A better understanding of security in finance can have a positive impact on your company’s ability to adapt to its future financial position.
Quick takeaways if you’re in a hurry
– Security allows a lender to protect the money it is giving to a client by registering an ‘interest’ against the equivalent value in assets
– A financier will assess how much money it can lend to a business based on a combination of internal and external factors. If these factors change the financier will reassess its lending position.
– Debtor and stock assets are key to maintaining your funding flexibility if your main provider declines a request for additional finance. Keep these assets separate from any finance agreements.
Read on: A quick guide to security in finance
(estimated reading time: 6 minutes)
Security is rarely a focus until it becomes a problem. The challenge is that if businesses don’t proactively determine their security position, they may find that they have reduced lending ability. So we’ve decided to share our insights into how security functions, how you can make the most of your situation, and why it is so important to the future of your company.
What is security?
It would be great if every business was given a crystal ball when they started, so that they could both see into and plan for the future. But even though there’s no crystal ball, it’s still possible to plan the best way to use your assets in order to stay flexible to whatever the future brings.
On its simplest level, security is the asset that lenders put their name against in case a business is unable to fulfil the conditions of their borrowing. Lenders register a charge in the PPSR (Personal Property Securities Register) against one or more of your business or personal assets. This effectively stakes a claim so that should you be unable to pay them, they can take the money that they are owed. Charges differ in type depending on what the assets are, and they are given priority based on the date they are registered. Basically this means that you can have more than one charge against the same asset, but in the event of selling that asset money is shared on a first registered, first rewarded basis.
To understand the security that you are committing to as part of any financial agreement, you need to look in the security section. You may not have been aware of this and if you weren’t you are not alone. It’s essential to use a lawyer to review the terms of any agreement that includes security, as the agreement can have longstanding repercussions if it is not handled correctly. The favourite form of security for most lenders (especially banks) is real estate, but it can be taken against any asset that you or your business owns.
Your finance set-up
When you start your business relationship with the bank, they will ask for security to protect the money that they are lending you to run your business. Like other lenders their preferred security is real estate, but it’s fairly standard for them to try and secure their agreement against any and all assets that your business has at its disposal. Naturally the more security you can offer the bank, the more relaxed they will be about giving you money. Being proactive in reviewing the security section of your agreement is key to protecting your business’s future position.
Our recommendation is that start up businesses try to keep their debtor and stock assets separate from their agreement with their bank. Part of the reason is because the bank attributes such a low value to these assets. Where an alternative finance provider like Fifo Capital would secure against up to 80 percent of your debtor assets, the bank would only attribute a value of up to 25 percent. The other key benefit is that keeping debtor and stock assets separate also keeps your options open for the future.
What does the future have in store?
When you start up, the bank offers your business funding based on your current position; the current status of the business sector that you operate within; and the current position of the wider market. All of these factors will inevitably change as time passes. Your customer base will shrink and grow. The industry may shrink and grow too. The economy could go boom or bust. Any single or group of changes could cause your bank to revisit its attitude towards your business borrowing.
When the bank assesses your position as having improved, they will in all likelihood increase your borrowing potential. But when their assessment of your position declines, the bank could freeze or reduce your funding. This is why it is important to have alternative sources of funding available.
What are the options?
There can be a variety of reasons why you require finance. You may be growing; you may have lost an important customer and need access to cash; you may just be trying to manage the cost of day to day operations. If the bank says no to your application for additional funding, what will you do?
Invoice finance is also known as receivables finance. It allows you to unlock the value of unpaid invoices – cash that was coming your way anyway – and use them to fulfil your current cashflow needs. If you’ve ensured that debtors and stock are excluded from your security agreement with the bank then it should be relatively easy to set up. Invoice finance offers you a quick finance option where lenders like Fifo Capital will allow you to access up to 80 percent of the value of an invoice up front. That will complement your existing relationship with the bank without negatively impacting it. Then, should the bank change it’s assessment of your position, you can return your borrowing needs to them.
Security often fails to be given the attention it needs until it is too late. Take a look through any finance agreements that you are currently in and consider your options. Plan now for what you will do if the bank cannot support your future business position. If you would like to understand the options that Invoice Finance presents, call one of our Business Partners today. Reviewing your security position in advance could take the headache out of getting fast access to funding in the future.
Invoice Factoring, Cashflow Finance and Business Loans
Fifo Capital specialises in invoice factoring and cashflow finance for small to medium businesses. Find out how we can help here.