How to avoid locking up working capital
in your commercial lease

• Bank guarantees are a common form of commercial lease security.
• Lease Bonds provide lease security without locking up capital.
• Maintaining access to cash and finance can support business growth.

Whether you’ve already signed the lease or you’re about to, your landlord will usually require some form of lease security, most commonly a bank guarantee worth three to twelve months’ rent.

While it’s standard practice in commercial leasing, many businesses don’t realise these guarantees are often backed by bank facilities, reducing the funds available to for other areas of the business. And for growing businesses, that can become a significant cashflow constraint.

Bank guarantees play an important role in commercial leasing. Landlords need confidence that if a tenant defaults, there’s security in place. The issue isn’t the guarantee itself, but the impact it can have on a business’s available capital.

When a bank issues a guarantee on behalf of a business, it’s commonly secured against an overdraft, line of credit or cash facility, like a term deposit or an asset like property. The guarantee amount effectively reduces the funding capacity available to the business elsewhere.

For example, if your business has a $500,000 overdraft facility and a $150,000 bank guarantee is secured against it, your usable working capital may effectively reduce to $350,000.

The lease hasn’t changed, but the business now has less flexibility in how it uses its funds.

For businesses operating in retail, hospitality, logistics or professional services, that reduction can have a real impact. It may limit the ability to open a new site, invest in stock, fund a campaign or simply provide breathing room during slower periods.

Every dollar tied up in lease security is a dollar that can’t be reinvested back into the business.

Before looking at alternatives, it’s important to be clear that secured and unsecured business loans absolutely have a place.

They’re valuable business finance solutions when used to fund equipment, expansion, acquisitions or investments that generate a return. But lease security is a different type of requirement.

Secured business loans

Secured loans are backed by assets such as property, equipment or even cash. Because the lender has security, interest rates can often be lower.

They could be a great option when the funding is being used to acquire something productive, like financing for machinery that helps generate revenue.

But using a secured loan purely to support a bank guarantee could be inefficient. The business is taking on debt, committing assets and managing repayments simply to satisfy a lease security requirement.

Unsecured business loans

Unsecured loans don’t require collateral, but they generally come with higher interest rates and ongoing repayment obligations.

And when unsecured lending is used to fund lease security, the business is still paying interest on money that’s effectively sitting idle. It’s like borrowing money just to lock it in a drawer.

The repayments still affect cashflow, the debt still sits on the balance sheet and the funds themselves aren’t actively helping the business grow.

That’s some of the reasons why more businesses are exploring alternatives that allow them to preserve cashflow without taking on additional debt.

A Lease Bond is a commercial lease security solution that provides landlords with financial security without requiring businesses to tie up large amounts of cash.

It’s not a loan, so there are no loan repayments, no asset security requirements and no additional debt facility created. Instead, eGuarantee assesses the financial position of the business and, if approved, issues a Lease Bond directly to the landlord in exchange for an annual fee.

The landlord receives the security they require while the business keeps those funds available for day-to-day operations and growth. For many businesses, that distinction can make a significant difference to business cashflow.

The value of a Lease Bond could go well beyond freeing up cash in the short term. It can improve financial flexibility across the business and help maintain access to capital when it’s needed most.

Keeping funds available for growth

The most immediate benefit is that capital which would otherwise be tied up in a bank guarantee remains available to use elsewhere.

For a business with a $200,000 lease security requirement, that could mean keeping $200,000 available for inventory, staffing, fit-outs, operational buffers or marketing or regulatory changes that impact your working capital.

Preserving borrowing capacity

This is one of the biggest advantages for finance managers and growing businesses. Because Commercial Lease Bonds don’t draw against existing bank facilities, they could help preserve borrowing capacity for future opportunities.

If the business later needs finance for expansion, equipment or investment, those lending facilities may still be available. Lease Bonds can also simplify lease security administration, particularly for businesses managing multiple sites, landlords or leases.

Avoiding additional debt obligations

Unlike many business funding solutions, Lease Bonds don’t create repayment pressure or add debt to the balance sheet. That can help businesses maintain flexibility and avoid unnecessary pressure on monthly cashflow.

More flexibility to grow

When capital isn’t tied up in lease security, businesses often have more room to make strategic decisions or take advantage of unexpected opportunities. That might mean opening another location, scaling inventory, investing in staff, upgrading equipment or managing quieter trading periods with more confidence.

For growing businesses, having greater financial flexibility can make a real difference.

Expanding locations: Star Car Wash

Opening new sites can be expensive. Between fit-outs, logistics, make-good period, staffing, equipment and marketing, growth can place significant pressure on cashflow before the business has even begun to generate revenue from the new location.

Star Car Wash used eGuarantee Lease Bonds while expanding across multiple sites. Rather than having large amounts of capital tied up in traditional bank guarantees, they were able to preserve liquidity across the business while continuing to grow their network.

Scaling inventory: Muscle Republic

Muscle Republic used an eGuarantee Lease Bond when securing a new and bigger warehouse facility to cater for their forecasted growth.

Instead of locking away capital in a traditional bank guarantee, the business was able to direct those funds into inventory and marketing activity to support the growth and help move stock more effectively.

Managing seasonal cashflow

For many retail and hospitality businesses, cashflow naturally fluctuates throughout the year. When working capital is already restricted by lease security arrangements, seasonal slowdowns can become more difficult to manage.

Replacing a traditional bank-backed guarantee with a lease bond can help provide additional liquidity and flexibility during quieter trading periods.

Consider a business with a $250,000 lease security requirement.

Traditional bank guarantee

• $250,000 tied up against an overdraft or lending facility with fees and regular repayment requirements
• Reduced borrowing capacity for the lease term
• Less funding available for business operations or growth
• Potential opportunity cost if capital is needed elsewhere

eGuarantee Lease Bond

• Annual fee instead of locked-up capital
• Working capital remains available to the business
• Borrowing capacity preserved
• No loan repayments or additional debt facility

There is a fee associated with a lease bond, but for many growing businesses, the commercial value of keeping capital available is often far greater.

eGuarantee Lease Bonds aren’t suitable for every business. Approval is based on financial assessment and landlord acceptance.

They can be worth considering if:

• you’re an existing business entering or renewing a commercial lease
• your bank facilities are heavily utilised
• you’re planning to expand or invest in growth
• you operate across multiple sites and want a more efficient approach to lease security

A smarter alternative to commercial lease bank guarantees

Businesses have long accepted that commercial lease security means tying up capital with a bank. But more businesses are now questioning whether that approach still makes sense, especially when cashflow and borrowing capacity can have such a direct impact on growth.

An eGuarantee Lease Bond allows businesses to meet lease security requirements without locking away large amounts of capital. That’s why many SMEs are starting to view Lease Bonds not simply as a bank guarantee alternative, but as a smarter and more flexible business cash flow solution.

Could an eGuarantee Lease Bond work for your business?

If your business is entering a commercial lease, renewing one or reviewing how lease security is funded, it may be worth understanding how an eGuarantee Lease Bond compares to a traditional bank guarantee.

Talk to the eGuarantee team to learn more about how Lease Bonds work and whether they may suit your business.

Lease Bonds are subject to financial assessment and landlord acceptance. The content of this blog is intended to provide a general guide to the subject matter. This blog should not be relied upon as legal, financial, tax or accounting advice. Specialist advice should be sought about your specific circumstances.