Start from a business like yours
Each preset fills the figures below with a typical pattern; change any number to match your own. The notes under each box say where to find the figure.
Your business
The facility size is the cash tied up in the cycle, plus one slow month of fixed costs, plus the growth in the cycle next year. It is a starting point for the conversation, not a lender's assessment; lenders size an overdraft on turnover, conduct and security, and invoice finance on the quality of the debtors.
Which line of finance covers which part
| Need | Amount | Fits | Indicative annual cost |
|---|
Costs are indicative mid-points of what each facility type has recently cost a trading business with clean conduct: overdraft and line of credit around 9–12% on the drawn balance plus a line fee; invoice finance 1–3% of invoice value a month depending on days outstanding; insurance premium funding 6–10% annualised over ten monthly instalments; equipment finance 7–11%; unsecured business loans 15–30% annualised once the factor rate is converted. Not offers, and they move with the cash rate.
The idea in plain words
Say you run an electrical business turning over $120,000 a month. You buy the materials and pay the apprentices this month, and the builder pays your invoice in about 45 days. By the time that money arrives, you have already paid for next month's materials and wages too. The money you are waiting on, roughly $180,000 at any moment, is the cash your business has to find from somewhere while it waits. That "somewhere" is the facility, and this page sizes it.
Three things make the gap bigger: slow-paying customers, stock or half-finished jobs sitting unbilled, and growth. One thing makes it smaller: taking longer to pay your own suppliers, within terms. Everything else, premiums, vehicles, the BAS, is a separate question with its own kind of finance.
How the gap is worked out
Debtors. Sales per day multiplied by the days customers take to pay is the money always owed to you. At $120,000 a month and 45 days, about $180,000 sits in invoices at any time.
Stock and work in progress. Cost of sales per day multiplied by the days held: materials bought, jobs part-done, goods on the shelf.
Creditors. Cost of sales per day multiplied by the days you take to pay suppliers, which funds part of the gap for you. Longer supplier terms shrink the facility you need; a trade account or trade finance does the same.
The buffer. One month of wages and fixed costs covers a slow month or a late payer, and the growth figure adds what next year's larger cycle will tie up. Growing businesses run short of cash more often than shrinking ones, because the debtors grow before the collections do.
What does not belong in an overdraft
- Insurance premiums. Premium funding spreads the annual premium over ten monthly instalments, secured by the policy itself, without touching the overdraft or the business's other security.
- Equipment and vehicles. Financed over their working life on a chattel mortgage or equipment loan; funding a $60,000 machine from the overdraft leaves no room for the cycle. The chattel mortgage calculator shows the repayment.
- Tax debt. An ATO arrangement, or a specific tax-debt loan, keeps a lump sum out of the working capital line; lenders look harder at a business that runs the overdraft at its limit to pay the BAS.
- Losses. A facility covers timing, not a shortfall; if the business is not profitable the overdraft creeps up and stays up, which lenders read quickly.
The words lenders use
| Overdraft | A limit on the business account you can go below zero to, paying interest only on what you use. Usually secured by property or the business. |
| Line of credit | The same idea as a separate facility rather than on the trading account. |
| Invoice finance | A lender advances most of an invoice's value the day you issue it and is repaid when the customer pays. Also called debtor finance or factoring. |
| Trade finance | The lender pays your supplier; you repay when the goods are sold, usually within 90 to 120 days. |
| Premium funding | The annual insurance premium paid in ten monthly instalments, with the policy as the only security. |
| Equipment finance | A loan over the life of a vehicle or machine with the asset as security; a chattel mortgage is the usual form for a business. |
| Unsecured business loan | A fast loan over months, no security, assessed on bank statements. Expensive; quoted as a factor rate, which is not an interest rate. |
| Cash conversion cycle | The number of days between paying for something and being paid for it. The gap this page measures. |
Understanding which part of the cash need is timing, which is lumpy and which is growth is what makes the facility the right size and the right type; the business cash flow page sets out how each is assessed.