Types of credit available to small business

With all the credit providers and products available it can be confusing to determine what product is best for you. Each can be useful however the key to getting the right finance is to understand what each offer means and how it is best used. You also need to ensure that you are fully aware what rate of interest you will be paying, over what time and including what fees.

Find out more about the types of credit available to your business:

Overdraft facility

An overdraft is a short-term funding option designed to help a business through minor lean spells by allowing you to spend more money than you have in the bank. Essentially, it provides working capital for the business before income is received.

Overdrafts can be secured or unsecured and their fees depend on the limit. A credit assessment is usually required to ensure the viability of your business.

An overdraft facility should not be used for capital purchases or long term financing needs.

Find out more about managing an overdraft >>

A line of credit

The main advantage of a line of credit is its flexibility. This form of finance is similar to an overdraft facility in that it can be drawn as the need arises.  A line of credit is usually secured by a registered mortgage over a property and because of this security, interest rates tend to be lower than for overdrafts. However if you fail to make your payments you can put your property at risk.

You are usually required to make payments to at least cover the interest and fees on the loan.

A fully drawn advance

A fully drawn advance provides access to funds upfront and is used for funding long term investments such as a new business or equipment (it is not a short term funding option that would be used to help with cash flow and day to day costs).  These types of loans are usually secured by a registered mortgage over a residential or commercial property or business asset.

The advantage of a fully drawn advance for business investment is that the interest rate is often fixed for a period, providing certainty and stability for repayments.

Secured / unsecured business loan

There are essentially two different types of business loans: secured loans and unsecured loans. The main difference is that unsecured loans do not require any collateral and secured loans do.

One of the first things you must decide when taking out a secured business loan is the type of interest - fixed or flexible.  If you want the security of knowing exactly how much you have to pay every month, a fixed rate is the best option for you.

An unsecured loan is a loan that is not backed by collateral. Therefore it represents greater risk to the lender and the interest rate is typically higher to compensate for the greater risk being assumed.

Credit card

The use of a personal credit card to pay for company expenses is not the best option for smart business owners. The primary benefit of a business credit card is that it offers you the opportunity to separate your personal and business expenditure therefore creating an efficient way to monitor business expenses. It also makes things simple come tax time.

However the interest on credit cards can be significantly higher than other forms of credit. Therefore you should think very carefully about how you use your credit card to avoid being hit with a very large interest bill.

Leasing / Hire purchase

Under a lease agreement the finance provider (lessor) purchases the asset and leases it to the borrower (lessee) for specific payments over an agreed period. At the end of a lease, the asset is transferred back to the lessor. At this point the lessee has three options:

  1. to buy the asset from the lessor
  2. to renew the lease
  3. to return the asset to the lessor

In a hire purchase agreement however, the hire-purchaser obtains the ownership rights after the payment contract is completed.

The types of items usually financed via a lease of hire purchase agreement include: machinery, vehicles or office equipment such as computers.

No single type of lending or deal will suit everyone - make sure you do your homework and figure out which type of finance is best for your business.

 

Connect with us to receive updates throughout the day:

Like us on Facebok Follow us on Twitter

Dun and Bradstreet AustraliaTop of page Dun & Bradstreet Australia Pty Ltd 2015 | D&B Small Business    *About Us    *Sitemap    *Advertise    *Privacy    *Terms & Conditions