Getting loan finance for your business can be exhausting. You have to update your business plan and your accounts, explain your operation to a lending team, educate them about your market, and inspire them with your vision.
It’s no wonder many business owners don’t want to go through the process again any time soon. But there comes a point when you owe it to yourself to take a fresh look at your options.
Here are six situations that should prompt you to consider refinancing.
1. Your borrowings are secured against property
Business owners commonly take a loan against their residential property, often the family home, when they start out and need finance. Back then, the headline interest rate might have looked attractive, but now it’s time to consider the downside.
If you pledge your property as security on a loan, your home is on the line. If your business fails, you may have to sell it, jeopardising the stability of your family life. There are also opportunity costs to consider. If your property is already being used as collateral for a business loan, you can’t borrow against it for purposes such as a holiday home, share market investments, or education expenses for your children.
Apart from that, borrowing against your home may not be the best move for your business anyway.
Traditional finance houses are conservative by nature and may not offer you the highest possible “loan to value ratio”, or LVR, and therefore refuse to release the full value of your house. Even when the housing market rises, renegotiating the loan to extract more value from your asset may be tedious and bureaucratic.
There is also the risk that if the housing market collapses, the price of your home could crash, taking your business with it. Even if it merely stagnates, or fails to grow as fast as your business does, your home could put the brakes on your business expansion by limiting access to funds.
Financing your business by borrowing against an external asset also makes it harder to sell as a stand-alone enterprise. But if you fund your business internally, you easily deepen the pool of potential buyers.
2. Your business needs more flexibility than your lender's rules allow
Some financiers impose strict conditions, known as covenants, on loans in the form of metrics that govern your liquidity ratio, balance sheet strength, cash flow conversion cycle and other aspects of performance. Working within these rules can absorb lots of time and energy and, even worse, severely limit your freedom of action. If you’re feeling hemmed in, unable to take advantage of opportunities, take this as a signal to look for a lender that is as quick and adaptable as you are.
There are smarter ways to access the level of funding business needs, without needing to cede a degree of control over the business’ direction.
Invoice finance allows you to neatly separate your personal and commercial dealings and funding grows in line with your business. Indeed, this form of finance supports businesses through the whole business lifecycle from growth to turnaround, refinance and restructure. We approve funding applications within 24-hours, giving your quick access to cash, without the headache of applying for a loan from a bank, which is much more time consuming and requires tedious paperwork.
3. You need to borrow more than your current limits allow
Let’s say your business enjoys an upswing and you suddenly need more working capital. A traditional loan will have strict limits on how much money you can access, depending on the value of the collateral you have pledged and the covenants you’ve agreed to.
Maybe your lender is unsympathetic for reasons that have nothing to do with you. It could be responding to regulatory changes or to forces in international financial markets. Whatever the cause, your business has outgrown your facility, and while you are looking for extra finance your competitors are taking advantage of the gap you leave.
Invoice financing would solve this impasse, because your “limits” rise in line with your receivables. If you make some big sales one month, the funds available to you automatically increase to match. If sales drop back again the next month, your borrowing limit will reduce, so you’re not overextending your business. It's like an inbuilt protection against taking on too much debt.
4. Your lender doesn't understand your business
Big finance houses may know a little bit about a lot of different things, but they can’t always develop detailed knowledge of your market niche. You need a client relationship manager who knows your industry, understands the sector and market you’re operating in, and is in tune with your ambitions.
With invoice finance, you have a dedicated Client Relationship Manager who knows your industry thoroughly and will work with you to develop an in-depth appreciation of your business.
5. You need a lender who will support you as you grow
Your primary aim is to grow your business, and you accept that this entails accepting risk. But for many lenders, the main aim is to deliver stable returns to shareholders – and this means avoiding risk. To them, your expansion plans may look like a threat rather than an opportunity. And their reluctance to go along with your dreams can slam the brakes on finance, when you need it.
With invoice finance, your supported as you grow, so the amount you can borrow is automatically matched with the amount you sell, so the lender has no reason to fear you’re becoming over-extended. Your shared purpose underpins the sort of long-term relationship that will see you through the tricky passages as well as the smooth sailing.
Invoice financing, secured against receivables, is the logical choice if you’re facing any of these five scenarios. A financier typically advances 80 per cent of the value of the invoice as soon as you issue it, and provides the balance, less a small fee, once the transaction is completed.
An invoice finance facility keeps your business dealings separate from your personal dealings, gives you the flexibility you need, and fosters a stable relationship with a sympathetic loans manager who is as agile in the market as you are yourself.
6. Your lending costs are too high
Lending costs impact on your margin, just like any other cost. And just like any other cost, if it becomes too high then it needs to be reviewed. Lenders are always reviewing rates and new products are always being delivered to market so there is often choice. Always look at the annual percentage rate (APR) when comparing lending solutions and take into account any additional costs such as establishment fees.
Generally speaking, the less secured the funding, the smaller the amount, the faster the decision and the shorter the requirement term, the higher the price, as these are aspects for which businesses are generally prepared to pay a premium. However, if your business requirements have changed you may find that you no longer need to pay that premium and should look to reduce your cost of financing.
