Business overdraft after 12 months+ in operation

Not sure if this is the best place to post so mods please feel free to move if appropriate.

A mate of mine has been in business for a few years now but he told me after his first 12 months of operation, he called up ANZ and got a business overdraft. His tax return/noa was at a loss for that first year but the ANZ business banker said it didn't matter as business overdrafts were calculated based on sales/revenue. His business transactional account was also with them so they saw in the system that he turned over ~1mil in the first 12 months. The banker pretty much said he's eligible for 80k and just needed to fill out an application form - didn't need to submit tax returns, noa's, or financials to accompany the app.

Has any one here experienced something like this and/or can any of the brokers on this forum that deal with business lending confirm that overdrafts can be done simply based on turnover/sales amount?

 

Yes they can

 

Thanks @Terry_w from your experience what other banks do this besides ANZ?

 

All

 

I think that rather than receiving an arbitrary sum based on turnover a business should forward plan their needs. A forecast profit and loss that ties into a cashflow statement will give a clear picture of what your business needs are for financing.

And the forward plan should be based on the return on investment the family is wanting to generate from their business asset.

You also pay for unused facilities (generally).

 

Thanks Ross. So in a situation where a business is going through a growth phase and can forecasts that there'll be a short period (say a month or two) where there will be a shortfall of funds (say 100k), would you recommend having an overdraft available or go for a business loan well before it's needed?

My mate was telling me he pays approx $400 a quarter for his anz overdraft regardless of whether funds are used. I also believe the overdraft is ~ 2% higher interest rates than an actual business loan. He did mentiom though that an overdraft is generally a lot easier to get vs a business loan, less hurdles to jump through. Is there any truth to this?

 

An overdraft can be an effective solution for many businesses with cashflow cycles.

Just make sure that the business uses the full range of the overdraft (so it ends up with cash in the bank at least once a year).

I have seen many businesses with say, a $700k overdaft limit and the facility ranges from $650k in debt to $700k in debt.

What that business should actually have is a $50k facility.

Also the cost of the overdraft should be compared to the return on investment the business can enjoy from the use of funds elsewhere. Typically a business will generate 25% ROI to 55% ROI so a 6% interest cost on a OD facility (say) is a better business decision.

 

Your first choice, as a company, should probably be a related party loan. You could lend the company the money by borrowing secured on property you own, and have a written loan agreement in place.

This will result in the lowest interest rate.

 

Commercial lending is a whole new world. A business owner can get a car loan with a driver's licence, medicare card and self-declared income.

There has been some noise lately about tightening up lending in commercial land, let's see if anything comes of it.

 

Do you guys know roughly how the banks look at calculating what's available for an overdraft? I heard as a general rule of thumb it was approximately 10% of turnover but have also heard it can be higher than this, around 20%+ ?

 

Not to sidetrack the topic but if I were to have a choice between getting paid as an employee vs ABN/Company structure - it is actually better in terms of borrowing capacity and what not with the latter?

 

Mostly yes, especially in the first years setting up the business.

The drawback is in many fields it's difficult to get a really high income and flexible working hours payg.