27 Jun Got A Bank Overdraft? Access Additional Working Capital With These 3 Options

Having a bank overdraft is the first thought for a business owner seeking funds, but what happens when the bank won’t increase your loan?

What if you could keep your bank finance in place and “bolt” on other lending facilities from alternative sources?

One in three businesses that we come across have some kind of bank facility. The most common is a small overdraft usually between $50,000-$100,000 in size and almost always secured by the family home or business assets. We regularly get enquiries from business owners needing further funding in addition to the bank facility as they have been denied an increase of the existing facility usually due to the asset position/equity in the home.

We won’t go into too much details as to why the bank won’t increase your loan and just to be clear there are other lending options out there but we are only going to talk about the ones that can most likely be used alongside a bank loan.

Let’s learn a brief overview of each loan option

Invoice Factoring
In factoring, the business owner sells his/her receivables in the form of invoice to the factor, who makes an advance of 70-85% of the purchase price of the receivable amount. The factor collects the full amount from the customer in due course and pays the balance amount due to the business owner after deducting his commission and other charges.

How does it work with a bank loan? Invoice factoring relies on the strength of your debtors/customers as long they are credit worthy you can be approved for a facility. If you already have a bank loan this would mean the bank would almost 100% of the time hold all security over your companies assets. Banks, however assess the strength of the property asset they have taken in order to approve your loan and in a lot of cases allow a release of your receivables from their security to allow a factoring provider to finance you. Now this doesn’t always get granted and it can take some persuading with your bank manager to get it released. Sometimes a good method is offering to pay down some of the existing banks facility in order to have the release granted. If this fails you may be able to payout the entire bank loan depending on how much you have available from the factoring provider especially if your going to achieve a lot higher funding level with the factoring provider than staying with the current bank loan.

Read also: How To Calculate Invoice Factoring Rates & Why It’s Not An Apr

Unsecured Fixed Term Business Loan
You get given a lump sum of funding in exchange for a set dollar amount based on your future credit card/EFTPOS/invoice sales. Let’s say you turnover is $200,000 per month in sales, your loan approval might be $150,000.

How does it work with a bank loan? These lenders usually have a very light touch credit requirement. That said it’s growing in popularity in Australia and working in with existing bank facilities is relatively easier. Most facilities claim to be “unsecured” meaning that no release from banks would be necessary. This option would most likely be the more expensive options out of the three here but does work well given your obtaining a loan based on the future sales that might occur rather than a firm order your current invoices outstanding. This option is most suited to businesses with regular cashflow.

Read also: How Does Unsecured Business Finance Work?

Import & Trade Finance Options
With this type of funding it’s dependant on your business obtaining purchase orders or purchasing inventory. Once you have purchase orders a funder will advance up to 65% of the sale price in order to pay suppliers for goods to be shipped. Funders will generally only finance finished goods usually delivered to high credit worthy buyers. You can also obtain stand alone inventory financing options if you have some trading history with no credit defaults.

How does it work with a bank loan? Purchase order funders work in with banks very well and also can work well with other factoring providers to compliment their existing facility. Working with Banks does require a release over the debtor/customer that the order is from and is usually granted easier that factoring as it’s usually only one or two debtors that need to be released and relate directly to the PO funder advanced funds to purchase the stock which they would hold title over. Working in with your existing factoring provider works if your existing provider is open to the idea. The PO funding effectively bolts on the back of the factoring facility and once goods arrive the current factor finances that invoice relating to the goods delivered and pays the PO funder directly.

Read also: Import & Trade Finance Options Explained at Loandesk

So from above you can see there are a few options to add in extra funding lines from a cash flow perspective and it depends on your relationship/approach to the bank in order to get the releases from their security to let the funding take place.

About Leigh Dunsford

I am a small business finance & lending columnist at Loandesk, teaching entrepreneurs what loan options are available to them in Australia, explaining the differences between each loan type & how to position themselves for the best chance of getting approved for their perfect loan. My thoughts have been published on Startupsmart, CEO Magazine, Smartcompany & more...

Connect on Linkedin
View All Posts

Your Email (required)

No Comments

Sorry, the comment form is closed at this time.