Understanding Business Accounting For Dummies, 2nd Edition (126 page)

You can see an A to Z listing of business bank accounts at
www.find.co.uk
(click on ‘Banking', ‘Commercial', and ‘Business Banking') where the top six or so are rated and reviewed. The
www.moveyouraccount.co.uk
Web site (go to the homepage and click on ‘Business Banking') offers a free service claiming to find you the best current banking deal.

Governments around the world have schemes to make raising money from banks easier for small and new businesses. These
Small Firm Loan Guarantee Schemes
are operated by banks at the instigation of governments. They are aimed at small and new businesses with viable business proposals that have tried and failed to obtain a conventional loan because of a lack of security. Loans are available for periods of between two and ten years on sums from £5,000 to £250,000. The government guarantees 70-90 per cent of the loan. In return for the guarantee, the borrower pays a premium of 1-2 per cent per year on the outstanding amount of the loan. The commercial aspects of the loan are matters between the borrower and the lender.

You can find out more about the UK Small Firms Loan Guarantee Scheme on the Business Link Web site (go to
www.businesslink.gov.uk
and click on ‘Finance and grants', ‘Borrowing', and ‘Loans and overdrafts'). The Department for Business Enterprise and Regulatory Reform Web site (go to
www.derr.gov.uk
and click on ‘Better Business Framework', ‘Small Business', ‘Information for Small Business Owners and Entrepreneurs', ‘Access to Finance', and finally ‘Small Firms Loan Guarantee') tells you which banks currently operate the scheme.

Banks: Short-Term Money

As a means of short-term borrowing, banks can offer
overdrafts
- a facility to cover you when you want to withdraw more money from a bank account than it has funds available. The overdraft was originally designed to cover the timing differences of, say, having to acquire raw materials to manufacture finished goods that are later sold. However, overdrafts have become part of the core funding of most businesses, with a little over a quarter of all bank finance provided in this way.

Almost every type and size of business uses overdrafts. They are very easy to arrange and take little time to set up. That is also their inherent weakness. The key words in the arrangement document are
repayable on demand
, which leaves the bank free to make and change the rules as it sees fit. (This term is under constant review, and some banks may remove it from the arrangement.) With other forms of borrowing, as long as you stick to the terms and conditions, the loan is yours for the duration, but not with overdrafts. Small businesses can expect to pay interest at three to four per cent above base - the rate at which banks can borrow. Larger and more creditworthy firms may pay much less.

Leasing and Hire-Purchase

You can usually finance physical assets such as cars, vans, computers, and office equipment by leasing them or buying them on hire purchase. This leaves other funds free to cover the less tangible elements in your cash flow. In this way, a business gets the use of assets without paying the full cost all at once.

Companies take out
operating leases
where you use the equipment for less than its full economic life, as you might with a motor vehicle, for example. The lessor takes the risk of the equipment becoming obsolete, and assumes responsibility for repairs, maintenance, and insurance. As you, the lessee, pay for this, the service is more expensive than a
finance lease
, where you lease the equipment for most of its economic life, taking care of the maintenance and insurance yourself. Leases can normally be extended, often for fairly nominal sums, in the latter years.

Businesses that need lots of fixed assets such as computers, machinery, or vehicles are the big customers for leasing. The obvious attraction of leasing is that you need no deposit, which leaves your working capital free for more profitable use elsewhere. Also, you know the cost from the start, making forward planning simpler. Tax advantages over other forms of finance may even exist.

Hire purchase differs from leasing in that you have the option to eventually become the owner of the asset, after you make a series of payments.

You can find a leasing or hire purchase company
through the Finance and Leasing Association. Their Web site (go to
www.fla.org
and click on ‘For Businesses' and ‘Business Finance Directory') gives details of all UK-based businesses that offer this type of finance. The Web site also has general information on terms of trade and code of conduct. Euromoney produce an annual World Leasing Yearbook that contains details about 4,250 leasing companies worldwide (go to their Web site at
www.Euromoney.com
and click on ‘Leasing & Asset Finance' and ‘Books' for ordering information). You can, however, see a listing of most countries' leasing associations for free in the ‘Contributors' listing on this site.

Factoring and Invoice Discounting

Customers take on average around 60 to 90 days to pay their suppliers. In effect, this means that companies are granting a loan to customers for that time. In periods of rapid growth, this can put a strain on cash flow. One way to alleviate that strain is to
factor
creditworthy customers' bills to a financial institution and receive some of the funds as goods leave the door, and this speeds up the cash flow. This form of financing currently (2006-7) accounts for £9 billion of business lending, up from £2 billion in 1990.

Factoring is an arrangement that allows a business to receive up to 80 per cent of the cash due from customers more quickly than normal. The factoring company in effect buys the trade debts, provides a 100 per cent protection against bad debts, and can also provide a debtor accounting and administration service.

Factoring costs a little more than normal overdraft rates. The factoring service costs between 0.5 and 3.5 per cent of the turnover, depending on volume of work, the number of debtors, average invoice amount, and other related factors.

Factoring is generally only available to a business that invoices other business customers for services provided. These customers can be either in the business's home market or overseas. Companies that sell directly to the public, sell complex and expensive capital equipment, or expect progress payments on long-term projects may find factoring their debtor book to be difficult, if not impossible.