Understanding bank guarantees, debtor financing and mezzanine finance

Sometimes your small business needs some extra cash, fast. But it can be hard to understand your small business finance options.

Let’s take a detailed look at bank guarantees, debtor financing and mezzanine finance.

Bank guarantees

As the name suggests, this is a payment guarantee is offered by a bank, credit union or similar financial institution.

How it works

  • Your small business deposits a specified amount of cash or provides an agreed asset to the bank for them to hold as security.

  • The bank then issues a guarantee to pay out this amount to a particular beneficiary on your behalf, should you fail to meet your payment obligation. It’s basically a formal ‘promise to pay’ from the bank.

  • A bank guarantee is most commonly used in contracts such as a lease on retail or commercial premises. They’re also used in joint venture and service agreements.

  • It provides the beneficiary – such as the owner of a property your business is leasing – with peace of mind. They know that if you fail to pay them, the bank guarantee means your bank has to.

Debtor financing

This type of small business finance involves you using your outstanding incoming debts as security for a cash loan.

How it works

  • You provide the institution lending you the cash with the details of your small business’ unpaid incoming invoices.

  • The lending institution reviews these to determine an agreed value, and provides you with cash funds to this amount.

  • In return, your small business transfers ownership of those unpaid invoices to the lending institution, who collect the repayments.

  • There’s two types of debtor financing:

1.       Invoice factoring

  • This is typically used when your small business has a cash flow problem.

  • The lending institution provides you with a cash loan as well as advice and assistance with collecting your unpaid debts.

  • The cash funds are usually provided to your business in two instalments. The first is around 80% of the invoice value. The second instalment is paid to you once your customer pays their outstanding invoice, and is the remaining balance less the lender’s fees.

2.       Invoice discounting

  • This option is typically used by bigger companies with accounts and collections departments.

  • A lender provides you with a line of credit that is linked to the value of your outstanding invoices.

  • Your business then manages the collection of unpaid debts yourself.

Mezzanine finance

  • This is a cash loan to your small business that is typically secured by equity, or ownership, of the business itself.

  • In other words – if you fail to repay the cash loan, the lender can claim ownership of your business.

  • This type of finance tends to be offered by alternatives to the banks and credit unions. It can be a quick and easy way to get the additional finance your small business needs for a special project.

  • Take care though, as mezzanine finance can attract high interest rates, fees and charges.

  • You’ll need to be certain your business will meet its repayment obligations, or you could lose ownership of your business.

Need another option for a quick cash injection for your small business?

For information on how your small business can access fast, flexible and hassle-free finance, talk to us at Limba.

  • We understand small business first-hand and know the challenges you can face. If you haven’t been trading for long or need a cash injection quickly, getting support from the big banks can be tough.

  • Unlike the big banks, we want to make like easier for small business, with easy access to additional cash flow. We offer unsecured business loans up to $10,000.

Let us help your small business build and grow

  • Limba can offer your small business:

    • a streamlined application process

    • a Business Specialist to assess your needs and guide you through the application process

    • fast approval and next day funding

    • no hidden fees

    • easy weekly, fortnightly or monthly direct debit repayments

  • Jump online today to request an obligation free quote for your business finance needs. During business hours, we’ll email you a quote within an hour!

Applying is easy!

The application form only takes approximately five minutes to complete.

  • Our friendly Business Specialists will call and assess your needs, advise you of the outcome of your application and recommend a suitable repayment schedule.

  • Funds can then be in your account the next business day!

  • Call 1300 10 10 77, or email us at business@limbaloans.com.au.

  • You can also apply online today!