An inconvenient truth about borrowing for business.

Whether your business is just starting out, or has been established for many years, the way you manage cash flow may not be key to Al Gore’s business success but it will be key to your own.

Understanding a few home truths about business finance can ensure you manage cash flow and optimise it.

Rates are less important than terms and features are

The first thing business owners tend to look at when exploring business finance is the rate at which finance is offered.

This isn’t necessarily the best way to approach finance.

While rates are important, they should ideally be thought off as a function of features and terms against the security you offer against the loan or finance amount required.

If you select the wrong term or features, a loan you thought was cheap may end up costing you substantially more.

This is a common error made by business particularly in the area of vehicle finance.

The best way to approach finance is to speak with people who will educate you about your security position and outline not just the cheapest rate, but also the options appropriate and specific to your business.

Beware of deals that sound too good to be true – they rarely are

Finance companies are always offering business owners, sweeteners – additional features and benefits.

These items are often intended to just distract you from the real cost of the loan to your business.

When evaluating a deal, be sure to compare options. Be careful about rushing a finance decision offered by a dealer or vendor, and discuss the capital expenditure forecast – and needs – beforehand with your accountant, or team, internally.

You can borrow against bricks and mortar – also unencumbered equipment, invoices, debtors, cash flow and more these days

Value is no longer defined by money, but by business assets which can range from ideas, to unencumbered equipment, invoices, debtors, cash flow and more these days.

Understanding your asset base, as defined by contemporary commercial brokers, and business financiers, can ensure you obtain the cash flow and funds your business needs to more than just survive – thrive!

The key to obtaining finance against such assets is bothering to make those additional enquiries, or utilising an experienced broker who is knowledgeable about options, and who will outline – and compare – alternatives.

It pays to finance any asset purchased for use in business

There are tax, depreciation and working capital based benefits that can ensure the retained earnings in your business are put to best use.

A few examples where it could pay to use borrowed money in your business include office fit-outs, software and licensing costs, specialised overseas equipment, older assets – they can all easily be financed when you deal with a financier or broker with appropriate options. The lower the resale value, generally, the higher the rate and shorter the term. Don’t accept a no – ask why and how.

The only person you should have to report to is yourself

When your exposure to a single business lender crosses $1 million, you will most likely be required to provide additional reporting and may require particular financial ratios or covenants to be met depending on your industry.

At this point, it may make sense to move all exposures with a single lender. Navigating across different lenders policies may minimise the need for updated financials or additional reports and can keep you focused on the only business that matters ultimately.

Your own.

By Chris Slack, Head of Business Finance at Global Capital Corporation