Cashflow Finance in Australia: Rates & Options

1. Business line of credit

A line of credit gives a business access to ongoing credit whenever it’s needed. You’ll have a credit limit and instant access to those funds as the are required. You can draw down from the credit line repeatedly without need to reapply with the lender.

Your credit line may be:

• Fixed  – which means you can draw the funds in one or more tranches and then repay your loan by an agreed date.

• Revolving  – which means you can draw the funds, repay them and redraw them as often as you like within the term of the facility.

You’ll only pay interest on the amount you borrow, rather than the full value of the facility, although you will probably need to pay a fee to set up the facility (and possibly ongoing administration fees) based on the full value of the facility limit.

A line of credit usually charges a lower interest rate versus a business credit card (albeit without the interest-free days credit cards usually offer) but rates tend to be higher versus a fixed-term loan.

Is a line of credit right for your business?

A business line of credit can be a straightforward way to access funds. Once set up, you can generally access funds more or less instantly at any time. If cashflow is an ongoing issue for your business but you have strong overall revenue and profitability, a line of credit can make a lot of sense.

If you do qualify and you opt for a revolving line of credit you’ll need strict financial discipline. It’s all too easy to get dependent on having extra cash on hand. But remember, your lender could withdraw your credit line at any time. It’s important that you only use it to cover shortfalls in your working capital, rather than for longer-term purchases.

3. Business credit card

Many small businesses in Australia have business credit cards, even if they have no other form of debt.

A business credit card is a flexible form of short-term finance which is ideal for financing ong shortfalls in cash flow.

It’s also a simple and convenient way to cover your general business expenses. It can also be very economical as long as you pay off your full balance each month.

If you find you can’t pay off your balance, that valuable interest-free period can quickly turn into compounding interest at very high rates.

Is a business credit card right for your business?

Having a credit card makes it super easy to buy from retail or online suppliers, so you’ll have no trouble keeping your office stocked, booking travel etc. There are lots of different types of business credit cards (rewards cards, frequent flyer, low rate etc.) so chances are there will be an option to suit.

Just watch out for the very high interest rates (20% p.a. or higher) on some credit cards, if you will need to repay the funds over a longer period of time.

5. Invoice financing

Invoice financing, also known as factoring, is considered by some to be the ultimate form of cash flow financing.

Why? Because it lets you accelerate the cash you’ll receive from your customers. Unlike all the other forms of cash flow finance on this list, factoring doesn’t involve borrowing. Instead, you’ll sell your invoices (or accounts receivable) to a third party.

You’ll get a cash advance (usually of up to 90% of the invoice value) and the factoring company will then collect payment of the invoice from your customer. At that point they’ll deduct their fee and pay you the balance.

Is invoice finance right for your business?

Invoice finance has a lot of advantages. Firstly, lenders will look at the creditworthiness of your customers, rather than your own financial history, so you may be able to access it even if you can’t get any other form of cash flow loan.

Using invoice finance means you can offer credit terms to customers – which can make your business more competitive – without having to worry about the long gap between paying your suppliers and getting payment for your services.

There are some pretty serious pitfalls to consider, though. For one thing, if you opt for a ‘recourse’ factoring arrangement, you could end up having to buy back the invoice from the lender if your customer fails to pay.

On top of this, once you sell an invoice, the factoring company will deal directly with your customer. That means you’ll have no control over the way they communicate, which could damage your customer relationships and your precious reputation.