The decision to seek finance for your business by way of a Small Business Loan is a significant step that requires proper consideration, and you would be well advised to seek professional advice, preferably from someone other than the finance provider, whose priority is that of a salesman!
Business Finance is a highly specialised field, and there is a multitude of products and funders available. Each provider has their own lending criteria and unique product specifications all of which can be overwhelming to comprehend. Lenders understand profitability, market share and product/service differentiation better than most businesses. Finding the right provider and product that best suits your requirements are challenging, and there are independent sources of product information to assist you.
Small Business Loans are loans of up to $2 million. At least 50% of small businesses have finance of some type, and given that most have a turnover of less than $200,000 per year, the loan size is typically less than $100,000.
Preparing to Apply for a Business Loan
To determine the loan amount required is an accounting/financial management task that requires your business plan and the most up to date accountant prepared financial statements – Profit and Loss, Balance and Statement of Cash Flow. These statements are all records of past financial performance and are used to prepare cash flow forecasts which are projections/assumptions of the expected business performance for the next two to five years, or whatever time frame stipulated by the lender.
Obviously, the best person to carry out this preparation is your accountant, as invariably a loan provider will look to be assured all financial information provided is professionally prepared and that the lender can independently verify from bank statements, BAS returns, tax returns and Integrated Client account fro the ATO portal.
The preparation of the business financial forecasts should clearly demonstrate the working capital or capital investment required while at the same time maintaining sufficient cash reserves based on expected business revenues and expenditure.
- Prepare a Detailed Business Plan
- Establish the Business Loan Amount Required
- Determine Business Loan purpose. The business could require funds for investment, working capital, plant and equipment, inventory (stock), debtor funding, tax debt, debt consolidation and other needs.
Sourcing a Business Loan
In most cases, the source of a Business Loan will be from a Bank although there are a growing number of non-bank lenders keen to do business and who provide products/services that the big banks do not provide.
The loan purpose is important as there at least 15 different types of business loan products with some quite specialised and more suited to specific applications e.g. factoring for debtor finance and equipment finance loans.
All lending will fall into one of two categories being either Secured or Unsecured loans.
Secured loans will always be less expensive and at a lower interest rate given the loan is backed by property, equipment, bank guarantee, personal guarantee or debenture being a charge over an asset.
Unsecured lending includes personal credit cards and then products provided by nonbank lenders as banks have no appetite for this type of finance.
- Overdraft or Line of Credit (for short-term needs with a revolving balance)
- Business Credit Card (25% of small businesses have these)
- Bank Guarantee (usually against funds on deposit)
- Term Loan (fully drawn advance)
- Commercial Bill of Exchange
- Commercial Hire Purchase
- Factoring (for debtor and cash flow finance)
- Short Term Loans
- Lo Doc Loans
- Construction and Development Loans
- Franchise Finance
- Debenture (charge over an asset)
Action steps to take today
Talk to a Business Advisor!