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Business Credit Facilities and How to Compare Them
A credit facility is a way to borrow the money that you need without having to pay the often high interest rates of credit cards.
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Whether you need cash for shares, property, equipment or investment, a business credit facility could help. Companies use these accounts quite often because it allows them to take advantage of investment opportunities that come up.
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What is a credit facility?
A credit facility is a type of loan that suitable for a business or corporation. It is usually a fully secured, revolving line of credit that is used for the short to medium term (rather than long term). These products have been designed to help manage business assets and to differentiate between working capital and investment capital. This enables better organisation and financial management for your business, as you know what funds are allocated to which purpose.
How do they work?
All of these products come in the form of credit, which means that your business will need to pay it back at some point with interest. These details are generally handled on a case by case basis but you can expect that there will be a loan term, interest rate type, repayment terms and a particular way your access the account.
These products are designed for businesses to take advantage of investment or operating opportunities that come their way. However, it’s important for businesses to consider how they’re going to pack it back, and whether this investment is crucial or not.
What are the types of business credit products?
It’s important to note that different banks may have different names for these products. This section will review the basic types and what you can expect.
- Revolving credit - This is when the customer pays a fee and is then allowed to access funds when they need them. Generally, these are suitable for operational purposes or day to day activities rather than a one off investment. The loan amounts would fluctuate each month depending on the cash flow needs of the business.
- Term loans - This is a specific amount that has usually has a variable rate; usually more long term.
- Committed facilities - This is when the lending requirements are set by the lender, so the business can borrow funds.
- Letters of credit - This is a guarantee from the bank that a buyer’s payment to a seller will be received on time with the amount stated in the letter. Letters of Credits are usually helpful when conducting international trade where the stock or items are in transit and the sellers need a guarantee that the amount will be paid upon arrival.
- Retail credit accounts - These are accounts that are set up to help your customers buy your goods and services, which means your business can make the sale. However, the interest rates on these are quite high, as there is a lot of risk involved.
How do I choose a credit facility?
This decision ultimately depends on the needs of your business. You’ll need to consider whether the investment is short, medium or long term and whether it’s coming out of your working capital or investment capital. Products such as letters of credit and retail credit accounts are not needed for every business and are usually appropriate for retail businesses.
What are the pros and cons of credit facilities?
Pros
- Funds if you need it. Credit facilities are ideal for when you needs funds for investments. This means that you always have the opportunity to reinvest in your business.
- No strain on cash flow. Generally these are quite a flexible solution, that doesn’t have an impact on your day to day cash flow.
- Flexible. You can also adjust the principal amount that you’ve borrowed each roll over in line with business cash flow patterns. However, this often has limits and is not offered all the time.
Cons
- Risky. There is always the risk of your investment making small returns, which may or may not pay off the credit facility that you’ve taken out.
An alternative to credit facility
If your business has any outstanding invoices and needs funds to manage its cash flow, invoice financing can be an option. It's a type of business loan with reduced risk, no asset requirements or interest payments.
Compare the invoice financing products below.
Frequently asked questions
- Are there any other types of credit facilities? The terms above cover the key elements of a credit facility. As mentioned before, banks will have different names and product mixes so you can choose one that suits the needs of your business.
- How do I access the funds? Sometimes there is a cheque account attached, and you can normally access it through BPay, cards, telephone or internet banking.
- How do I know my loan term? This will be discussed when setting up this facility with your lender. Please note that banks ultimately have the last say in terms of what the repayments will be.
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