Looking for a cheap business loan?

Getting a real cost before agreeing a business loan means digging into the small print and getting your calculator out. However, other forms of lending such as Invoice Finance or Invoice Discounting are actually much clearer about the costs involved.

APR works for business loans

When a bank or alternative lender is trying to persuade your business to choose them, they have ways of promising rates that look very reasonable. Remember that the lender also charges various fees for setting up and providing a business loan, and these should be incorporated into calculations of the real cost of lending. Others charge a “factor rate” which is expressed as a decimal figure and not a percent. This figure differs charged against the principal rather than the outstanding balance and hence looks lower than it actually is.

The best way to compare loans is therefore by looking at the annualised percentage rate (APR), which includes all of these fees to give a more realistic idea of what the loan actually costs. Even then, it can be hard to know exactly what you are getting. Until very recently Australian banks were almost universally operating a system that gave them sweeping powers to close business overdrafts and withdraw business loans without notice.

Thanks to the recent work of the Australian Small Business and Family Enterprise Ombudsman, the banks have agreed to change their ways. But they retain their ability to vary contracts under certain circumstances.

SMEs can also seek a business loan from an alternative lender that are called “unsecured Loans” although many of them are secured by a personal guarantee and because they carry out little due diligence, the APR can be very high – up to 72% from some lenders.

Invoice discounting is the real alternative

The so-called alternative lenders aren’t really so different from the banks. On the other hand, businesses do have the option of using their unpaid invoices to raise money, and this is a very different proposition from a technical point of view.

Invoice discounting, and other forms of cashflow finance such as factoring or Invoice Finance, are explained on our website, but how can you compare the cost of raising money this way with other forms of business finance?

Often many accountants and business advisers try to compare invoice financing directly with business loans by simply annualising the discount rate – effectively, the fee that a company like OptiPay deducts for advancing cash against your invoice, but using receivables in this way is actually the sale of a company asset (the invoice) at a small discount to the face value or pool of invoices under a facility provided by OptiPay A discount rate of say 2% for 30 days should not be accurately described as a 24% APR, any more than a business offering a 5% discount for early payment of a claim would be thought of as offering credit at 60% per annum and that because an invoice may only be repaid every 45 days (i.e. 8 cycles in a year instead of 12).

With flexible invoice discounting you retain total control and know exactly what you’re getting. Effectively, it’s a fixed and known fee with the finance company collecting its fee only when your debtor pays the invoice/s you have issued to them.

So, your business is advanced funds against the face value of invoices under a facility provided by OptiPay and fees are only paid 30, 60, 90 or 120 days later when your debtors pay their invoices. No regular payments to service the accounts, funds in your account immediately and an ability to use all or nothing of the facility (revolving line of credit). Thus, providing absolute flexibility and reduced costs.

This, however, is just the start, canny businesses can land up getting their money a zero effective cost and even make a profit on their cash flow funding provided by OptiPay simply by coupling Invoice Finance together with a Supply Chain Funding facility.

To find out how easy this can be, get in touch with our friendly support team.