Australian Business Loans

Starting a business, no matter the size, requires a solid foundation

Cash Flow Solutions and Business Expansion Funds

Each business has a cycle, its cash flow, its ups and downs, and wants and needs. Most of the time this just carries on as usual but there are times that you need assistance with short-term cash flow shortfall, funds to expand business, a piece of equipment et cetera and that’s where we come in.

Working Capital

A working capital loan is a loan that is taken to finance a company’s everyday operations.

These loans are not used to buy long-term assets or investments and are, instead, used to provide the working capital that covers a company’s short-term operational needs.

Those needs can include costs such as payroll, rent, and debt payments. In this way, working capital loans are simply corporate debt borrowings that are used by a company to finance its daily operations.

Understanding Working Capital Loans

Sometimes a company does not have adequate cash on hand or asset liquidity to cover day-to-day operational expenses and, thus, will secure a loan for this purpose. Companies with high seasonality or cyclical sales may rely on working capital loans to help with periods of reduced business activity.

Many companies do not have stable or predictable revenue throughout the year. Manufacturing companies, for example, may have cyclical sales that correspond with the needs of retailers. Most retailers sell more product during the fourth quarter—that is, during the holiday season—than at any other time of the year.

To supply retailers with the proper amount of goods, manufacturers typically conduct most of their production activity during the summer months, readying inventories for the fourth quarter push. Then, when the end of the year hits, retailers reduce manufacturing purchases as they focus on selling through their inventory, which subsequently reduces manufacturing sales.

Manufacturers with this type of seasonality often require a working capital loan to pay wages and other operating expenses during the quiet period of the fourth quarter. The loan is usually repaid by the time the company hits its busy season and no longer needs the financing.

 Types of financing include a term loan, a business line of credit, or invoice financing, a form of short-term borrowing extended by a lender to its business customers based on unpaid invoices. Business credit cards, which allow you to earn rewards, can also provide access to working capital.

Pros & Cons of Working Capital Loans

The immediate benefit of a working capital loan it lets business owners efficiently cover any gaps in working capital expenditures. The other noticeable benefit is that it is a form of debt financing and does not require an equity transaction, meaning that a business owner maintains full control of their company, even if the financing need is dire.

Some working capital loans are unsecured. If this is the case, a company is not required to put down any collateral to secure the loan. However, only companies or business owners with a high credit rating are eligible for an unsecured loan. Businesses with little to no credit rating will more than likely have to have security for the loan.

Trade Finance

Trade finance represents the financial instruments and products that are used by companies to facilitate international trade and commerce. Trade finance makes it possible and easier for importers and exporters to transact business through trade. Trade finance is an umbrella term meaning it covers many financial products that banks and companies utilize to make trade transactions feasible.

How Trade Finance Works

The function of trade finance is to introduce a third-party to transactions to remove the payment risk and the supply risk. Trade finance provides the exporter with receivables or payment according to the agreement while the importer might be extended credit to fulfill the trade order. 

The parties involved in trade finance are numerous and can include:

  • Banks
  • Trade finance companies
  • Importers and exporters
  • Insurers
  • Export credit agencies and service providers

Trade financing is different than conventional financing or credit issuance. General financing is used to manage solvency or liquidity, but trade financing may not necessarily indicate a buyer’s lack of funds or liquidity. Instead, trade finance may be used to protect against international trade’s unique inherent risks, such as currency fluctuations, political instability, issues of non-payment, or the creditworthiness of one of the parties involved.

Below are a few of the financial instruments used in trade finance:

  • Lending lines of credit can be issued by banks to help both importers and exporters.
  • Letters of credit reduce the risk associated with global trade since the buyer’s bank guarantees payment to the seller for the goods shipped. However, the buyer is also protected since payment will not be made unless the terms in the LC are met by the seller. Both parties have to honor the agreement for the transaction to go through.
  • Factoring is when companies are paid based on a percentage of their accounts receivables.
  • Export credit or working capital can be supplied to exporters.
  • Insurance can be used for shipping and the delivery of goods and can also protect the exporter from nonpayment by the buyer.

Although international trade has been in existence for centuries, trade finance facilitates its advancement. The widespread use of trade finance has contributed to international trade growth.

“Some 80% to 90% of world trade relies on trade finance…” – World Trade Organization (WTO)1

How Trade Financing Reduces Risk

Trade finance can help reduce the risk associated with global trade by reconciling the divergent needs of an exporter and importer. Ideally, an exporter would prefer the importer to pay upfront for an export shipment to avoid the risk that the importer takes the shipment but refuses to pay for the goods. However, if the importer pays the exporter upfront, the exporter may accept the payment but refuse to ship the goods.

A common solution to this problem is for the importer’s bank to provide a letter of credit to the exporter’s bank that provides for payment once the exporter presents documents that prove the shipment occurred, like a bill of lading. The letter of credit guarantees that once the issuing bank receives proof that the exporter shipped the goods and the terms of the agreement have been met, it will issue the payment to the exporter.

With the letter of credit, the buyer’s bank assumes the responsibility of paying the seller. The buyer’s bank would have to ensure the buyer was financially viable enough to honor the transaction. Trade finance helps both importers and exporters build trust in dealing with each other and thus facilitating trade.

Trade finance allows both importers and exporters access to many financial solutions that can be tailored to their situation, and often, multiple products can be used in tandem or layered to help ensure the transaction goes through smoothly.

Other Benefits to Trade Finance

Besides reducing the risk of non-payment and non-receipt of goods, trade finance has become an important tool for companies to improve their efficiency and boost revenue. It can:

  • Improves Cash Flow and Efficiency of Operations
  • Increased Revenue & Earnings
  • Reduce the Risk of Financial Hardship

Cashflow Lending

Cash flow is essential for a healthy business, but sometimes you need a little help to keep things moving.

If you need extra cash to grow your business, cash flow lending is one financing option that may be helpful.

We explore how it works and how it differs from traditional business lending.

What is cash flow lending?

Cash flow lending allows you to borrow funds against expected future revenue for business purposes, such as investing in new equipment or temporarily covering wages.

Cash flow loans can be secured by property, however there are options that don’t require mortgage security. They can also offer repayment flexibility to suit business needs.

From a line of credit to a term debt facility, cash flow loans come in many shapes and sizes. Speaking with a broker can help you determine which product is right for you.

How does it work?

Lenders typically look at the health of your business to determine if you qualify for a cash flow lending solution.

Cash flow loans are generally suited to businesses that have gaps in their working capital cycle – such as needing to pay for expenses before receiving customer payment.

The amount you can access with a cash flow loan will depend on your business needs and financial circumstances.

How is cash flow lending different from a business loan?

Cash flow loans typically take the form of an ongoing line of credit or a cash injection from a short-term business loan.

While loans used to provide a cash flow boost are usually shorter than a traditional business loan, line of credit options are often revolving and may be subject to annual review.

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