546 Accounting: Business Reporting for Decision Making
• A bank overdraft is normally a loan facility attached to a cheque account. The loan is drawn down
only as required, when cheques written on the account exceed positive balances.
• Bank-accepted commercial bills (BAB) are a common form of short-term finance where banks
guarantee for lenders the repayment of their funds. Banks arrange the transactions and charge fees
for their services.
• Promissory notes (PNs) are similar to BABs, but they are not endorsed by an acceptor. As there is
no other party involved in guaranteeing repayment, the raising of finance by means of PNs tends to
be restricted to larger entities with good reputations and excellent credit ratings.
• Debtors may be used as security to back business loans by:- guaranteeing a general line of receivables or specific invoices
- factoring.
• Factoring gives the lender the right to collect the cash owing on invoices. The factor discounts the
invoices and hands over the cash. It then collects the amounts owing by the borrowing entity’s
customers.
• Inventory is also used as security for business loans. The most important example of inventory finance is
floor-plan finance, which is commonly found in the motor vehicle (cars, trucks and motor bikes) retail sector.
13.6 Sources of long-term debt finance
LEARNING OBJECTIVE 13.6 Compare the sources of long-term debt finance.
Again, remember the hedging principle suggests that permanent assets should be funded with long-term
funds. Long-term debt finance is supplied to borrowers through financial institutions acting as intermedi-
aries, or directly by the debt markets.
Intermediated finance
Australian entities tend to look to the financial institutions, in the first instance, as suppliers of intermedi-
ated finance. While larger entities with standing in the community (or internationally) are able to access
the financial markets and financial institutions for funds, smaller entities typically approach one or sev-
eral financial institutions for long-term funding.
For long-term funding purposes, most financial institutions offer:
- fixed-rate business loans
- variable-rate business loans
- instalment loans
- interest-only loans
- fully drawn advances
- lease finance.
Fixed-rate and variable-rate business loans
Fixed-rate business loans are available from most of the major financial institutions. Many institutions
prefer loans in the range from $100 000 to $2 million. Terms are usually given for up to 25 years. After
the expiry of the initial period, the rate may be fixed for a further period or converted to a variable
rate. These loans may be unsecured, secured with entity assets or secured with residential property. The
availability of acceptable security naturally affects the interest rates charged. Repayment conditions are
negotiated to suit the business conditions of customers. Variable-rate business loans are also available
from most of the major financial institutions and amounts available vary up to about $2 million. Terms
are available up to 25 years. Interest rates vary in line with changes in the markets and depending on
security and loan terms and conditions. The lender will also assess the risk of the entity to determine the
excess interest rate the entity is charged over and above a base rate. Many financial institutions offer flex-
ible draw down of the contracted loan amounts and flexible repayment schedules. JB Hi-Fi Ltd reported
$139.4 million of bank loans secured against its assets for the reporting period ended June 2015.
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