Looking to grow your business and need to acquire additional stock or business assets?
Maybe you just have some short term cashflow issues that need covering for a few months.
Need to upgrade your business vehicles as they are coming to an end of their useful life?
While cash will most likely afford the best purchasing power, it is not necessarily always available or the best funding alternative for your business.
While it is best to speak with your finance specialist to help determine the most appropriate loan suitable to your financing needs, we provide a summary of some of the more commonly used financing solutions utilised by businesses.
Traditional loans are drawn down at the beginning of the loan term and are traditionally repaid in equal instalments over the agreed loan term.
These loans are generally provided on either an unsecured or secured basis depending on the amount and the nature of the business. Security for the loan can either be assets within the business or personal assets outside the business with a guarantee provided by a director or business owner.
Secured loans will by their nature have lower interest rates with a greater certainty of repayment provided with security.
The term may vary significantly depending on the amount of the loan (generally lower loans are repaid over shorter terms) and the nature of the security.
Line of credit
Unlike traditional business loans, a line of credit provides greater flexibility in terms of drawdowns and repayments.
Approval is given for a maximum loan amount and, provided you maintain the loan balance below the facility limit, there is no limit as to the number of times you may utilise funds within the loan account or repay the loan account.
The additional flexibility usually comes at an additional cost in the form of both facility fees and higher interest rates.
Interest is charged on the loan balance only. Accordingly, should the loan balance be zero then only facility fees will be payable.
Chattel mortgage, equipment finance or a car loan all operate in a similar manner with the purchased asset being utilised as security for the loan.
The proceeds of the loan are utilised for the purchase of the assets and repaid in equal instalments over the loan term.
The loan term generally has reference to the nature of the asset, its useful life and the diminishing value of the asset over time.
This funding alternative is generally utilised to assist in increasing the cashflow of a business. At times cashflow can be constrained by long payment terms of major companies for the payment of goods already supplied, with some at 90 days or possibly longer.
Invoice funding, also known as invoice factoring or debtor finance, allows you to access an immediate cash injection up to a percentage of the outstanding invoice. The benefit from payment of the invoice is in effect assigned to the financier who upon collection will deduct their fees (usually a percentage of the invoice amount) with the balance then being remitted to you.
Purchase order funding
This financing option allows you to purchase items to fulfil a customer’s order.
How does it work? A business receives an order from a customer for items with payment terms say 30 days from delivery. However, in order to complete the order you need to buy the items from your supplier who may require a deposit or payment prior to your receiving payment from your customer. Purchase order funding allows you to fund the timing differences between these two payments.
Purchase order funding can only be utilised for goods purchased that can be immediately delivered to the customer without modification or repackaging. This funding option is ideal for businesses that are within the supply chain acting as a distributor.
To be eligible for purchase order funding, minimum profit margins need to be earned.
Still not too sure what funding alternative is most suited to your business?
Need assistance in identifying a range of lenders for your preferred funding needs?
Want to position your business in the best possible position to gain lender approval?
Call the office today and we can walk you through your finance options and assist you with your loan application and approval process.