Six Ways to Finance a Business
Financing a business is a lot tougher now than it was before the financial crisis – banks are even more conservative - but they’re still the best, and cheapest source of money so the first rule is to use their money to finance the purchase rather than using your own capital. Apart from the tax advantages this also lets you keep your cash for other purposes and spread the initial costs over a period of time rather than laying them out as a lump sum at the beginning..
The normal loans used in business are:
- Using your residential property to obtain a Line of Credit. This is still the lowest cost source of funds available and by far the most likely funding facility used for smaller businesses with manageable repayments. At present funding to 90% of the value of the home can be obtained.
- Raising a Business Mortgage Loan using the equity available in either residential or commercial property as security. Again, relatively low-cost funds (although slightly more expensive than straight residential) and the term provided is normally more aligned to generally accepted amortisation rates for business loans. An advantage with these is that as the business improves, lenders may be more open to increased funding requests, even if they exceed the usual lending values against the security. This assumes the business is well-run.
- Business Overdrafts provide funds for business that sell on credit and have to wait 30-90 days for the bills to be paid. Overdrafts can cover business expenses while waiting for payment. It must be used correctly and it’s vital that the amount borrowed matches a proper Cash Flow Forecast and is monitored regularly. The overdraft is usually required to be secured, particularly for smaller, less established operations.
- Chattel Finance is used to provide funds to purchase motor vehicles and items of plant and equipment. This can be either Commercial HP or lease. Some companies will consider second-hand equipment purchased as part of a business.
- Business Loans using the business assets as security can be provided against the value of the business though this is harder today and generally means that the business has to have a strong background such as well-known franchise, news agency, post office, management rights and real estate agent's rent roll. However larger businesses with good business plans, operating manuals, strong management and cash-flows may also access these facilities. Business loans also require owners to contribute their own funds and share the risk.
- Debtor Finance to fund outstanding debtors using no other security is often provided by banks and other lenders. This is becoming more popular here because it can provide definite benefits to a growing business and can, some circumstances be used in a start-up.
There are other types of Industry-Specific loans available and you should speak to us or to Better Business Finance.
It is essential that a business has adequate funding in place to allow for growth and changes in the market and time spent preparing business plans incorporating realistic and soundly based cash-flow and profit forecasts will pay off in both the short and long term.
Because of the way the market works now, we recommend you speak to Better Business Finance to see what will work best for you in the current financial situation. Call Tony Mapley on 0408 518 595 or Barry Newton on 0404 494 951.