Different types of business debt
There are a number of different debt solutions available to businesses. The ideal debt structure is very much driven by the underlying purpose for borrowing while taking into account the overall business goals and those of the business owners. For more detailed information on each type of debt product, to calculate how much working capital your business needs and the impact that each of these debt facilities can have on the pricing you are offered and how risky your business is perceived by lenders, please give us a call. In short the various debt facilities include:
Working Capital facilities
These are generally shorter term facilities used to fund the day to day ongoing operations of a business. Typically this type of facility is often used to bridge the costs of purchasing stock or meeting upfront and ongoing business costs pending the receipt of debtors. In effect therefore you are bridging the cash flow cycle from when raw materials are first ordered to the point when you get paid for a sale. Or in service businesses from the time you commence providing the service to the point you receive payent from your customer. While 'credit' offered by suppliers is the most common source of funding working capital, it is often necessary to also use bank overdrafts, trade finance, bank loans or Invoice financing. Typically a General Security Agreement (GSA) is taken over the fixed and floating assets of the business as security, and to give the lender a claim over the business cash flows (ultimate repayment source), but in some cases more tangible security will be required to support working capital facilities.
Business Loans and longer term debt facilities
Typically term debt is used for longer term debt requirements. This could for example be where a business has a larger more permanent working capital need, where a business is expanding into new product or service lines or geographic markets, when a business is purchasing assets for use within the business or for investment, or when purchasing a business or part of a business. Business loans can be over varied terms from typically 1 - 10 years, depending on the underlying purpose for the loan and the security being offered.
Term business loans will often require tangible asset supporting security (eg property, equipment etc), but many lenders are prepared to consider the business value and strength of cash flows in order to provide loans against only the business assets and value. These types of loans are typically higher risk and therefore higher priced and usually have shorter repayment terms and more monitoring conditions. The reasons behind this are explained further in our various ebooks. We are cash flow lending experts, and with these types of loans it is even more important to correctly represent your business to your bank and to know what your bank will need in order to find comfort to lend.
Commercial Property Loans
There are various types of property finance facilities available. As the name suggests, the underlying purpose of these facilities is to borrow against commercial property in some shape or form, whether this is to purchase, develop or improve a property, or to gear up against property assets for use of the cash raised elsewhere, known as equity release. Many borrowers are quick to ask 'what Loan To Valuation (LVR) can I get for a property?'. Well, the correct answer to this question is 'that depends on the quality of the deal'. While all banks have policy LVRs as a starting point, these are only guidelines and agreed LVRs very often differ from a lender's standard guideline, due to the reasons below. Finance Negotiators are able to not only advise you of the standard LVR guidelines but more importantly we can highlight any potential risks and offer possible solutions to improve your chances of getting the loan structure and terms that you are looking for. We know exactly what risks affect the offer you receive from a lender and have been very successful in reducing these risks for borrowers and lenders, leading to improved loan offers.
Owner Occupied Commercial Property Loans | Business Premises
Loans to businesses to purchase or refinance a property from which the business will operate fall under this category. The underlying purpose of the loan is to provide owned premises as an alternative to renting. The debate over leasing vs owning your business premises is an ongoing one, with strong arguments on both sides. In the end it comes down to individual financial and business strategies taking into account current market conditions.
Owner occupied commercial loans rely wholly or predominantly on the ongoing strength of your business to service the repayments. As such, robust business information is typically required to assess these types of loans. Often however, these loans are cheaper and have more generous terms than Commercial Investment loans. The borrowing entity does not necessarily have to be the same as the trading business entity in order to be classed as 'owner occupied'. It is quite common to have separate property owner and trading business companies / Trust / SMSF etc, but there are of course a few requirements to meet in this regard.
Commercial Property Investment Loans
These loans are typically part of an overall Investment strategy. The expectation is that over time the Commercial Investment property will provide regular cash flow as well as potential capital gains. Market conditions of course have a large impact in this regard. The servicing of these loans is typically via the net rental income collected from tenants. From an investor's and lender's perspective the quality and length of tenancies is therefore critical to ensure likely ongoing ability to service debt repayments. A valuation and lender risk analysis will therefore typically focus on these areas as well as the quality and location of the building, whether the current property rental is above or below market value, the ability to re-let the property if the current tenant leaves or cannot pay, and the weighted average lease expiry (WALE) or weighted average lease term or expiry (WALT or WALE), which is an average length of all remaining tenancies combined.
The strength of the above will ultimately determine the overall 'Loan to valuation', pricing and loan term that a lender will be prepared to offer you. Supporting income from outside of the commercial investment can be considered if further comfort is required.
At Finance Negotiators we are able to guide you through the process and ideal structure to suit your investment plans. The use of SMSF as borrowing vehicles is a growing area in this regard.
Property Development Loans
A development project can involve land sub-division, commercial property development, industrial property development, residential property development or specialised property development.
Loan terms, LCRs (Loan to Cost Ratio) and conditions vary significantly across these various development types and across lenders. In addition more upfront work and clarity is required by the borrower and lenders to ensure sufficient information is available to assess the various risks involved on this type of lending. It is important that your proposed lender is comfortable with the overall size, quality and location of the project, the experience of the project and construction team, the equity contribution by the borrower and funds available for any cost overruns and the market conditions that will affect the level and pricing of any sales or rentals on project completion.
We are able to ensure your development loan proposal is correctly prepared to significantly improve your chances of getting an approval while also ensuring the best available loan terms. We guide you through the entire process and ensure you are clear and comfortable on what the lenders will expect at each stage of the development.