Types of Bank Borrowing in Optometry

Whether you are starting your practice, expanding into a new project, or just want to make it through the month and need cash, it is crucial to know the different types of borrowing you can get from banks and how they work. With the large range of borrowing types available, there are two main determinants that you should consider in selecting the most appropriate type of debt finance: duration and cost.

The duration of funding defines how long is the funding required and therefore it is directly influenced by the type of investment you are doing. If it’s a long-term asset that you are funding, you will need a long-term debt. If you need cash for a short-term obligation you will need a short-term type of financing.

The cost of funding consists of both the initial fees you pay to set up the loan and the interest that has to be paid for the period of the loan.

Five types of bank borrowing are frequently employed in Optometry:

Overdraft, which normally has a fixed time period, consists of a setup fee and interest fee and is employed to finance daily working capital and closing the gaps between receipts and payments when needed.

Loan, which regularly has a fixed term and a prearranged repayment date but can be extended for a long and undetermined period. It consists of an arrangement fee and a percentage return and is employed to finance projects that generate enough funds to cover repayments.

Commercial mortgage, which is fixed-term funding with the probability to be secured on a freehold property. It has a lower interest rate than unsecured loans and it is employed for long-term financing of properties.

Invoice factoring, consists of outsourcing debt collection, has management fees as well as interest rates discounted on the debt being factored. Invoice factoring ensures easy access to steady cash flow, reduces the risk of late payments, liberates cash from working capital, and reduces accounting functions.

Leasing, consists of financing for the life of the leased asset, has monthly payments that include interest rate and is employed to acquire and use an asset without a straight purchase with tax and replacement benefits.