Business finance products
Once you've assessed your needs and you know where to go, you should investigate which finance products suit your needs. When weighing up your options analyse the potential costs, interest payments and any hidden charges or terms. Each option will have different tax and GST implications, so it's wise to discuss your options with abusiness advisor or accountant.
Below are some common products available to help you get started:
There are a variety of loans available to business that suit various situations. They can vary in the amount, loan term (the period in which the loan needs to be repaid), interest rate, interest rate type (i.e. fixed or variable), fees and security. It's best to check the product disclosure information carefully before you apply, regardless of which product you choose.
An overdraft facility can be attached to your business account with an authorised overdraft limit. Security is usually required together with a credit assessment of the business viability. The purpose of an overdraft facility is to provide working capital for the business before income is received. It should not be used for capital purchases or long-term financing needs.
It's important to note that an overdraft facility is an authorised overdraft and differs to an unauthorised overdraft which can occur if a payment is made from an account with insufficient funds. Unauthorised overdrafts can sometimes incur considerable fees.
Line of credit
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're generally required to make payments to at least cover the interest and fees on the loan.
Flexibility is the main advantage of a line of credit – like an overdraft, money can be accessed as the need arises. As this type of loan is usually secured against property, interest rates tend to be lower than for overdrafts. However, it can put your property at risk if you fail to make repayments.
Fully drawn advance
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.
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. The advantage of using a fully drawn advance for a business investment is the interest rate may be fixed for a period, providing certainty and stability for repayments.
Commercial bill (also known as a bill of exchange)
A commercial bill is a form of commercial loan suitable for short-term funding needs such as inventory. A commercial bill offers a fixed sum advance and requires an interest charge to be paid periodically. The final amount is then paid at the end of the term. Commercial bills typically require some sort of security.
Rent to buy
Rent to buy is where a product is purchased through an initial deposit and then 'leased' while the good is paid off. Once the good is fully paid the purchaser has the option to buy the good or break the lease for a fee. Although rent-to-buy arrangements are useful if you prefer a periodic payment rather than an upfront payment, alternatives such as lay-by can be a cheaper solution.
A commercial hire-purchase is a type of finance contract where a good is purchased through an initial deposit and then 'leased' while the good is paid off in instalments plus interest charges. The purchaser also has the option to reduce the instalments by opting for a larger final payment often called a 'balloon' payment. With a hire-purchase agreement the ownership of the good only transfers to the purchaser once the good is fully paid.
A chattel mortgage is a loan that uses the good purchased as security. A chattel mortgage is similar to a hire-purchase agreement, although the purchaser owns the asset from the start. Chattel mortgages require regular ongoing payments that may be reduced by opting for a larger final payment.
Factoring (also known as debtors finance and accounts receivable finance)
Factoring is when a factor company buys a business' outstanding invoices at a discount. The factor company then chases up the debtors. Factoring is a way to get quick access to cash, but can be more expensive compared to traditional financing options.
Invoice finance is offered based on the strength of a business' accounts receivable. This form of financing is similar to factoring, except that the invoices or accounts receivables remain with the business.