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Business overdrafts and lines of credit

October 8th, 2015 / 1 Comment /

These facilities are sometimes described together and are essentially very similar. They allow you to overdraw your business account by an agreed limit, which is determined by the business’s capacity to service the debt. Interest is only charged on the funds used and funds can be drawn and repaid at any time.  This differs to the fully drawn advance described above where the entire loan amount is released for use upfront, usually for a specific large purchase, and repayments of either principal and interest, or interest only, are a contractual obligation.

Overdrafts are usually described as having a smaller limit (under $20k), are unsecured and used for the short term to cover some unforseen or irregular expenses. Lines of credit are often described as having a larger limit (over $20k), are secured and used for more long term use or capital boosting purposes rather than resolving cash flow issues.

Due to the nature of their use, overdrafts and lines of credit can only have a variable rate. While there are no contracted monthly repayments, borrowers must ensure that they do not exceed their agreed limit.

 

Asset finance

Rather than spending your business capital on buying and maintaining vehicles or equipment, you could obtain asset finance to use this equipment within a set timeframe, in exchange for rental or lease payments. This enables you to save your capital for other purposes. Once the agreed timeframe has expired, the equipment or vehicles leased must be returned to the lessor. Clients may then seek new asset finance or have the option to renew or purchase the equipment they have used.

 

Optional extras

Like many other loans, business loans come with a number of optional extras including redraw facilities, overdrafts and early repayments but it’s important to be aware that there is often a cost associated with these features. Before you sign up to a loan that includes extra features, it’s worth considering whether you really need them or whether you would be better off saving costs and choosing a more basic business loan.

There may be tax implications for the type of finance that you decide to use and for this reason, clients should seek advice from their accountant to confirm this prior to committing for tax advantage reasons. With regard to organising your finance however, seek credit advice from an experienced mortgage broker. Finding the right business loan is crucial to the success of your business. To help find the right business loan for your situation, speak to one of our mortgage brokers today.

This article is general information only, and is not advice. You should not rely on it as advice. We recommend you speak with a credit licensee or authorised credit representative, licensed financial service provider, registered accountant or tax practitioner, or lawyer for any credit, financial, tax, or legal advice.

Business overdrafts and lines of credit

These facilities are sometimes described together and are essentially very similar. They allow you to overdraw your business account by an agreed limit, which is determined by the business’s capacity to service the debt. Interest is only charged on the funds used and funds can be drawn and repaid at any time.  This differs to […]

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