Types of Loans
Business Finance OptionsTo cope with fluctuations in cash flows your business may need access to an alternate source of funding.
Overdraft FacilityAn overdraft facility can be attached to your business account with an agreed 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. Overdrafts can be secured or unsecured and their fees depend on the credit limit.
Line of CreditA 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 working capital requirements. 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.
Fully drawn advanceA 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.
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Commercial BillsCommercial Bills are generally associated with business lending or high-end investment lending. They provide an injection of cash for borrowers who need more than $100,000. These types of loans are generally rolled over until the borrower has the funds to repay the loan amount in full.
A commercial bill assists you to raise the finance you need for investment purposes through negotiable bank bills. The interest rate, or ‘floor’ rate, is based on two things, the Bank Bill Swap Rate (BBSW), and a margin added by the lender of 1.00-3.00% called the facility fee. This margin can vary significantly between lenders, depending on a combination of factors including the financial strength of the borrower, the underlying security, competitive pressures etc.
The bills can be either variable rate or fixed rate, with periods varying between 1 and 10 years. During the loan term there are ‘rollover’ periods, at which time the interest rate and the amount borrowed may be recalculated. The rollover period may be 30, 60, 90, 180 days, 6 monthly or even annually. Interest is paid at each rollover, and you may negotiate any number of combinations to suit you.
Similar to capped rates, a ceiling rate is a feature applied to a variable rate commercial bill that ‘puts a ceiling on’, or limits, how high the rate can go. This can be particularly useful in a volatile interest climate, but be aware that lenders will generally offset the potential costs of a ceiling rate with a higher starting, or ‘floor’ rate.
With fixed rate bills, your interest rate is constant for the term of the facility, which may include several ‘rollovers’. With variable rate bills, the interest rate is fixed for each rollover period, and may change as the period is extended or rolled over, the interest rate may rise or fall.
Cash Flow FinanceCash flow finance provides a business with access to the money tied up in outstanding invoices, allowing you to continue meeting your working capital requirements in periods of fluctuating or irregular cash flow.
With cash flow finance your business will generally be able to access funds totalling up to 80 per cent of the value of your unpaid invoices, which is particularly useful during periods of rapid growth, business acquisitions or seasonal sales cycles.
The outstanding value of your invoices acts as security so there is no need to use residential or commercial property or sales goods to secure a cash flow finance facility.
Franchise Finance or Franchise FundingTo meet an emerging need, new Business Finance products have come onto the market to help people buy Franchises. Lenders can be more inclined to provide Franchise Finance because, while your business might be new, it could be based on a proven formula. Most banks and secure lenders will provide funding to purchase common, well-known franchises.
Venture CapitalVenture Capital (VC) describes where a Lender gives you funds in return for a stake in your business. The further your idea is from fruition, the less likely the Venture Capital or VC firm will be to give you the money, and the more equity they'll want in return.
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