It’s common for businesses of all sizes to experience fluctuations in cash flow from time to time. Small businesses, in particular, may experience variations in market demand that necessitate a loan. These can include cash loans in the form of overdrafts, lines of credit, and other types of debt. There are a range of commercial loans available to business borrowers.
Credits cards should ideally be used only to fund short term needs or as a convenient payment method for businesses. Credit cards tend to have higher interest rates and are interest-free only until the next billing cycle. Businesses seeking short term cash finance should use an overdraft or a line of credit.
Leases and Hire Purchases
These are several of the most common types of commercial financing for cars, equipment, plant, and technology. Leases and hire purchases use the leased or hire purchased asset to secure the loan and so are very easy to obtain. The business makes regular payments, over months or years, often until they obtain full ownership over the product (hire purchases). In case of leases, the business usually has the option of purchasing the vehicle or equipment at the end of the agreed lease term, for a sum set by the lease company. There are different tax implications for items bought under a lease and hire purchase agreement that businesses should stay aware of.
Overdraft facilities are very common for businesses. They are attached to business accounts and come with a limit, known as an “overdraft limit.” Lending banks and institutions may conduct a credit assessment and ask for some form of security. An overdraft facility is one of the fast loans, an easy option that can be accessed, once the overdraft is approved, without further authorisation and used much like a debit account as long as the limit isn’t exceeded.
Line of Credit
Lines of credits are secured by a mortgage over a property, which can be your office or place of business. Lines of credit tend to have more attractive (lower) interest rates than overdrafts as they are always secured, while offering the same level of flexibility. However, unlike an overdraft, repayments that cover interest payments and associated fees must be made periodically.
Fully Drawn Advance
Fully drawn advances provide upfront financing, usually larger amounts. These advances are often used for funding longer term outlays such as capital expenditure (equipment) and investments, and are not designed for short term needs. They come with scheduled repayments for both interest and principal, and are secured with a mortgage over a property or commercial asset.
An example of a fully drawn advantage is a business home loan, where business owners can certify their own income and borrow against the value of their personal home. Borrowers can borrow in their own name, the company name, or under some other legal structure. Borrowers can borrow as much as 80 per cent of the value of their home.
It is also common for some businesses to obtain finance by securing a loan on the total amount owing to the business by customers as identified by their accounts receivable ledger. Usually the loan amount can be up to 80 per cent of the total amount owing. This is a short term financing option that allows businesses to receive needed funds well before customers make payment and assists with smoothing out the invoice cycle. It’s highly flexible and tied to the amount of business or sales made by the business.