Seven kinds of business finance, side by side
The middle column is business.gov.au’s description, in its own words or close to them. The right-hand column points to where each kind shows up in the paperwork, from the source named.
| Kind | How business.gov.au describes it | Where it shows up in the paperwork |
|---|---|---|
| Loan | A lender lends money that is paid back over time with interest. A secured loan is backed by collateral the lender can take if the loan is not repaid; an unsecured loan puts no assets at risk. | Security over personal property can be registered on the PPSR (see roll 05). |
| Line of credit | A “revolving” loan up to a pre-approved limit, with interest paid only on the amount borrowed, not the whole limit. | The pre-approved limit, and interest on the amount actually drawn. |
| Overdraft | A line of credit attached to the business bank account, useful for short gaps in cash flow, not for capital purchases or long-term financing. | Under the Banking Code, when a bank requires an overdraft or on-demand facility to be repaid, it may not have to give notice (paragraph 85). |
| Hire purchase | The business gets an asset and pays it off in instalments with interest, owning it outright after the last one; a larger final “balloon” payment can lower the instalments. | The size of any balloon payment and when it falls due. |
| Invoice finance | Borrowing against invoices sent and not yet paid, to manage cash flow until they are paid. | The PPSR’s “account” class covers obligations to pay, such as book debts owed by customers. The Banking Code lets invoice discounting carry special covenants (paragraph 91). |
| Invoice factoring | Selling unpaid invoices to another business at a discount, for cash up front; the buyer then chases the debt. | The discount, and who now collects from the customer. |
| Trade finance | Finance for the gap between paying suppliers and being paid by customers, most useful for importers and exporters. | What the money is for, and when it is due back: business.gov.au’s example repays the loan when the customer pays for the delivered order. |
A worked example: what a discount costs over time
A discount is quoted as a share of the invoice, but it buys only the time until the customer would have paid. Putting it on a yearly footing shows what that time costs. This is an example with invented figures, chosen to make the arithmetic plain. They are not anyone’s price.
- Invoice sent to a customer, due in 60 days$20,000.00#
- Discount on selling it, 3% of the invoice (invented)$600.00−
- Cash received up front$19,400.00=
- Discount as a share of the cash received: 600 ÷ 19,4003.09%#
- On a yearly footing: 3.09% × 365 ÷ 60about 18.8%*
Invented figures, for the arithmetic only. Change the days and the yearly figure moves: the same $600 over 30 days would come to about 37.6% a year.
The yearly figure is only a way of reading the offer. Fees beyond the discount, if a contract has them, would add to it.
What else to look for in the paper
Security over what the customers owe
When a business borrows against its invoices, the thing standing behind the debt is the money its customers owe it. The PPSR treats that as personal property in the “account” class, which takes in book debts and credit card receivables. A funder can register its interest over a business’s receivables, and the business, as the grantor, is sent a copy of each registration, unless the property is commercial and it has agreed in writing not to be. The detail is in roll 05.
Covenants that come with the product
The Banking Code limits the defaults a subscribing bank can act on in a standard form small business loan, but it lets some specialised products, invoice discounting among them, carry financial indicator covenants or special covenants suited to them as a trigger for default action (paragraphs 87 and 91). Those clauses are worth finding in the contract and reading twice.
Standard form terms
ASIC’s Information Sheet 211 lists business loans among the standard form contracts small businesses commonly enter for financial products and services, and the unfair contract terms law can reach a term in one. See roll 04.
business.gov.au’s list for comparing offers
business.gov.au suggests setting offers side by side on these points, taken from each one’s terms and conditions:
- what it costs to set up, and what it keeps costing
- the interest rate, and whether it can move
- the smallest and largest amounts on offer, and the lengths of term
- whether the lender asks for security
- restrictions, and any other conditions
It also suggests checking that a lender is real by searching its name or ABN on ASIC’s register, and warns that a call or email about a loan the business never applied for “is almost certainly a scam”, which can be reported to Scamwatch.