Choosing the right type of business finance for what you're funding

Start with the golden rule: match the finance to the asset

As a rule of thumb, the term of the finance should line up with the useful life of what you're funding. Stretching a loan for fast-ageing gear like computers over many years can leave you paying for something long after it's been replaced, while a heavy truck or machine that works for years can reasonably be financed over a longer term. Short-term needs, such as bridging a gap between paying suppliers and getting paid, suit short-term facilities.

Business term loans

A term loan provides a lump sum that you repay on a set schedule. It's often used for things that don't come with a serial number, such as buying a business, buying out a partner, an expansion or a larger project.

Term loans can be secured, for example against property, or unsecured. Secured loans generally come with lower rates and longer terms, while unsecured loans typically cost more but can be quicker to arrange and don't tie up your property. Many owners assume they need to offer the family home as security. Depending on the strength of the business and its cash flow, some lenders may consider lending without it, so it's worth asking before you commit your home.

Equipment and asset finance

Equipment finance uses the asset itself, such as a machine, vehicle or fit-out item, as security, and spreads the cost over its working life. Structures such as a chattel mortgage, finance lease or hire purchase each have different ownership, GST and tax treatment, so talk to your accountant about which suits you. We've covered this in more depth in our articles on whether a machine will pay for itself, replacing versus repurposing machinery, and finance for new businesses.

Invoice finance

If your customers pay on 30, 60 or 90-day terms, a lot of your cash can be sitting in unpaid invoices. Invoice finance (sometimes called debtor finance) advances a portion of the value of outstanding invoices, so you can access cash sooner. Because it's linked to your sales, the funding available tends to grow as your invoicing grows. Some facilities cover your whole debtor ledger, while others let you fund selected invoices when you need to.

Overdrafts and lines of credit

An overdraft or line of credit gives you access to an approved limit that you draw on as needed, and you generally pay interest only on what you use. It's designed as a buffer for timing gaps and quiet months, not as a permanent source of funding.

If your overdraft is constantly at its limit, that's a sign the debt may be structured the wrong way. In some cases it can make sense to move that balance into a term loan with a set repayment schedule, restoring the buffer for day-to-day use.

Commercial property and development finance

Buying your own premises can give you more control over your costs and location. Commercial property finance is specialised and usually needs a larger deposit than a home loan, with requirements varying by lender, property type and industry. Development finance works differently again, typically releasing funds in stages as construction milestones are reached. Both involve detailed assessment and valuations, so allow plenty of time.

What lenders look at

Whatever the facility, lenders want confidence that the business can comfortably service the new debt. Things that commonly help:

• Up-to-date financial information, such as current management accounts, not only older tax returns
• A clear picture of cash flow after the new repayments, not just before
• An explanation of how your industry and contracts affect risk, since lender appetite varies between industries
• A clear purpose for the funds and how they will support the business

If your paperwork isn't up to date

If your financials aren't finalised or your business is new, some lenders offer alternatives. Our guides to low doc business loans and finance for new businesses explain how those options work.

General information only

This article is general information only. It does not take your personal circumstances into account and is not personal credit, legal, tax or financial advice. Talk to your accountant about finance structures and tax. Funding options are subject to the asset, supplier, applicant and individual lender policy, and all finance is subject to lender assessment and approval.

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