Regardless of whether your business is retail, manufacturing, or any other industry, the right tools of trade are essential to ensure that the business will function efficiently and profitably in order to survive in today’s demanding world. The correct finance structure is one of the most important tools that your business must have, particularly at this time when financial institutions are looking for ways to maximize their income to overcome their well publicized “cost of funds”.
For many small business proprietors, their first step in financing their business is to mortgage the family home in order to draw whatever equity may be available. This is done with little research to confirm that the finance package offered to them by their Bank is competitive. For instance, some financial institutions will offer terms based on home loan rates, whereas others will charge much higher commercial loan rates. If you are using residential property as security, then you have justification to seek lower rates aligned with home loan facilities. This includes the establishment of a “Line of Credit” facility, which compares more favourably with the higher rates and fee structure of a commercial overdraft. Simply put, do not just accept an “approved” answer. Compare!!
Whilst on the subject of Overdrafts and Lines of credit, it is a golden rule of finance that cash flow funds should not be used for the purchase of motor vehicles, plant or other equipment. Commercial Hire Purchase or Chattel Mortgage Finance is the best means of financing such items, with interest rates comparable to or lower than current standard home loan variable rates. The security for this type of facility is the goods themselves, thus preserving equity in real estate for other investment purposes. It also aligns the term of the loan to the useful life of the equipment.
Invoice Finance is a little known method of generating funds to assist business, particularly those that are growing quickly. It is particularly suitable for businesses that carry slow paying debtors. Invoice financing enables payment to be received within 24 hours of raising the invoice, bringing cash flow forward, instead waiting for the expiration of the terms that you allow your debtors, usually 60 to 90 days. The overall interest and fee cost for this type of facility is only marginally higher than the usual Commercial overdraft rates. Sometimes, discounts generated as a result of paying your own creditors quickly, may result in savings well in excess of the cost of the facility. The icing on the cake is that no real estate security is required. Indeed, some customers have used this type of facility to repay loans secured by real estate thus releasing the mortgage over property, such as the family home.
Loans structured on an interest only basis, particularly in the early stages, allows the business to establish a sound cash flow position, whilst retaining the ability to make voluntary principle reductions as and when funds are available. Principle reductions set by Banks can sometimes place an unreasonable burden on the cash flow of a new business. The comfort of the Banks, sometimes leads to your own discomfort.
The limitation of space prevents me from covering all forms of finance products available to business, which include “low doc loans” and commercial loans for credit impaired applicants.
Prepared by
Luke Kouzapa
Director
Luke Kouzapa Finance Service (LKFS)
102 Payneham Road
St. Peters, SA 5069
Ph: (08) 8363 4133
Fax: (08) 8363 4080