It is worth spending a little bit of time regularly reviewing the financing of your business to make sure you are not throwing away hard earned money. There is a range of finance options open to business and the right options change as your business changes. Take a look at the list of some of the major options below to see which one or combinations work best for your business at this point in time.
Commercial finance can be a fast, flexible way to get immediate use of equipment such as cars, trucks, plant or computers while conserving cash (working capital) for business development and other business running costs.
Hire Purchase is generally used where you want to own the equipment at the end of the term and where you account for GST on an accrual basis. Ownership automatically transfers to you upon final payment.
If you are financing high depreciating equipment or equipment that becomes obsolete quickly then leasing or renting may be options. Here you use the equipment for an agreed period while making payments structured to suit your business cash flow. You have flexibility to vary the term. At the end of the term you simply return the equipment with no disposal costs. If the financier agrees, you can re-finance or purchase the equipment.
With both options the asset is off the balance sheet. You may be able to claim tax deductions on payments and stamp duty.
For businesses that already own relatively new (under two years) plant, equipment and vehicles you may want to consider a ‘sale and leaseback‘ to access debt funds at these competitive rates. You “sell” the asset for its second hand value to the leasing company and immediately lease it back again, so retaining use of the asset but freeing up the capital tied up in that asset.
Creditors are people or businesses your business owes money for goods or services supplied. By getting access to their goods or services before paying for them, you can generate income. You want to try and reduce the time between when you pay and when you get paid. It is effectively interest free finance but is short term only.
An overdraft allows the balance in your account to go below zero to an agreed limit. It is flexible but can be relatively expensive, depending upon the interest rate and other fees.
A business loan usually has a lower cost than an overdraft and is suitable for long term core debt needs. Those backed by real estate are cheaper than unsecured loans or loans backed by other assets. Residential real estate backed loans are the cheapest of all. Look for loans that offer redraw or offset facilities.
A business credit card is expensive if you don’t pay it off at the end of the month but it can give you up to 55 days interest free money. It can be useful if your suppliers will give you a discount for immediate payment or if they require immediate payment. There are some low rate cards around.
Commercial bill lines can be secured or unsecured. They generally have relatively low interest rates but usually have significant minimum repayment sizes and fees. Rollover periods are inflexible.
Get some help from your accountant, business advisor or business banker to choose the right options.
Wayne Russell has been Chairman of the Hunter-base Greater Building Society for two and a half years. He is a partner at the Newcastle, Maitland and Singleton based accounting and business advisory firm Pitcher Partners. He is also a Director of the Greater Charitable Foundation, a Past President of the Australian Financial Institutions Auditors Association, President of Local Government Auditors Association of NSW, and a registered company auditor.