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According to the Department of the Treasury, roughly 96% of Australian businesses are small enterprises and sole traders. The numbers seem impressive, but what’s even more extraordinary is the actual people behind them. Small business owners are not only an essential part of our economy, they’re an inspiration. They’re business managers one day, marketing wizards another, skilful salespeople the third and bookkeepers the fourth. The list goes on, and their ability to adapt is phenomenal.
To thrive, businesses need to be given the chance to quickly and flexibly respond to the opportunities coming their way. Yet in the realm of traditional bank loans, this couldn’t be further from the truth. Historically, banks have been tightening their grip around access to funding, making it harder for small businesses to obtain finance. And even if a bank loan becomes available, it might not really be the right fit for the applicant’s plans.
Fortunately, alternative finance solutions have gradually become more and more accessible to the Australian market. But not every product is made equal. Each comes with its own set of conditions which might fit your situation perfectly, or be a complete mismatch to your plans. Making the difference between the two is a vital part of strategically investing in your business.
In this article, I’d like to guide you through some of the most frequently used alternative solutions and what details to look out for.
1.Business Lines of Credit
Business lines of credit provide what a term loan usually doesn’t—flexibility. They’re similar to a credit card. Rather than receive one lump sum, with a line of credit you are given a certain limit to borrow from. You can flexibly draw down funds in accordance to what your business needs at specific moments in time, and repayments are based only on what you’ve withdrawn, not the whole credit amount.
Let’s say that you’re given a credit limit of $250,000. You’re not obligated to use all of the funds and you draw down on separate occasions within the first three months. If the total withdrawn sum is $180,000, your interest rate and repayments will be based only on the $180k.
In some cases, credit lines expire after an agreed period of time, while others are revolving and are re-established automatically after being fully repaid. This financial product is a reliable safety net that can protect your daily cash flow from unexpected costs and bills, or allow you to respond to sudden opportunities.
2.Online Business Lenders
Equipped with algorithms that can extract essential information from your financial data, online lenders are able to reach a decision sometimes as quickly as within one working day. Some require security only if you request finance above certain amounts, while others don’t ask for any collateral for you to be approved.
Applications are usually fast and simple, and can be done while on the move—a much more flexible experience than bank appointments. Online lenders also tend to have a more responsive customer service than the bank, so don’t neglect the opportunity to reach out via phone in case you have questions or concerns.
Another point to note is that these lenders aren’t necessarily limited to only one product offering. Their services range from term loans to credit lines to invoice factoring. Each has different terms and conditions, but most importantly, they can vary significantly when it comes to costs. If you reach for this financial alternative, it’s best to take the time to do your research so you can make the most informed decision.
3. Asset Finance
Asset finance is a great solution when you need to purchase new specialist equipment, but don’t want to put a big dent in your cash flow. There are three ways to approach this kind of financing.
Hire Purchase
A hire purchase arrangement is set up when the lender buys the equipment and rents it to the business. The business then uses the asset while paying a fixed monthly installment, until the asset’s value and all incurring fees have been paid for. Afterwards, the equipment becomes the property of the business.
Leasing
Leasing is similar to hire purchase, where the lender initially buys the equipment and the business pays a rental fee. However, once the asset’s value has been repaid, ownership doesn’t pass on to the business—it stays with the lender. The main difference in this arrangement is that the monthly repayments are often considerably lower than with a hire purchase.
Sale and Leaseback
Sale and leaseback (also known as just ‘leaseback’) is the scenario where the business sells its equipment to a leasing firm, and then immediately leases it back to retain exclusive use. The benefit of this process is that you can release capital which otherwise stays locked in the asset. For example, you can quickly receive cash from equipment you’re planning to replace or remove in the near future.
4. Invoice Finance / Invoice Factoring
Invoice finance (also referred to as ‘invoice factoring’) could be a solution to delayed customer payments. This financial arrangement involves you selling outstanding invoices to the factoring company. In exchange, you receive between 80% and 100% of their value, minus any incurred fees. Funds are usually transferred in two instalments; for example, one instalment of 80% of the value, with the remaining 20% released after the invoices have been paid by your customers.
Invoice finance quickly releases finance locked in accounts receivable, but it does have its own set of conditions to factor in. While you receive immediate cash, it could come with a big price tag. What determines the cost of financing is the factoring rate, ranging from 1% to 4% of the value of your invoices. These fees are influenced by how long it takes for the invoices to be repaid, where in some cases the advertised rate is charged for every 30 days, while in others it’s on a weekly basis.
Additionally, loan repayments are usually managed by the lender, who directly deals with your customers. You might have to forfeit more control of customer relations than you would prefer. To make the right choice between different factoring companies, focus on how repayments will be handled and what the total cost of the finance will be, rather than just the factoring rate.
Much of the success of a business endeavour is securing the right type of finance. With a bit of research and negotiation, you can find a solution that is not only a counter to a ‘no’ from the bank, but has been a better fit for your business all along.
“The opinions expressed by BizWitty Contributors are their own, not those of BizCover and should not be relied upon in place of appropriate professional advice. Please read our full disclaimer."
