It had not been easy; I was working all hours of the day, waking up at four in the morning to do the paperwork, usually concerned with my business account and correspondence from the bank’s business advisor.
Considering you have to beg and plead for the loan that the bank gives you there is no let up in the information they require about where their funds are and what you are using them for. Sadly I was beginning to think that a different business account with a different bank may have been a better idea. After all I had been wooed into this account by the introductory offers and had neglected the long term picture.
This is an easy mistake to make when there are so many choices of business account on the market. It made my head spin just trying to choose one. No wonder I had ended up simply looking at the offers and neglecting the small print, it is easy to do when you have a pile of pamphlets in front of you so large it blocks the sunlight.
I can hear what you are thinking; does this man have any business sense? Surely he would spend as much time as possible choosing the right account for his business? Well I challenge anyone to sit there and trudge through leaflet after leaflet of the same bank dialect and stay focused on the task at hand. It is an unenviable job at the best of times but when you are under pressure to find a bank account it is far too easy to take the best option after a light skim read of the details.
Overall though I do not think if I spent another week working my way through the epic pile of pamphlets on my coffee table I would have found a better offer for my business. To be fair to the bank although they were on my back a lot of the time I cannot blame them, it is their money after all and they are simply taking care of their investments.
The business advisor that came as part of the account package had been a real help in the first few months of operation. He understood the problems that fledgling businesses faced and supported many of the decisions I had made. A pity however was the account package had only provided this service free of charge for the first year and I was now worried that with the year nearly up, I would lose the expertise of my business advisor.
My fears though were unfounded as the business advisor soon made it clear to me that although I would have to pay for his services from now on; the amount was trivial, especially compared to using an advisor from the open market.
Overall I can say that the bank had been helpful at almost every step of my journey. Their insistence of sending reams of paper to my house was simply prudent financial practice. To be perfectly honest, it had taught me a great deal about how to run my own business along more logical and productive lines.
So the introductory offers were close to their expiration, a few percent here and there would make a slight difference to the account although I was sure it would be negligible. I had gotten to know both the business advisor and bank manager well here and felt they would support my business wholeheartedly.
I had chosen my account on a bit of a wing and a prayer, but it seemed it had paid off, even though, in future I would take more care when choosing an account.
Shaun Parker is an experienced businessman who places great emphasis on choosing the right business account for a company. To find out more please visit http://www.lloydstsbbusiness.com/accounts/index.asp
Commercial Fraud – Manage the Symptoms and Avoid Catching a Cold
As with all ills, prevention is better than cure as they say, and commercial fraud is no exception. Like most crimes though, commercial fraud is viewed as something that happens to someone else.
Unfortunately, the reality is it is often far closer to home than most people realise and, while ignorance may be bliss, it is also a sure fire way to leave your company wide open to abuse.
Fortunately, there are plenty of telltale signs to look out for that should help to trigger those alarm bells. The key, like any good Ruth Rendell murder mystery, is recognising these early and taking action.
It’s important to remember that most fraud is committed because your suppliers are under financial pressure, so if you have a group of key suppliers, it is wise to review their trading status on a regular basis; quality issues, late deliveries and CCJ’s could mean cash flow problems, while changes in key personnel or different professional advisers could be a sign of asset-strippers moving in.
It is now possible to carry out in-depth credit checks on individuals and businesses, including trading histories and links to previous businesses. Digging a little deeper into the wealth of information that is available could reveal fraudulent connections before you engage in a trading relationship with them.
Look out too for sales of stolen property or double retention of title from suppliers down the line as these could pose a very real threat, as are substandard goods or parallel and grey imports.
Other indicators of potential fraud include constant verification of a debt from a third party, being pushed for early payment; delays in filing accounts or a change of year-end. And if you get a big payment from a company you don’t recognise, think twice about banking it, as the signatories may well be using it to get a legal cheque reissued by you to wash out or cover up their fraudulent invoicing. Finally, if a supplier asks you to verify a balance that doesn’t exist, beware, the end may be nigh for them.
Don’t get too downhearted. Commercial fraud is still the exception rather than the rule but vigilance is the key. It may seem a drag but investing time researching the credentials of your trading partners, staying alert, and looking out for signs of trouble, could save you a lot of heartache and bother in the long run!
John Mce writes for (http://www.hiltonbaird.co.uk) who offer free independent business finance advice and has helped over 2,000 UK businesses raise extra capital.