Money (cash) is just another key component of business, similar to raw materials and labour. It should be accessed at the cheapest possible rate and with the greatest limits available, and with flexibility.
Perhaps it is time for owners of small businesses to have a look at the way they finance their day to day business activities.
In the vast majority of cases, the following statements would be accurate for most privately owned businesses:
- Their present bank overdraft facilities incur interest rates, fees and charges that are significantly higher than “home loan” rates.
- In many cases, these bank overdrafts are secured via mortgages over real estate that have a value well in excess of the debt. Yet their bank is reluctant to provide a reasonable overdraft limit.
- Additionally, many companies have had to provide as additional security for their overdrafts a fixed and floating charge over their business, known as a general security agreement (GSA), despite the significant equity in real estate held by the bank.
In the past few years two occurrences have led to a unique opportunity for businesses to substantially reduce the costs and constraints in a traditional bank overdraft and secure overdraft style facilities that are sufficient to fund the ongoing business. These two developments are:
- The real estate-secured loan market has become highly competitive, with many non-banking financial institutions providing excellent alternatives to the banks.
- Highly flexible services, with “come and go” facilities similar to an overdraft being arranged for amounts up to 80 per cent of property values, with no cost for undrawn amounts, no ongoing fees, no requirements for annual reviews and no charges (GSA) over the business.
In many instances the value of real estate owned by private business owners has substantially increased over the past few years, providing a much higher level of security on their original facilities, and as such they can now secure substantially higher levels of low cost, flexible overdraft style facilities.
Simple real estate-secured debt, arranged correctly, is the cheapest, most flexible structure for working capital and far superior to a traditional overdraft.
Mark O’Donoghue is the founder and CEO of Finlease.