Mastering your mortgage loan agreement…or risk turning out to be ‘Collateral Damage’
In any variety of financing, one must always study the value of the lines of credit of any business – and this ought to be something that is of crucial significance for SME’s that are looking to use a debtor factoring service. This post hopes to supply a simple breakdown of how finance companies look at the area of “collateral” and establish a few of the challenges when SME’s are seeking to use various commercial credit services at the same time.
A lot of SME’s in Australia make use of banking credit facilities just like credit cards and overdrafts. These products can supply SME’s with a “line of credit” that can be used as needed more often than not with a “credit limit” that sets out the maximum amount to use by the business enterprise. These products can provide SME’s with a good deal of flexibility to support them through times when they need some extra money to help the organization. One factor to keep of utmost significance, however, is for SME’s to be aware of the “security” that they have presented to the bank.
There are a couple of forms of lending in this area:
1. Unsecured – this means that the financial institution has extended the credit to the small enterprise without attaching a “security charge” to any particular assets. Financial institutions, on the other hand, rarely provide this kind of service except in quite small amounts like $20,000
2. Secured – in this types of credit line, banking institutions require property to ensure the loan if it is not paid back – the resource may serve as a collateral. In this situation, the standard bank would be able to have possession over the asset/s and liquidate them in order to be paid back for the sum it was supposed to be paid.
What we see all too often is where an SME carries a line of credit with the bank and is convinced that either (a) the loan is unsecured; or (b) that the loan is secured but that the lending institution’s security is barely over a unique asset say for example a personal property. Unfortunately, after a security search is executed on the ASIC register, you realize the bank in fact has a “fixed and floating charge” over the belongings of the company.
This “fixed and floating charge” is a security interest in all the belongings of the firm. A ‘fixed’ charge is attached to specific and physical property just like vehicles, property, equipment, etc. while ‘floating’ charges cover assets that can fluctuate in value with respect to the operations of the small business (e.g., cash, stock, receivables, and so forth.).
This ‘floating charge’ is what can be of most significance for an SME that is seeking to set up a debtor factoring facility – for example invoice factoring or invoice discounting. For the reason that commercial debtor factoring is the purchase of invoices to help the SME with income working capital, the accounts receivable should be free as well as clear of any security charge. The accounts receivables of any SME can’t be sold without the consent of the bank if a floating charge is in place; this is true even if there’s ample security in other properties.
SME’s must thoroughly read the loan arrangement on any existing lending facility so they can ensure that an application for invoice discounting or factoring line will be authorized. There will be a section called “Security” in the loan agreement which will set out precisely what belongings the bank will have as its guarantee for the loan. If the standard bank does have a floating charge over the belongings of the enterprise, then the SME and the factoring company can work with the SME’s lender on what’s known as a “subordination” where the bank may concur to putting its security interest in accounts receivable in a secondary position to that of the debtor factoring company to permit the factoring facility to be put in place.
If you need to find out more about invoice factoring, remember to feel free to speak to the Interface Financial Group (IFG) at phone number: 1300.957.900.
