What Is Unsecured Finance?
Unsecured finance is where a loan facility is established without the use of collateral security such as residential or commercial real estate.
What Types Of Unsecured Finance Is Available?
There are a number of different facilities available which vary in how the funds are disbursed to you, the assessment, and also in the method of repayment. The types of unsecured facilities are:
Business Cash Flow Loans
These loans are based on the monthly cashflow of the business and were originally designed to be used for businesses with high daily transactions through eftpos facilities. In recent times they have migrated to be used for a wider variety of businesses, with repayments structured to suite the revenue of a business. Loan terms could be anywhere from 1 month to 24 months, however the preferred term is 12 months.
Invoice Factoring / Invoice Discounting
These facilities are offered based on the invoices by your business. If you’re customers have 90-day terms on the invoices, this can severely affect your business and your business cashflow. We find businesses mostly suffer when there is a change in terms on the invoices where 30-day terms are extended to 90-day terms and your business needs to cover a further 60 days before receiving revenue.
In these instances, you can obtain finance against the outstanding invoices and receive up to 80% of the outstanding invoices. The remaining 20% is received once your customer pays the invoice (minus the interest and costs which vary depending on term of invoice). As the costs are associated to the invoice they are not an ongoing overhead to your business and are associated to a cost of the transaction.
Variations in this type of facility include:
- Based on whether the factoring company requires all invoices to be factored, or on an ad-hoc basis on individual invoices that you determine.
- Collection of invoice payments; some factoring companies collect payments while others allow you to receive the funds and pay back the funds owed to the factoring company. The difference is in whether your client knows about your facility, or it is sitting in the background and your invoice collection processes don’t change.
Invoice finance is where funds are provided to pay your invoices directly, while you retain the cashflow of your business which can be used for other purposes. Usually funds can also be provided for cashflow purposes, however this is usually limited to small amounts up to $15000. Invoicing Finance is largely used for business expansion, or minor fit outs and are very good facilities for new, or recent start up businesses where there is little evidence of cashflow. The facility amount offered would be largely based on the company and personal credit scores, hence clean credit would be mandatory requirement.
What Purpose Can Unsecured Finance Be Used For?
Unsecured finance can be used for a variety of purposes, with each facility noted below having a different intention and purpose. One of the main underlying purposes would be the ability to secure finance without the use of real estate security. This would be useful where there are multiple directors and a secured finance facility would either have the loan secured against one or multiple directors properties, which could potentially cause future issues with refinancing or the directors personal investment interests.
Unsecured facilities can be established in the business or company name, without the need to implicated personal security in the borrowing of funds. If the facility was established in the personal names, then there would need to be an accounting process implemented to accommodate the business borrowing the funds from the individual directors. As an individual; when lending funds to your business a PPSR security would usually need to be applied to secure your personal interests in the event of a business wind up.
In any case, these are all the issues that could potentially occur when using secured facilities. Secured facilities have risks and benefits, along with unsecured facilities having different risks and benefits.
Loan Saver Networks team can assess the benefit and risks for each type of facility and assist in developing a strategic approach to your business financing requirements.
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