Choosing the right kind of business finance can be difficult. Banks and other lenders offer a range of business loans including overdrafts, lines of credit and fully drawn advances.
An overdraft facility can be attached to your business account with an agreed overdraft limit. Security is usually required together with a credit assessment of the business viability.
The purpose of an overdraft facility is to provide working capital for the business before income is received. It should not be used for capital purchases or long term financing needs. Overdrafts can be secured or unsecured and their fees depend on the credit limit.
A line of credit
A line of credit or equity loan can provide access to funds by allowing the borrower to draw on an account balance up to an approved limit. As long as the balance does not exceed the approved limit, funds can be drawn at any time.
These loans are usually secured by a registered mortgage over a property. You are usually required to make payments to at least cover the interest and fees on the loan.
The main advantage of a line of credit is it’s flexible – like an overdraft it can be drawn as the need arises. It can be used to access funds for working capital requirements. As this type of loan is usually secured against property, interest rates tend to be lower than for overdrafts. However, if you fail to make your payments you can put your property at risk.
Fully drawn advance
A fully drawn advance provides access to funds upfront and is used for funding long term investments such as a new business or equipment that expands the capacity of the business. It is not the same as a short term loan that you would use to help with cash flow and fund the day to day running of the business.
A fully drawn advance is a term loan with a scheduled principal and interest repayment program. These loans are usually secured by a registered mortgage over a residential or commercial property or business asset.
The advantage of using a fully drawn advance for business investment is the interest rate may be fixed for a period, providing certainty and stability for repayments.