Figuring out when your business is ready for a business loan is tough enough. Then you have to find the right lender and choose the most suitable loan product from the dizzying array of options.
So where do you start?
Build Your Case
The first step is to build a strong business case for acquiring funding, to establish:
- Whether financing really will help you to grow your business or improve your financial performance.
- How you will use the funds. The most common reasons SME’s take out loans include:
- Buying real estate, equipment or machinery
- Buying inventory and stock
- Hiring new employees
- Increasing working capital / providing a cash flow buffer
- Advertising and marketing to grow the business
- Acquisition of another business
- Moving premises
- Paying staff or suppliers
- How much you need to borrow.
- What assets you you have to offer as security.
- How quickly, and on what schedule, you can afford to repay a loan. This will need to be based on your projected cash flow, making provision for common problems such as fluctuations in turnover, exceptional costs and late payment of invoices by customers.
Match Your Needs
Armed with this information you can begin to research your options, bearing in mind these three fundamental principles
- The type and term of finance must match the business need (long-term finance for long-term needs etc.) Long-term needs, like buying property, need to be matched with long-term financing like a mortgage or term loan, so that you won’t be forced to seek finance again when your loan matures. On the other hand, you should cover fluctuations in working capital with a flexible form of short-term financing, like an overdraft or business credit card.
- Keep the cash flowing. Running out of cash is the number one reason small businesses go down. A profitable business can be brought to its knees by late-paying clients or seasonal fluctuations, so it’s essential that you make sure you’ll have funds available when you need them. But flexibility comes at a price – you can expect to pay more for at-call financing that gives you access to cash whenever you need it.
- The higher the risk, the more you’ll pay. There many different types, terms and structures of business financing, but one simple rule underlies them all: the bigger the risk a lender has to take on you, the more the loan will cost you.
So if you are able to offer collateral you can expect lower rates than you’ll pay on an unsecured loan. Super-risky financing options like Merchant Cash Advances can attract interest rates of up to 200% APR, because the lender has no recourse if you don’t make the sales to repay the advance.
While the high rates might be worth the benefit of getting funding when you need it, it makes sense to seek the most economical financing option available to you.
Bank or Online Lender?
While your bank might seem like the obvious place to turn for a small business loan, most SMEs struggle to meet the big banks’ rigorous lending requirements. Without a solid financial and trading history, a strong credit rating or sufficient collateral to offer as security, small business loan applications frequently get rejected by banks.
What’s more, bank loan application processes can be slow and burdensome, meaning that you may miss out on important business opportunities – or simply run out of cash – while waiting for your loan to get approved.
That’s why more and more Australian businesses are turning to alternative finance providers instead, such as online lenders, for the funds they need. These fintech lenders use much more flexible criteria for assessing the credit-worthiness of a business, as well as an agile approval process that can see loans approved and funds in the bank within a matter of days.
There are many different types of business funding on offer from both banks and alternative finance providers – ranging from secured term loans and mortgages to leasing contracts and specialist trade financing.
The rates, terms and conditions of each type of finance will be different for each lender, and new products are being offered all the time. The key to choosing the right finance product is thorough research – be certain that you know:
- Who you’re borrowing from
- Exactly how much it’s going to cost you (including interest rates, fees and any hidden or penalty charges for late payments)
- Any terms or conditions that are attached to the loan – e.g. a prohibition on seeking any other financing.
It’s also wise to seek professional financial advice, to help you choose the best option and structure your loan appropriately.