Business Finance

Business Finance is an area where the lender offering is most varied and to that extent the area where a good Broker can offer the greatest level of value.

Generally speaking, “business finance” is for the purpose of;
  1. Purchasing an existing business,
  2. Starting up a new business,
  3. Expanding an existing business or
  4. Providing working capital for an existing business.
The most common lending instruments in business finance include:
  1. Term loan – a basic loan which can be P&I or Interest Only (very similar to a home loan).
  2. Commercial Bill – an Interest Only facility which rolls over every 30, 60, 90, 120,150 or 180 days. Lump sum reductions can be made at roll-over, but not during the set period.
  3. Business Overdraft – fluctuates regularly to pay business expenses and reduces by business income.
  4. Debtor/Invoice Finance – a working capital facility secured specifically by debtor listing.
  5. Trade Finance – Working Capital facility specifically for importing/exporting.
  6. Inventory Finance.

Business Finance – Security

In most cases Business Finance is secured by either Commercial or Residential property. However, some lenders will also consider a number of other “non property” assets, including:
  • Stock
  • Debtors
  • Goodwill
  • ash flow
With most businesses, the lenders will assess each business on its relative strength and the strength of the partners/directors; however, there are certain industry sectors that lenders have developed specific guidelines for. They include:
  • Franchise Businesses
  • Pharmacy, Medical and Vets
  • Accountants and legal practices
  • Child care
  • Hotels and motel
  • Newsagents
  • Rent Rolls
  • Independent Supermarkets

Typical items you need to ascertain at your initial contact.

If client is purchasing a business:
  1. What is the business?
  2. How long has it been trading?
  3. What experience does the borrower have in the industry?
  4. What experience does the borrower have in running a business and any other essential skills related to running that particular business?
  5. Are trading figures available on the business?
  6. Is the vendor staying in the business for a period?
  7. Strategy for retention of other key staff.
  8. What is the financial impact on the new owner (the borrower) going into the business compared to existing owners? This is most important. There will nearly always be a financial impact. Either positive or negative. It is important that the client has considered what this is and has budgeted for it.
  9. Security Offered.
  10. Client asset/liability position.
  11. What due diligence has the purchaser performed on the business?
If client already owns the business:
  1. How long have they been trading?
  2. What is the funding for?
  3. Historical Trading results and Balance sheet strength.
  4. What changes have taken place in the business?
  5. What changes are anticipated going forward (if the funding is for expansion, how will the expansion effect profitability and ability to repay debt).
  6. Security Offered.

Debtor Finance

Debtor Finance, also known as Invoice Finance or Cash flow finance, is a flexible working capital facility to raise working capital to fund growth. (secured by Debtors).

Types of Businesses using Debtor Finance:
  • Start ups requiring WC to fund growth.
  • Businesses experiencing fast level of growth.
  • Established businesses requiring additional WC to streamline operations, fund growth, mergers/acquisitions or execute succession plans.
  • Where directors do not wish to pledge personal freehold as security.
  • Businesses needing to extend terms of trade to maintain competitiveness.

Benefits of using Debtor Finance are numerous – the business is able to access cash from sales immediately when required, to manage cash flows and fund sales growth. Greater buying power also allows the business to take advantage of supplier discounts, and better control over cash flow may allow the business to scrap early settlement discounts offered to clients (and therefore increasing margins).

The key advantages of Debtor Finance over alternative cash flow products (overdrafts) are that Freehold Security is not required and funding limits grow automatically in line with sales.