What is Fully Drawn Advance
A fully drawn advance is a type of long-term business loan used in Australia. A fully drawn advance lets a business borrow a fixed amount of money upfront and repay it on a predetermined schedule, with interest. The interest rate may be fixed or variable, and the loan may be secured or unsecured. Because it is a long-term loan, a fully drawn advance is best suited for assets with a long life, such as real estate, a manufacturing plant or equipment.
BREAKING DOWN Fully Drawn Advance
Fully drawn advances are appropriate for all types of businesses, including sole proprietorships and partnerships, and businesses can use the loan proceeds for any purpose. The lender can work with the business to structure the loan payments in a way that suits the business’s cash flows. Interest can be charged monthly, quarterly, semiannually or annually; the loan can even be structured as interest only, so that monthly payments are smaller and all principal is repaid at the end of the loan term.
An advantage of a fully drawn advance with a fixed interest rate is that the payments are stable and predictable. Disadvantages of a fixed interest rate are that if market interest rates go down, it will be necessary to refinance the loan to get the lower interest rate, and there may be a prepayment penalty to pay off the existing loan early. A variable rate might decrease automatically if market interest rates go down, but it will also increase if market interest rates increase, which means payments are unpredictable and will change over time. It’s often impossible to know the total cost of borrowing before taking out a fully drawn advance when it has a variable interest rate. However, some variable rate loans have interest rate caps, so it might be possible to determine ahead of time the most the loan could possibly cost.
Alternative to a Fully Drawn Advance
Businesses that need to borrow money have many options.
- Credit cards, which are widely available, may be a poor option because of high interest rates
- Invoice financing lets companies borrow based on amounts due from customers and use invoices as collateral
- Overdraft facilities are a type of secured, short-term loan
- Equity loans are secured by real estate and have terms of a few years
- Lines of credit are a good option when a business wants to have money available to borrow, but isn’t sure how much it will need or when.
Different types of business loans are best for different circumstances. When a company needs short-term funds to cover payroll, invoice financing or other short-term borrowing might make sense. When it wants to expand, a fully drawn advance or other long-term financing is the right way to borrow.