A business line of credit is normally used to finance temporary working capital needs of the borrower typically accounts receivable and inventory. It is usually extended for one year. However, the structure of the line is flexible and can be accommodated to the needs of both the borrower and the lender.
Some of the common types of structure or "terms" for lines of credit are:
Demand line of credit
A loan payable "on demand" is one in which the lender leaves the loan open until the lender calls it due. In other words, there is no set term or schedule for repayment. This is very common and is actually preferred by the lending institution as it makes it possible to "demand" payment from the borrower when deemed necessary.
Revolving line of credit
It usually involves a commitment from the lending institution for a set amount of time "anywhere from 1 year to several years". It allows the borrower to use the funds, as they need them and to repay them at will.
Asset Based line of credit
A revolving line of credit where the amount available for disbursement is governed by a formula, which is usually the sum of the accounts receivable outstanding plus the inventory and multiplied by a factor (usually around 80% for accounts receivable and 50% for inventory).The amount owed by the customers of the borrower (account debtors) and the inventory is monitored by the lending institution and the submission of monthly accounts receivable ageing and inventory listings is a requirement.
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Business Overdraft Facility
A Business Overdraft can provide the extra cash your business needs to cover seasonal or working capital requirements. Essentially, an overdraft is a method of allowing an account balance to operate in debit up to a pre-approved limit. These facilities are usually secured against property.
This type of facility offers clients the flexibility of a ‘line of credit’ attached to a cheque account, providing a business the flexibility of drawing funds up to the overdraft limit as required. Although there is a cheque account attached to this type of facility, access is also available (generally) through B-pay, cards, telephone and/or Internet banking.
Generally, as long as the minimum monthly interest is covered, clients can clear this debt at any point in time and have funds available up to the limit as business opportunities arise. It also provides a convenient means of dealing with fluctuations in cash flow which every business experiences.
Lending Value ratios (LVR’s) vary depending of the Institution and type of security offered our consultants can assist you in this area, providing you with the details to ensure that the appropriate facility is considered for your individual circumstances.
It should be noted that the overdraft facility is provided as a revolving line of credit and that debt and interest are payable on demand by most institutions.
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Debtor Finance
Many businesses in Australia are not aware that they can use their debtor book, to effectively finance growth and even out cash flow. Debtor Finance provides an innovative alternative to businesses overdraft facilities – one that is based on your debts without the need for bricks and mortar security.
Debtor Finance is one way for businesses to raise working capital.
Debtor Finance – also known as invoice discounting - provides the business (the borrower) with finance based on the value of its outstanding debts. A revolving credit facility is set up which provides funding at up to 90% of the value of invoices being issued by the business. The rest is made available to the business, less any interest or fees, when their customer (or debtor) pays.
Through Debtor Finance, cash becomes available well before the debtor actually pays.
The extra cash has traditionally been used to purchase more stock, labour or advertising to grow the business. It can be used for other purposes such as:
Taking advantage of supplier discounts. Many suppliers offer discounts of 5% or more for payment within 7 Days. This discount more than offsets the cost of factoring.
Removes some of the debtor’s power in the relationship. The client is much less at the mercy of the debtor in regard to payment.
Avoid offering debtor discounts. Some very large corporations take a significant discount, eg 5% on payments for 14 days. In many cases Debtor Finance is cheaper.
Allows the owners to keep a greater share of their equity as a business grows. All debt lenders will cap the amount they will lend to a proportion of the assets value (whether it is the businesses or the owners own personal assets). Thus, if a business reaches this ceiling, the shareholders must source funds elsewhere. By using funds released from their debtors, they do not have to forgo any equity by bringing in extra capital from outside the business.
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Commercial Bills
A commercial bill loan is an arrangement you enter into with financial institutions which results in you making an interest repayment at the end of the loan term. The full amount that you borrow is to be repaid at the completion of the contract usually between 30 and 90 days.
A commercial bill loan is primarily a short-term loan facility offered by the banking sector to clients who need more that $100,000 for investment purposes. These types of loans are generally rolled over until the borrower has the funds to repay the loan amount in full.
