6 Ways to Finance a Business

The first rule is to use the bank's money to finance the purchase of a business rather than using your own capital. This will give you significant tax advantages, so speak to your accountant about using borrowed funds and retaining your own cash for other purposes. An obvious advantage of borrowing is that you can amortise or spread the start-up cost over a period of time as profits are generated, rather paying for it in one lump up-front.

The most common loans used in business are:

1. A Line of Credit using residential property as security. This is probably the lowest cost source of funds available. It is the most likely funding facility used for lower priced ventures and the repayments can be managed by you. At present funding to 90% of the value of the home can be obtained.

2. A Business Mortgage Loan uses the equity available in either residential or commercial property as security. These are also low-cost funds (although slightly higher than straight residential) and the term provided is more aligned to generally accepted amortisation rates for business loans. An advantage with these is that as the business grows, lenders are often more willing to listen to increased funding requests for well-run businesses even if they exceed the usual lending values against the security.

3. A Business Overdraft provides funds for business that sell their products or services on credit and sometimes have to wait 30-90 days for the bills to be paid by the debtors. The overdraft can be used to pay the business expenses while waiting for the income from debtors. It can be expensive if not used correctly and it is essential that the amount sought aligns with a well prepared Cash Flow Forecast and is also monitored regularly. The overdraft is usually required to be secured, particularly for smaller, less established operations.

4. Chattel Finance is used to provide funds to purchase motor vehicles and items of plant and equipment. This can be either Commercial HP or lease. Some companies will consider second-hand equipment purchased as part of a business.

5. Business Loans using the business assets as security can be provided against the value of the business. Lenders generally require that the business has a very strong background such as well-known franchise, news agency, post office, management rights and real estate agent's rent roll. Business proprietors are also required to contribute their own funds and share the risk. Larger businesses with good business plans, operating manuals, strong management and cash-flows may also access these facilities.

6. Debtor Finance is provided by specialised companies and banks to fund outstanding debtors using no other security. More popular overseas than here, its somewhat chequered history is now being overlooked for the benefits it can provide to a growing business. Can be used in a start-up situation.

There are other types of Industry-Specific loans available and you should speak to us or to Financial Planning Services

Remember, the cash-flow of a business is its life-blood and it is essential that a business has adequate funding in place to allow for growth and changes in the market. Time spent at the outset to prepare business plans incorporating realistic and soundly based cash-flow and profit forecasts will pay large dividends down the track, as well as allowing you to focus on the business.

My thanks to Mark Robinson of Acquire Finance Solutions for this excellent summary. He can be reached at Acquire Finance Solutions on 5499 6022. Their website is www.acquirefs.com.au and they have already proved to be more than helpful to a growing number of our clients.