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Choosing the right kind of business finance can be difficult. Banks and other lenders offer a range of business loans including overdrafts and lines of credit. Using online loan calculators are a good way to research your options. The Business Loan Finder can help you find and compare business loans.
To cope with fluctuations in cash flow your business may need access to funding from a bank, credit union or other type of financier. It is important that you choose the right type of loan to match the reason why you are borrowing. Lenders offer many different types of loans that are designed to fund for specific purposes.
In matching a debt product and selecting the appropriate features to suit your business requirements you need to determine the following about your business:
This evaluation will help you better match your requirements and limitations to the specific 'guidelines' for particular alternative debt funding.
Once you have decided the reason why you need to borrow (buy equipment, cover cash flow gaps etc.), below are some types of financing you may like to consider:
An overdraft facility can be attached to your usual business bank account with an agreed overdraft limit. Security is usually required together with a credit assessment of the business viability.
Overdraft facilities are generally used to finance the day-to-day fluctuating cash needs of a business and are usually only provided to a business that has been successfully trading for a few years.
It should not be used for asset purchases or long term financing needs as it usually will be more expensive than loans provided for these purposes and is usually repayable at call. Overdrafts can be secured or unsecured and their fees depend on the credit limit. Overdraft facilities do not have a specific maturity date. The product is 'at call' or on demand, which means that the bank has the right to cancel the facility at any time.
A line of credit or equity loan can provide access to funds by allowing the borrower to draw on an account balance up to an approved limit. As long as the balance does not exceed the approved limit, funds can be drawn at any time.
These loans are usually secured by a registered mortgage over a property. You are usually required to make payments to at least cover the interest and fees on the loan.
The main advantage of a line of credit is it's flexible - like an overdraft it can be drawn as the need arises. It can be used to access funds for everyday needs of the business. As this type of loan is usually secured against property, interest rates tend to be lower than for overdrafts. However, if you fail to make your payments you can put your property at risk.
Credit cards should only be used to fund short term everyday needs of the business and are usually offered on either 'interest-free days' or 'no interest-free days'. They are generally easier to obtain due to the high fee structure and interest rates charged. It is best to use credit cards only where you can pay the full amount due when the payment is due, as they often carry large interest charges.
Debtor financing is secured by the value of the amount owed by the customers (debtors). The finance is generally available up to 80 per cent of the amount outstanding from customers to the business. When the business invoices the debtor, the lender will pay the agreed percentage of the invoice. When the customer pays the business, the remaining percentage is received.
The benefit to the business is that they do not have to wait until the customer pays before they receive their funds. This finance effectively shortens the cash cycle for a business.
The funding is very flexible as it increases with the level of sales activity and is only utilised as required.
A fully drawn advance provides access to funds upfront and is used for funding long term investments such as a new business or equipment that expands the capacity of the business. It is not the same as a short term loan that you would use to help with cash flow and fund the day to day running of the business.
A fully drawn advance is a term loan with a scheduled principal and interest repayment program. These loans are usually secured by a registered mortgage over a residential or commercial property or business asset.
The advantage of using a fully drawn advance for business investment is the interest rate may be fixed for a period, providing certainty and stability for repayments.
Leasing and hire purchase are used to finance assets such as motor vehicles, plant and equipment and technology. The finance is often easier to obtain as the lender uses the funded asset as the main source of security. One of the advantages of these products is that they will fund the full value of the asset.
There are different types of leases and hire purchase arrangements and each provides different taxation treatments, so it is best to seek the advice of a professional.
There are many other types of debt finance available, so it is advisable to ask your banker or seek professional advice before choosing the right debt financing for your needs.
If you do not have financial assets to offer a financier as security you may want to consider getting a micro-enterprise loan. Small loans from $500 - $20,000 are available at low interest to people who can present a sound business plan and have a mentor from the Small Business Mentoring Service.
To be eligible for a micro-enterprise loan, you will need to:
If your mentor is satisfied the business plan is sufficiently developed, they will provide details of financiers you can approach.
