Bank lending for your business, what’s appropriate?


The majority of large businesses look to the biggest banks for their cashflow needs and to finance large projects. Many small and medium firms still look to main street banks to help finance their cashflow needs too, however did you realise that globally over half of all SME trade finance requests are rejected compared with 7% of all multinational finance requests?*.

On many occasions the bank won’t consider trade-financing for smaller companies based upon their typical risk assessment models, which lean towards supporting big business. Without doubt the banks have become more risk averse since the global financial crisis.

Here below in short, are the typical loan types offered by your local bank:

Bank Overdraft

The greatest thing about overdrafts is they are typically the most flexible of all bank lending.

However bank overdrafts tend to have a fixed limit. This is great if the limit provided is all you will need. It’s not so well suited for businesses where orders are not so predictable or volumes are growing quickly, while the overdraft remains at the same level. This can impede business growth as you may be reluctant to receive new orders or start new projects, until the overdraft is paid down or has sufficient space to enable the owner or management to feel comfortable to take that new order or opportunity.

If you have obtained an overdraft, it may be tied to your home as security for the bank in the case you don’t repay it when the bank requires repayment. In this case the interest rate charged is reduced since you are providing residential property as security and hence the finance can look attractive as you compare it to other forms of finance including your home loan.

During periods of financial crisis or even when banks change their policy towards financing business, they can call in overdrafts for repayment, at very short notice.

Business Loans

A business loan from a bank may be available to a business with a good track record of profits – and usually a home property is again preferred to be used as security, alongside any business property or assets.

Such loans can provide a cash injection to the business, but they will require monthly loan repayments. These bank facilities are fixed loan amounts and will not grow with the business, in fact it is a reducing debt expected to be repaid in less than 5 years, or 10-15 years typically.

You are provided the full loan funds at the outset when you may not need all of the money at the same time (in your working capital cycle), and bank interest is charged nonetheless on the total amount advanced initially.

It’s important to recognise these limitations and reflect upon them: are these types of finance best suited and appropriate for the working capital cycle and the business need for flexible cashflow when you need it most ?

*WTO report, Trade Finance and SME’s Bridging the gap, 2016

For more information about finance available to fund the working capital cycle, call us on +61 (0) 8 94803746 or email us for a callback:

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