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Is it time to review your loans?

It’s always a good idea to understand your loans and how they work for your business. We talked to some experts and they offered these tips.

31 October 2023

For businesses, taking on debt in the form of loans or overdrafts can be necessary to finance growth and purchase property or equipment.

However, with interest rates and cost pressures high, it pays to be on top of your debt. Sarah Eifermann from SFE Loans says businesses should regularly review their loans.

Anne Simmonds from One Ledger agrees.

“Consistently reviewing your financial status will enable you to pinpoint areas for potential cost savings and assist with managing your cash flow. I would suggest at least reviewing once a year or when priorities and strategies change,” she says.

Dealing with a high interest rate environment

In October, the Reserve Bank of Australia announced they would keep the cash rate on hold at 4.10% – a full 4 points higher than May 2022. At the same time, governor Michele Bullock flagged that more might be necessary, and analysts are now predicting that rates to remain high throughout much of 2024.

So, what should businesses be doing in this environment? Simmonds says that there are several ways to ensure your business remains healthy in a higher interest rate environment.

“Ensure that your budget is resilient enough to accommodate anticipated rate increases,” she says.

“Keep a watchful eye on cash flow – it’s of paramount importance in the current financial climate. Meticulous cash flow management is the key to ensuring adequate funds for covering operational costs and servicing debt obligations.”

She also says not to neglect necessary investment in your business, such as developing new products and services or hiring staff.

“Lenders continue to have an appetite for lending in various areas including cash flow support, term debt, or asset finance,” she adds.

Picking the right loan

When it comes to options for financing, it’s important to have a strong grasp of your needs and the types of loans that can meet them, Eifermann says.

“You want to be paying as little interest as you possibly can. That comes back to solid business planning and knowing your cash flow, as well as understanding the different types of loans that are available,” Eifermann says.

For example, an unsecured overdraft might have a higher interest rate, but interest is only charged on the days you use it – so if you’re only going to use it occasionally, then it may work out cheaper. On the other hand, if you plan to use it for longer, another option might be better.

Some common types of debt businesses use are:

  • Commercial loan. Generally, this is a loan for purchasing commercial property, secured against the property.
  • Overdraft/line of credit. A type of flexible business finance that allows you access to cash, up to a set amount. Similar to a credit card, you only get charged interest on the amount you draw down.
  • Invoice finance. If a business has outstanding invoices, then invoice finance will pay typically 80% of the outstanding amount – usually for a fee and interest.
  • Equipment finance – can be used to finance commercial vehicles and equipment and is typically secured on the asset.

Interest rates can vary, so it pays to shop around, Eifermann says. A broker can be a good source of help here.

Should I pay down debt?

Eifermann says businesses that are doing well financially can certainly pay down their debts.

However, always do so with careful consideration of cash flow – because there’s no point in paying down a loan if you’re going to need a big lump of cash for your summer stock order three months down the line. Another thing to keep in mind is that it can be expensive to get out of certain fixed-term loans.

“A lot of people are debt averse. They don't like borrowing money because they think it gets them into trouble. However, if you understand your cash flow and ability to meet repayments, and pick the right type of loans, then there’s nothing wrong with having debt,” Eifermann says.

Take action early

If you have any doubts about your ability to pay off your loans or to maintain your cash flow, then it’s best to address them right away.

“As soon as you notice that something's not quite right in your business, reach out, because a small overdraft or loan may completely turn your business around. But if you wait until you need a lot of money, you could be in trouble. And at that point the only debt you might be able to access is an unsecured facility with an interest rate of 40%,” Eifermann explains.

Simmonds adds that businesses shouldn’t be afraid to speak up and let their lender or broker know if they’re having issues. Some solutions might be available, such as renegotiating loan terms or working with an accountant to implement a solid budget.

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