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What is Short Term Business Finance?

24 October 2012

Short term business finance allows individuals, partnerships, and corporations to borrow funds for any commercial purpose. Without this type of funding many businesses would not exist today. This is an extremely important part of Australia’s economy.

Some Examples are:

  • Cash Flow
  • Taxation debts
  • Purchase stock
  • Turn an idea into a business (start up costs)
  • Purchase a business
  • Pay outstanding invoices
  • Council Approvals/Head Works,
  • Purchase real estate other than for personal purposes. (Commercial, Retail, Industrial, Residential*)

Business Finance is broken up into two sectors: secured and non-secured loans.

UNSECURED LOANS

As the name suggests these loans are not secured against anything of value. The funds are leant against the borrower’s ability to pay back the debt and their past behaviour with paying back funds.

There are very few lenders in the market that will do unsecured business loans as loans for commercial purposes are considered higher risk in the industry than those for a more personal purpose. The majority of these types of loans are just business credit cards issued from the banks and credit unions.

SECURED LOANS

This is the majority of the business funding throughout Australia. These loans are secured against something of value. Whether it be secured by the business itself or against tangible assets such as real estate, cars, boats, etc. The idea behind this type of lending is to offset some of the risk associated with business loans for the lender. If the client defaults and is unable to pay back their debt then the lender can seize the asset(s) that has been put up as security and sell the asset to try and recover the loan.

Crown and Gleeson only do secured loans.

Types of Secured Funding

Caveat Loans

A caveat loan is a loan that is to be secured over real estate with a caveat only. What is a caveat? A caveat is a document that can be lodged on the government records of ownership (Title) of the secured real estate. A caveat will stop all other dealings on that property. This prevents the sale of the property or acts as a warning to other lenders that the property has been used for security..

A caveat gives a lender an equitable interest in the property however does not give them the right to sell the property.

It is rare to find a lender that does true caveat lending. Many lenders advertise that they offer caveat lending, but instead they take second mortgages and call them caveat loans.

Crown and Gleeson do not advertise that they offer caveat loans. Instead Crown and Gleeson offer a combination of Caveat and Mortgage loans that have all the benefits of a caveat loan including speed but with the benefits of a mortgage loan.

Mortgage Loans

A mortgage loan is a loan that is secured by a registered or unregistered mortgage. A mortgage is a land document that can be lodged on title and protects the lender's interest in the property and gives them rights to sell the property in the event of default. A mortgage can take anywhere from 7 days up to six months to be registered on title depending on the Title and what state of Australia the property is located.

The benefit of a mortgage over other types of secured loans is that more than one lender can lend against the property. These types of loans are called second mortgages. They are called this because the second lender ranks second in priority to the lender that was already registered on title.

These are the most common loans offered in the business finance industry.

Crown and Gleeson specialises in being able to offer first and second mortgage loans.

Personal Property Security Secured Loans

A Personal Property Security Secured Loan is a loan that is secured under the Personal Property Security Register. The Personal Property Security Register has replaced REVS (Register of Encumbered Vehicle Search). This allows lenders to secure an interest over things such as cars, boats, planes, helicopters, tractors, trucks, and pretty much anything of value. These loans can be done very quickly and easily without hassle or red tape.

For a lender to lend against this type of security the client must not have any other finance owing against the asset and must be the true and beneficial owner of that asset.

Crown and Gleeson offers this type of finance as well as non-recourse loans.

Line of Credit

A line of credit is usually a mortgage loan with a few very nice extras. These extras include the ability to pay down the loan as much as you want at usually no extra cost which in turn reduces the amount of interest the client pays AND then allows you to redraw those extra funds when required.

ALL Crown and Gleeson loans have line of credit facilities at no added cost.

Mezzanine Finance

Mezzanine Finance is finance secured only against the business itself. The company borrowing the money puts up the company as security against the debt and if the debt is not repaid then the lender will have the right to convert the ownership of the business to them and keep or sell the company.

Crown and Gleeson does not offer this type of finance.

Debtor Finance (Invoice Finance / Factoring Finance)

Debtor finance is finance that is secured against outstanding incoming invoices. The client will provide the lender with a number of invoices for work that has been completed but payment has not been received. The lender will then advance funds to the client and transfer ownership of those invoices to the lenders and collect those payments.

Crown and Gleeson do not offer Debtor finance.

Overdrafts

Overdrafts are offered by banks and credit unions. They usually attach to a trading bank account and allow the business to put that account into a negative when needed to allow the business to continue to operate. These range in size depending on the security offered by the client. In some cases overdrafts can even be unsecured for small amounts.

These are very convenient types of loans for businesses as the loan rolls into their trading bank account and as their trading improves it pays off the debt automatically.

Crown and Gleeson do not offer overdrafts.

Leases and Hire Purchases

Leases and Hire Purchases are used by businesses to purchase equipment and vehicles. Depending on the business these types of loans can be beneficial for tax purposes.

While Crown and Gleeson can funds for the purchase of business equipment they do not offer Leases and Hire Purchase contracts.

Bank Guarantees

These are only offered by banks and credit unions. The client either deposits the amount of the guarantee to the bank as cash to put in a term deposit or provides real estate security. The bank then guarantees to pay the guarantee amount on the occurrence of a certain event or default.

These are usually given with Retail and Commercial shop leases. If you were to lease a shop from Westfield you would be required to put up a bank guarantee to Westfield for an amount to cover a period of rent and to clean and fix the premises in the case your business was no longer able to pay its rent.

If this article was helpful you may also find Why Use Short Term Business Finance valuable.

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