Most business funding problems are not shortages of finance. They are mismatches — short-term facilities funding long-term assets, or long-term debt covering what is actually a working capital gap. Getting the instrument right matters more than shaving margin off the wrong one.
Overdraft: for fluctuation, not for growth
An overdraft is a revolving facility on your trading account. You draw as needed, repay as money comes in, and pay interest on what you use.
It suits genuine fluctuation — the gap between paying suppliers and being paid, seasonal swings, the timing of a tax payment. It is the most flexible facility available and priced accordingly.
The failure mode is the hardcore overdraft: a facility that never returns to zero and has quietly become permanent funding. Banks watch for this, because a permanently drawn overdraft usually means the business is funding losses or an asset purchase with the wrong instrument. If your overdraft has not touched zero in eighteen months, it is term debt and should be restructured as such.
Term debt: for assets with a life
A term loan advances a fixed amount repaid over a set period. The discipline is the point — the repayment profile should roughly match the useful life of whatever it funded.
Term debt suits property, business acquisition, major plant and any investment producing returns over years. What it does not suit is working capital, because a fixed repayment schedule against variable cash generation creates stress precisely when trading is difficult.
Watch the covenants. Term facilities commonly carry financial covenants, and breaching one gives the lender rights that can be exercised at the worst possible moment. Know what yours are and monitor them monthly rather than discovering a breach at year end.
Invoice finance: converting receivables to cash
Invoice finance advances a percentage of your unpaid invoices — typically a substantial majority — with the balance paid when the customer settles, less fees.
It works well for businesses with creditworthy customers on long payment terms, particularly where growth is consuming cash faster than it generates it. It scales with turnover, which term debt does not.
Two considerations. Cost is higher than conventional lending and needs to be measured as an annualised rate on the funds actually used, not as a headline percentage per invoice. And the arrangement may be disclosed to your customers depending on structure, which some businesses care about more than others.
Asset finance: funding the equipment itself
Asset finance secures against the asset being purchased — vehicles, machinery, plant, technology. Structures include hire purchase, finance lease and operating lease, and they differ in who owns the asset, who carries residual value risk and how the accounting works.
Because the asset provides security, approval is often easier than unsecured lending for the same amount, and it preserves other facilities for working capital. For businesses that need equipment to trade, it is usually the right tool.
The decision between owning and leasing turns on how long you will use the asset, how fast it depreciates, whether you want the residual value risk and your tax position. Run the numbers rather than defaulting.
Trade finance and specialist facilities
Importers and exporters have access to instruments built for the gap between paying for goods and being paid — letters of credit, trade loans, export finance. New Zealand Trade and Enterprise and the major banks both publish material on these, and exporters frequently do not realise the facilities exist.
What lenders actually assess
Whatever the instrument, the assessment is broadly the same: can the business service the debt from its own cash generation, is there security, and does the management team know its own numbers.
The third point is underrated. Businesses that arrive with current financial statements, a cashflow forecast that reconciles to reality, and a clear statement of what the money is for and how it will be repaid get better outcomes than businesses of identical financial strength that arrive without them.
The sequencing question
Before borrowing, check whether the problem is actually a funding problem. Extended debtor days, excess stock, underpriced work and unclaimed GST refunds all present as cash shortages and none of them are solved by borrowing. Fixing the underlying issue is usually cheaper than financing it.
General information only, not financial advice. Terms vary between lenders — get advice specific to your situation.
