The moment that first cash flow hiccup hits, it’s easy to run to the bank for finance and get locked into expensive loans. In business, there are many situations that benefit from finance, however, choosing the wrong finance can mean the end of it. Bad credit and overindebtedness are two of the reasons new businesses close up shop. Knowing what debt to apply for during the various business cycles will make a substantial difference.
An overdraft facility grants the business owner permission to go into excess on their current accounts. The facility is usually granted as a revolving facility and larger facilities are often reviewed once a year. The interest rate is charged on the amount used, and many banks levy a facility as well. Some things to consider, include:
- This type of facility is suitable for the business that is able to settle the account on a monthly basis.
- Businesses who operate a cash business and experiences their income spread over the full month, will find they get stuck in overdraft fairly easily.
- This facility is considered a bridging facility.
You Should Get This: If your business experiences cash flow constraints during the month and you receive bulk income.
You Shouldn’t Get This: If you are unable to settle the full facility within 12 months, or if your income is divided into small streams income throughout the month.
The repayments on these loans usually run between 6 and 60 months. Banks often require some form of collateral in order to secure the loan. This is the ideal loan type for those who wish to expand their business, do a revamp, introduce a new product, or purchase equipment that cannot be accommodated under asset finance.
- This is the ideal facility for businesses who can’t afford to use up their cash flow.
- Furthermore, this should also be a once-off expense.
You Should Get This: If you have a one-off expense that requires a big capital outlay.
You Shouldn’t Get This: If your need is monthly or if this injection is to pay your day-to-day running expenses.
Commercial Property Finance
This is suitable for those who wish to add an asset to their book, whether they wish to trade from the property or not. The property will serve as its own security. Customers pay the installments according to an agreement and this is often a good source of investment for businesses as well.
- Banks often require customers to put down a deposit of between 10% to 30%.
- Some banks require customers to occupy at least 70% of the premises.
You Should Get This: If you wish to add a property to your books.
You Shouldn’t Get This: If you simply need to perform shopfitting inside the premises. Furthermore, many banks don’t finance commercial vacant land without proper details on development.
Business Credit Cards
This type of credit has landed more businesses in trouble than they would care to admit. The cards are handy to purchase stock and office supplies. They are also handy in terms of fleet management. Those who get in trouble, often use the card to run the day-to-day expenses of the business. This becomes dangerous when the business can no longer afford to keep up with the payments.
- Many business credit cards now offer clients the opportunity to repay 5% or 10%.
- Traditionally, business cards required that customers repay the full amount every month at the end of the statement cycle.
You Should Get This: When you have many card purchases and different members who will require access to cash in the business. This will allow proper management of the funds.
You Shouldn’t Get This: If the funds are going to pay the running costs of the business.
When the business experiences a downswing, it’s important to discuss the severity of the finances with a trusted accountant. Once they determine the nature of the constraints, the business banker is the next point of contact should finance be the only option. Alternative options for funding include business agencies and government initiatives.