How to use your assets as security for a loan

invoice factoring circulating asset floating charge

Using your business’ receivables or assets to secure a loan may enable you to gain access to funds for growth.

YOUR BUSINESS MAY need working capital in order to grow, but perhaps you are reluctant or unable to secure a loan for it. If you have in place sound credit management procedures, one option is to sell your receivables — known as invoice factoring — to a third party at a discount, in order to have access to funds right away.

Another is to use your business’s inventory or receivables as security for a loan, categorised as what’s known as a circulating asset, previously a floating charge.

What is a circulating asset?

Although the terminology has changed, a circulating asset is a security, such as a mortgage or a lien, that has an underlying asset or group of assets which is subject to change in quantity and value — inventory or accounts receivables and so forth.

When businesses use the circulating asset provision, it does not affect their ability to use the underlying asset as normal. Only if the company fails to repay the loan or goes into liquidation does the circulating asset become “crystallised” or frozen into a non-circulating asset, and the lender becomes the first-in-line creditor to be able to draw against the underlying asset.

New rules change the game

Under new rules introduced by the Australian Government in 2012, the distinction between what were previously known as floating charge and fixed charged assets was eliminated, with receivables being used as security to be treated as “secured property” (the equivalent of a fixed charge asset) only.  

In order to secure your receivables or inventory as a circulating asset, it must be expressly stated in the general services agreement (GSA).

Greater protections for businesses

Categorising your business’s receivables or inventory as a circulating asset offers greater protections compared to an unsecured loan, as the creditor only has access to the proceeds of the assets once other creditors are paid first. Obtaining such finance is difficult, however, for precisely that reason.

If you intend to use your receivables or inventory (or any other assets, for that matter) as security for a loan, you should register them on the Personal Property Securities Register (PPSR). Fees start at $6.80 for a financing statement of up to 7 years, through to $119 for a financing statement that has no stated end time.

If you want more information using assets as security for a loan, visit the Australian Financial Security Authority’s website.


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