Fully Drawn Advance Set
What is a fully drawn lead?
A fully drawn lead is a type of to lend used in Australia. Although they can be customized to meet a variety of needs, fully drawn advances are commonly used as long-term business loans.
Key points to remember
- A fully drawn advance is a type of long-term loan that is popular in Australia.
- They are known for their highly customizable loan terms.
- Fully drawn advances are essentially term loans that can be structured as secured or unsecured loans.
Understanding Fully Drawn Advances
A fully drawn lead is essentially a term loan in which the borrower receives the main at the initiation of the loan and undertakes to repay the principal with interest according to a Amortization schedule. The details of the fully drawn advance, as if fixed or variable interest is used, may differ depending on the needs of the lender.
Fully drawn advances are typically structured as long-term loans, making them well suited to financing the purchase of long-term assets. useful liveslike immovable or long life equipment. Fully drawn advances can be structured as secured loansin which the underlying asset is pledged as collateral or unsecured loans.
Additional customization is available regarding the interest payment schedule. Interest can be fixed or variable and can be charged monthly, quarterly, semi-annually or even once a year. Fully drawn advances can even be structured as interest only loanswhere the principal is repaid in one balloon payment at the end of the term.
One of the benefits of using a fixed interest rate is that payments are stable and predictable throughout the life of the loan. On the other hand, choosing a fixed rate exposes the borrower to the risk that market interest rates will fall during the term of the loan. In this scenario, the borrower will suffer from opportunity cost to pay an interest rate higher than the market rate. And although it is possible to refinance the loan in order to take advantage of lower rates, this may trigger prepayment penalties.
Variable interest rates, on the other hand, will rise or fall depending on the broader financial markets. This makes it difficult for the borrower to accurately predict the true cost of the loan over time. On the other hand, the fully drawn advance may include provisions for maximum interest rates, which can help the borrower understand and prepare for the potential cost of holding the loan if interest rates rise for the term of the loan.
Concrete example of a fully drawn advance
Al is a small business owner based in Australia. He wishes to acquire new equipment to enable his company to increase its production. To that end, Al approaches his account manager at XYZ Bank to discuss a fully drawn advance.
Al’s account manager explains that the terms of the fully drawn advance can be customized to suit his needs. In this case, Al is looking to purchase equipment with a probable useful life of 20 years. He estimates that it will take 12 months before the equipment is operational and able to generate revenue for his business.
Hearing his priorities, Al’s account manager recommends structuring a fully drawn advance with a 20-year amortization, in which the loan is interest-only for the first 12 months. This way, Al will be able to minimize his loan repayments until his equipment is able to generate revenue for his loan payment. To further minimize loan uncertainty, he recommends using a fixed interest rate so that Al can plan his loan repayments with a high level of precision.