The complete guide to short-term business finance in Australia

Short-term business finance is one of the least well explained products in the Australian market, largely because the people selling it benefit from the confusion. This is the version we would give a client on the phone: what it is, what it costs, how the decision gets made, and the questions worth asking any lender — including us.

What it is

A fixed amount advanced once and repaid on a fixed schedule over a short period. Ours run from $5,000 – $500,000 over 3 to 6 months, repaid by weekly or fortnightly direct debit from the business account. The total repayable is set the day you accept the offer and does not move afterwards.

It is business-purpose credit. That places it outside the National Consumer Credit Protection Act, which is why it can be assessed in days rather than weeks — and also why the consumer protections you may be used to, including statutory hardship rights, do not apply. That trade is the single most important thing to understand before taking one.

What it is not

• Not a line of credit. It is drawn once. Repaying it early does not free the limit to draw again.
• Not a substitute for a term loan. A three-to-six-month facility funding a five-year asset is a mismatch that shows up as a refinance you did not plan.
• Not consumer credit. It cannot be used for personal, domestic or household purposes, and you will be asked to declare that it is not.
• Not priced like a mortgage. The number on the offer is not an annual rate, and treating it as one will mislead you in both directions.

How the cost is expressed, and why it confuses people

Most short-term lenders quote a factor rate — a fixed multiple applied once to the amount advanced. Borrow $50,000 at a factor of 1.15 and you repay $57,500 in total, whether the term is three months or six. It does not compound and it does not move.

This is where comparisons go wrong. A factor rate is not an annual percentage rate and cannot be read as one; the same factor over three months is a far more expensive proposition than over six, because you give up the same money in half the time. There is only one number that compares two offers honestly, and it is total repayable — principal, establishment fee, and every other charge, added together.

Ask for that figure in dollars. Any lender that will not put it in writing before you sign has told you something useful.

What it is normally used for

The facilities that work have a specific purpose and a visible end. The ones that do not tend to be funding a gap nobody has measured.

• Stock for a peak that is already on the calendar — see stock for a seasonal peak.
• Bridging the gap between doing work and being paid for it, where the debtor is real and the terms are known.
• Wages and supplier payments through a quiet quarter that has an end date.
• Clearing an ATO balance that is blocking something specific. See ATO payment plans vs short-term finance.
• A repair or replacement the business cannot trade without and cannot wait a month for.

How a lender decides

For a facility of this size and length the assessment is mostly arithmetic on your bank statements. We are asking one question in several ways: can the business meet this repayment out of its ordinary revenue, in a soft week as well as a good one?

• Trading history. An active ABN and at least six months of trading.
• Revenue. Regular turnover, in our case from around $10,000 a month, read from the statements rather than from a forecast.
• Servicing. What share of revenue the repayment would take, and what is left for everything else.
• Conduct. Dishonours, overdrawn days, and how many other facilities are already debiting the account.
• Identity and purpose. Who the entity is, who the directors are, and that the finance is for a business purpose.

Getting the statements right removes most of the friction. There is a short guide to that in getting your bank statements assessment-ready.

Security, guarantees and what you are signing

Facilities this size are commonly unsecured in the sense that no specific asset is mortgaged, but that word does more work in marketing than in the documents. Two things are routine and both matter.

A director guarantee makes a director personally liable if the business does not pay. A general security agreement gives the lender an interest over company assets, usually registered on the PPSR where anyone looking at the business can see it. Neither is unusual. Both should be read before signing rather than after, and there is a longer treatment in director guarantees explained.

The questions to ask any lender before you sign

• What is the total repayable, in dollars? Not the rate. The number.
• What are the fees, including the ones that only apply if something goes wrong? Establishment, dishonour, default, early repayment.
• Does repaying early cost me less? With a factor rate, usually not — which is worth knowing before you plan around it.
• What exactly am I signing personally? A guarantee, a GSA, both, and whether the guarantee is capped.
• Who makes the decision? A lender using its own capital can answer that. A broker cannot, and may be introducing you to a lender you never see.
• What happens if I am late? Ask now, while it is hypothetical.
• Will this be registered on the PPSR? It is public, and your other financiers will see it.

When it is the wrong product

When the purpose has no end date. When the business would need to refinance the facility to repay it. When a bank overdraft at a fraction of the cost would do the same job and the business can wait the extra fortnight. And when the honest answer to “what does this fix” is “this month”.

We decline applications for these reasons regularly, and a short note on the most common ones is in why we say no. If you want a read on your own position, check your eligibility — four steps, and it does not affect your credit file.