Business Loans For SME’s- The Complete Guide

Introduction

SME business loans come in an array of options, but the challenge is making the right choice for your business, so in the following short chapters, we’ll show you how to find a lender and a loan that meets your needs and explain how to ensure that your loan application is approved.

1. The Grim Reality

Business survival statistics are sobering.

As many as 5000 businesses, give or take, stumble into financial strife and close their doors each year in Australia.

New businesses face the toughest battle.

Flipping a coin

The odds of a start-up going under within 4 years are about the same as you could expect from flipping a coin. That means only half of the companies which opened their doors in 2019 will still be open for business today.

Clearly, for many people, the dream of owning your own business will sour.

A primary reason is poor cash flow. It’s true that more business go broke from poor cash flow than from poor profits.

Cash flow

New business owners, in particular, underestimate the funds needed to sustain their operations so they poorly prepare for the requirements imposed by lenders.

Rejected

No surprise then that Lenders reject 37 per cent of new applications for business loans from rural Australia. Nearly as bad, if you live in a city you are not much better off. Lenders reject 25% of loan applications from urban based firms.

Of those SME’s lucky enough to get a loan, one-third told the Australian Bureau of Statistics that they needed the money to survive.

To ensure your company enjoys easy access to business loans and doesn’t become another unhappy statistic it is vital you understand how to present a powerful and persuasive argument to the lender of your choice. We’ll start with what not to do first.

2. Six Mistakes To Avoid

Sketchy credit

One of the first things a credit analyst will do when you ask for money is obtain a credit report on your company and each of its directors.

You’ll probably get away with a few minor blemishes here and there – perhaps a phone or power bill you forgot to pay. Most lenders will ignore these as long as the debts have been remedied.

More significant blemishes are not so easy to sweep under the carpet. If you have too many, your loan application will be dead before it lands in the credit analyst’s inbox.

Statistics

At the back of every lender’s mind are the following statistics from the credit agency, Creditor Watch.

  • Over 50% of businesses with a payment default go into administration within 18 months.
  • A company director with a payment default is 5 times more likely to have another.
  • Directors sanctioned by a court are twice as likely to be sanctioned again.
  • A director with a failed business is twice as likely to experience another failure.

If you fall into any of these categories, you must provide convincing reasons a lender should ignore your credit history.

There are lenders who will deal with “credit impaired” borrowers but you can expect to pay more for your loan and provide the lender some kind of tangible security – usually residential or commercial real estate.

Late creditor payments

Lenders like to see their business loans repaid promptly. Any hint that you may not is going to endanger your application.

The credit analyst will examine the repayment history of all your credit accounts.

You are on a slippery slide to nowhere if the documents show payments to suppliers are always late.

It’s a sign of a struggling business.

Unless you love rejection, don’t submit documents showing consistently late payments to your creditors.

Postpone your application to bring them up to date if you can.

Dishonoured payments

Someone will scour your business and personal bank accounts before an application for a business loan is approved. Among other things they are looking for dishonoured payments.

You might get away with one or two, but a bank statement littered with them is a convincing sign that business isn’t going well. It’s not going to be good for your loan application either.

In some instances, lenders want to see 12 months’ worth of business bank statements and, yes, someone will go through them line by line.

To get that application approved make sure you keep dishonoured payments to a minimum and have a good reason to explain the ones that are there.

It’s surprising what an analyst can learn from your bank account.

It’s not a good look when the account shows daily visits to the bottle shop, the TAB or the pokies. These alone might not endanger your application, but they raise red flags.

Tax

Many business owners use the tax office as a substitute bank.

It’s understandable. You need cash to run your business, so instead of making a tax payment you spend the money on stock or to pay staff hoping things will turn around.

Lenders understand this can happen, but if you have a significant tax debt and have not entered an arrangement with the Australian Tax Office to pay this money back you can forget about a loan.

Lenders don’t want an ugly fight with the ATO over your who gets first dibs on your assets in a forced wind up.

In short, make sure your tax affairs are in order before applying for finance.

Last minute

According to a report by the Australian Bureau of Statistics, too many business owners leave their applications for business loans until the last minute. It shows a lack of planning and a poor understanding of what your business needs.  You’re inviting rejection.

No one wants to risk money on a business owner who waits until the last minute to solve a problem.

Your business can tell you when you are running short of funds long before you do. Listen to what it’s saying (or your accountant) and do the spade work for the day you will knock on a lender’s door.

3. What Lenders Want

Every lender wants to see a capable and experienced management team running a company. In other words, you need to inspire confidence.

This first step is straightforward.

Switched on

Get clear in your head how you are going to use the money you want to borrow.

Is it for new equipment or a new vehicle? Do you need a cash injection to fund a new project; or money to pay an unexpected bill?

Are the funds required for the short-term or long-term Have you any security to offer? How are you going to repay the loan?

These are all questions you will be asked from the start.  Create an impression of competence by having the answers at your fingertips.

Interrogate

The lender will then interrogate your documents to find the answer to what they consider to be the most important question of all: “What are our exits?”.

The lender wants to know how it will get its money back if you default on the loan. This means it is vital to have all your financial documents prepared and in order. Patchy paperwork raises doubts about your business and your ability to run it.

The application form

A lender wants to understand the personal circumstances of all the company directors who will ultimately be responsible for repaying their business loans.

It will ask for your age, marital status, where you live, the location of your workplace and your contact details.

You will have to provide photo identification – a driver’s licence and/or a passport. Perhaps both.

Solid

Lenders will want a statement of your personal financial position. This details what you have in the bank account, what you own and what you owe. The bank isn’t just being nosy. It wants to prove your credentials as a solid citizen who won’t, as the song goes, take the money, and run.

Your Score

Protecting your credit history is one of the most important things you can do in business. It is vital to securing business loans.

The credit reporting agencies keep score of all your financial activities both as individual and, as a business owner. The score will determine whether you get a loan and how much you pay for it.

Your score is effected everytime a lender searches your credit file whether its for a business loan, home loan or credit card. Missed payments are noted when reported to the credit agency as are, inquiries by debt collectors, court judgements, voluntary or forced liquidations and bankruptcies,

Avoid late payment of your telephone and utility bills like the plague. Each time you are late your score drops.

The highest score is typically 1000. Lenders are unlikely to lend to individuals or companies with scores under 500. Those who will, charge very high rates.

Remember that lenders are not the only people who will check your credit report. Many of your suppliers will also run a check before engaging with you and giving you a credit limit. This will also affect your score.

Security

Most finance companies will require security of some kind.

Some will simply place a charge over the assets of your business. They will do this by registering a security on the Personal Property Securities Register (PPSR).

Check your PPSR regularly to see if there are charges registered which shouldn’t be there because they are out of date. Ask your former lenders to remove them. It’s not hard and can be done online.

If a lender you have approached decides there are already too many creditors on the register it might look elsewhere for security which might include equity in residential or commercial real estate.

Few business owners want to use their homes to secure a loan. That is entirely understandable but consider the message it sends to a lender.

If you are not prepared to back your own business, why should the lender back it?

There are other securities you can offer.

Invoice finance companies might accept trade insurance.

There are specialist insurers who offer insurance bonds or director guarantee cover, but you will still have to convince these providers that you have a strong business and that boils down to your financial documents.

4. A Persuasive Application

It will go a long way to persuade a lender to approve your loan application if your financial documents paint a positive outlook for your business.

Pull your documents together before you start your search. Ask your accountant or bookkeeper to help and give thanks for the invention of online accounting software!

Some lenders want a lots of information, others less. You should expect to be asked for some or all the following:

  • Interim financial statements.
  • Statements of the personal assets and liabilities of directors.
  • The end of year Balance Sheet and Profit and Loss Report – up to two years.
  • BAS statements for the preceding 3 quarters.
  • Cashflow projections or at least a budget.
  • Most recent tax office consolidated accounts report – ask your accountant for help with this.
  • Current bank balance and transactions for the preceding 90 days. Up to date aged debtors’ list.
  • Up to date aged creditors’ list
  • A copy of the Trust Deed if a trust is involved.

Customers

If you want to raise finance using your receivables (invoice finance, debtor finance, invoice discounting), it is important to provide evidence that you have delivered the goods or services to your customers.

The following documents will help.

  • A copy of invoices showing the amount owed, the name of the customer and the payment dates. It’s not a good sign if an invoice is overdue.
  • Proof of delivery – including dockets, emails, payment schedules or anything that shows that your customer has received the product or service.
  • Terms and conditions of sale to check if there are any conditions which could reduce the final amount paid by your customer.

Assessing your application

Every lender has a desk draw full of formulas and ratios that will be applied to your paperwork to answer 4 key questions.

  • Is the business growing and how?
  • Is the profit adequate and sustainable?
  • Is the business generating enough cash?
  • Are the company’s current finance arrangements sensibly structured.

Your accountant will help to answer these questions – preferably before your lender asks for them.

5. Loan Types

You have a variety of options when it comes to business loans. The choice depends on your specific funding needs, cash flow requirements, and the nature of their businesses. Options include:

Traditional business loan

This loan typically comes with a predetermined repayment schedule, interest rate, and term.

It’s often used for specific purposes such as starting a business, expanding operations, purchasing equipment, or funding other large investments.

Business loans can be secured or unsecured, meaning they may or may not require collateral depending on the bank’s assessment of the borrower’s creditworthiness and risk.

Pros:

Structured Repayment: Fixed repayment schedules, making it easier for businesses to budget and plan their finances.

Higher Loan Amounts: Making the facility suitable for large investments.

Lower Interest Rates: Bank business loans traditionally offer lower interest rates compared to overdrafts, resulting in lower overall borrowing costs.

Longer Terms: Loans often come with longer repayment terms, providing businesses with more time to repay the borrowed funds.

Cons:

Collateral: Some loans may require collateral, which poses a risk to the borrower if they do not repay the loan.

Lengthy Approval Process: The approval process for loans can be time-consuming, requiring extensive documentation and credit checks.

Fixed Repayments: Businesses must make regular payments regardless of their cash flow situation, which can strain finances during lean periods.

Business overdraft

A business overdraft allows a business to withdraw more money from its account than it has available.

It’s a form of short-term borrowing, and the overdraft limit is usually determined by the bank based on the business’s credit history, cash flow, and relationship with the bank.

Overdrafts are often used to cover temporary cash flow shortages, unexpected expenses, or to capitalize on opportunities.

Pros:

Flexibility: Overdrafts offer flexibility as funds are available on-demand, allowing businesses to cover short-term cash flow gaps or unexpected expenses.

No Fixed Repayment Schedule: Unlike loans, overdrafts do not typically have a fixed repayment schedule, providing businesses with more flexibility in managing their cash flow.

Easy Access: Once approved, businesses can access overdraft funds at once without going through a lengthy approval process.

No Collateral: Overdrafts may not require collateral, making them accessible to businesses without valuable assets to pledge.

Cons:

Higher Interest Rates: Overdrafts usually have higher interest rates compared to loans, increasing the cost of borrowing for businesses.

Lower Borrowing Limits: Overdraft limits are generally lower than loan amounts, limiting the amount of funds available to businesses.

Risk of Withdrawal Restrictions: Banks may impose restrictions or withdraw overdraft facilities at any time, especially if the business’ financial condition deteriorates.

Misuse Risk: Overdrafts can be easily misused, leading to higher debt levels if not managed responsibly.

Business line of credit

A business line of credit is a flexible form of financing that allows businesses to borrow funds up to a specific limit, repay them and borrow again without the need to reapply for a loan each time. Here is how it works

Approval and Setup: The bank approves a maximum credit limit for the business based on factors such as creditworthiness, cash flow, and business performance. Once approved, the business can access funds up to this limit at any time.

Withdrawals: Similar to a credit card, the business can withdraw funds from the line of credit as needed. withdrawals can be made via check, electronic transfer, or using a debit card linked to the line of credit account/

Repayment: The business must make regular payments to repay the borrowed funds, along with any added interest. Unlike term loans, repayments are typically based on the amount of credit used rather than the total credit limit.

Interest: Interest is charged only on the amount of credit used, not on the entire credit limit. This provides businesses with cost-effective financing as they only pay interest on the funds they borrow.

Pros:

Flexibility: Businesses have the flexibility to borrow funds as needed, making it ideal for managing cash flow fluctuations, covering short-term expenses, or seizing opportunities.

Cost-Effective: Interest is only charged on the amount of credit used, potentially making it a more cost-effective financing choice compared to traditional loans where interest is charged on the entire loan amount.

Reusable: As funds are repaid, they become available for borrowing again without the need to reapply, providing ongoing access to capital.

Builds Credit: Responsible use of a line of credit can help businesses build a positive credit history, which may improve their access to financing in the future.

Cons:

Variable Interest Rates: Interest rates on lines of credit may be variable, meaning they can fluctuate over time in response to changes in market conditions, potentially leading to higher borrowing costs.

Risk of Overborrowing: Easy access to funds can tempt businesses to overborrow, leading to excessive debt levels if not managed carefully.

Potential Fees: Some lines of credit may come with fees such as annual fees, transaction fees, or early repayment fees, which can increase the cost of borrowing.

Credit Risk: Defaulting on a line of credit can damage a business’s credit score and jeopardize its ability to access financing in the future. It’s important for businesses to manage their credit responsibly to avoid negative consequences.

Receivables finance

This type of lending occurs in several guises including invoice finance, invoice discounting, factoring and debtor finance.  At the end of the day, they are all basically the same: a business uses all or a portion of its receivable’s ledger as security for short-term loans. Any differences lie in the details of each facility and what each lender requires to set one up.

If you have business customers who have negotiated long payment terms you can raise funds by “selling” the lender single or multiple sales invoices at a discount.  In return, you will receive advance payment of between 80 percent and 95 per cent of the invoice value.

The lender gets its money back plus a fee when the invoice is paid by your customer. You receive the balance. 

The facility is for business-to-business invoices only.

Pros:

Immediate Cash Flow: Provides immediate access to cash, improving liquidity for the company.

No Debt Incurred: Receivables finance is not considered a loan because it involves the payment of invoices at a discount. Consequently, it doesn’t increase the company’s debt burden.

Outsourced Collections:  The finance company may manage collections, saving you time and resources.

Cons:

Cost: Fees can be relatively high, cutting into the company’s profit margins.

Customer Perception: Customers may view the company differently if they know invoices are being financed, potentially affecting relationships.

Reliance on lender:  Issues could arise with your customers in cases where the financier controls collection of invoices and the collection procedures are poor.

Supplier Finance

This is a form of financing which enables a company to optimise its working capital by having a financier pay suppliers when funds are due.

While such facilities can be used for both domestic and overseas suppliers, here is a classic example involving imported goods:

Let’s say you own a furniture store and receive an order for 100 chairs which are manufactured overseas.  Your supplier will often payment before the chairs are shipped. This might cause you to empty your bank account, leaving it short of funds until the goods arrive and are sold.

So instead you as a financier to pay the supplier on your behalf which means you avoid depleting your cash reserves.  You repay the lender along with fees when the chairs arrive in Australia a few weeks later and your customer has paid for them.

In some instances, you can offer your supplier early payment in exchange for a discount which can then be used to offset your fees.

Pros

Improved Cash Flow: Supplier finance allows companies to free up their own cash for other business needs and improved liquidity.

Working Capital Optimisation: By perfecting the timing of payments, companies can better manage their working capital and use funds more efficiently.

Supplier Relationships: Supplier finance can strengthen relationships with suppliers by providing them with early payment and potentially securing discounts, leading to better terms and enhanced collaboration.

Cost Savings: Supplier finance can often provide financing at a lower cost compared to traditional forms of borrowing, making it a cost-effective option for improving cash flow.

Risk Mitigation: Supplier finance can mitigate supply chain risks by ensuring suppliers have access to prompt payment, reducing the likelihood of disruptions due to financial issues.

Cons

Costs and Fees: Supplier finance arrangements may involve fees or interest charges, reducing the overall benefit to the company.

Dependency: Companies may become overly reliant on financial institutions for funding, limiting their flexibility and independence.

Complexity: Implementing supplier finance arrangements can be complex and require coordination between multiple parties, including the company, suppliers, and financial institutions.

Credit Risk: Supplier finance arrangements may expose companies to credit risk if suppliers’ default on their obligations or if the financial institution providing the financing becomes insolvent.

Supplier Perception: Suppliers may view supplier finance as a sign of financial distress on the part of the company, potentially affecting relationships and negotiations.

Equipment Finance/Asset Finance

Equipment finance is a type of funding arrangement where a company obtains financing to buy equipment needed for its operations.

This financing can come in various forms, including loans, leases, or hire purchase agreements.

Equipment finance allows businesses to buy essential assets without having to pay the full purchase price upfront, spreading the cost over time. Here’s how it works:

Loan:

With an equipment loan, the lender provides funds to the business to buy the equipment outright.

The business then repays the loan amount plus interest over a specified period, typically through regular instalment payments.

Lease:

In a lease arrangement, the business agrees to make regular payments to the lessor (the owner of the equipment) for the use of the equipment over a predetermined lease term.

At the end of the lease term, the business may have the option to buy the equipment at its fair market value or return it to the lessor.

Hire Purchase:

Hire purchase agreements allow businesses to buy equipment gradually through a series of instalment payments.

The business pays a deposit upfront and makes regular payments over a fixed term.

Once all payments are made, ownership of the equipment is transferred to the business.

Now, let’s explore the pros and cons of equipment finance:

Pros:

Conservation of Capital: Equipment finance allows businesses to buy necessary assets without depleting their cash reserves, preserving capital for other business needs such as operations, expansion, or emergencies.

Tax Benefits: Depending on the structure of the financing arrangement and relevant tax regulations, businesses may be eligible for tax deductions or credits on equipment finance expenses, reducing their overall tax liability.

Fixed Payments: Equipment finance typically involves fixed monthly payments, making it easier for businesses to budget and plan their finances without worrying about fluctuating costs.

Asset Upgrades: Financing equipment allows businesses to stay up to date with the latest technology and equipment advancements without having to bear the full cost upfront, enabling them to remain competitive and efficient.

Flexible Terms: Equipment finance arrangements can be tailored to suit the specific needs and financial circumstances of the business, including flexible repayment terms, customizable payment structures, and options for end-of-term ownership or renewal.

Cons:

Interest Costs: Financing equipment often involves interest charges or finance fees, increasing the overall cost of buying the equipment compared to paying upfront with cash.

Obligations and Commitments: Equipment finance agreements typically come with contractual obligations, and defaulting on payments could result in penalties, fees, or repossession of the equipment.

Ownership Considerations: Depending on the type of financing arrangement chosen, the business may not own the equipment outright until all payments are made, limiting flexibility and control over the asset.

Depreciation: Equipment value tends to depreciate over time, and businesses may end up owing more on the equipment than it’s worth, especially if the financing term is long.

Restrictions and Conditions: Equipment finance agreements may include restrictions or conditions on the use, maintenance, or modification of the equipment, limiting the business’s flexibility in managing its assets.

Merchant Cash Advance Loans

A merchant cash advance (MCA), often referred to as a merchant cash loan, is a type of financing where a business receives a lump sum of capital upfront in exchange for a percentage of its future credit card sales.

It’s particularly popular among businesses with fluctuating or seasonal revenue, such as retail stores, restaurants, or service providers.

How MCA’s work

Application and Approval:

The business applies for a merchant cash advance with a financing provider. Unlike traditional loans, MCAs typically have lenient eligibility criteria, focusing more on the business’s credit card sales history than its credit score or collateral.

Advance Amount:

Upon approval, the financing provider offers the business an amount which can range from a thousand to hundreds of thousands of dollars, based on factors like the business’s average monthly credit card sales and projected future revenue.

Repayment Structure:

Instead of fixed monthly payments, the business agrees to repay the advance plus a fee by allowing the lender to automatically deduct a percentage of its daily credit card sales.

This percentage typically ranges from 10% to 30% of daily sales.

Repayment Duration:

The duration of repayment is not fixed like traditional loans but varies based on the volume of credit card sales. As sales fluctuate, the amount deducted towards repayment also fluctuates, allowing for flexibility in repayment.

Completion of Repayment:

The advance, along with the fee, is considered repaid once the lender has collected the agreed-upon total amount, usually within a period ranging from several months to a year or more.

Pros

Quick Access to Funds: MCAs offer rapid access to capital, with providers approving and funding advances within days, making them suitable for businesses in need of immediate cash flow solutions.

Flexible Repayment: The repayment structure is tied to the business’s credit card sales, providing flexibility during slow periods. There are no fixed monthly payments, and the repayment amount adjusts based on revenue.

Lenient Credit Requirements: MCAs are often available to businesses with less-than-perfect credit scores, as providers primarily consider the business’s credit card sales history and future revenue potential.

No Restriction on Use: Businesses can use the advance for any purpose, whether it’s covering operational expenses, purchasing inventory, renovating facilities, or seizing growth opportunities.

Cons

High Cost: MCAs often come with high fees, which can translate to a high effective annual percentage rate (APR), making them a costly form of financing compared to traditional loans.

Potentially Deceptive Terms: Some agreements may have complex terms and opaque fee structures, leading to misunderstandings or confusion about the true cost of the advance.

Revenue Impact: The daily deduction of a percentage of credit card sales can put a strain on the business’ cash flow, especially during periods of low sales volume.

Risk of Overleveraging:   Because MCAs are based on future revenue, relying too heavily on them can lead to overleveraging and a cycle of debt if the business struggles to keep consistent revenue.

6. Finding The Right Lender

There are more than 70 companies offering loans to businesses in Australia. They range from the Big Four banks and their regional counterparts to independent non-bank lenders who might specialise in a particular type of product such as invoice finance.

It is an unregulated market. There are no standard fees, no standard terms and vast differences between products which sound similar but are not the same.

All lenders will be keen to work with you if your business is humming along with high annual turnover, good profits, a strong asset base and good credit. 

However, a few blemishes and you start becoming less attractive.  More than a few red flags and you can forget about dealing with traditional banks.  They’ll run for the hills.

Realistic

It is important that from the start you are realistic about the kind of lender who will deal with you because every lender you approach will perform a credit check.  Every credit check reduces your credit score.  The lower your credit score, the more you will pay in interest and fees when a lender finally agrees to support you.

Brokers

I recommend using a specialist business finance broker to find the best loan.

Ask your accountant for a referral.

Don’t rely on the person who arranged your home loan unless they can prove their expertise in business finance.  A universe of knowledge exists between business finance brokers and those who manage your home loan.

Traditional Lenders

Regulatory Framework: Traditional banks work in a highly regulated environment, overseen by central banks and financial regulators. They adhere to strict regulations covering capital reserves, lending practices, and consumer protection measures.

Funding Source: Banks primarily fund their lending activities through customer deposits, interbank borrowing, central bank facilities, and capital markets for more liquidity.

Product Diversity: Traditional banks cater to diverse customer needs offering a wide array of financial products and services beyond lending.  These include savings and checking accounts, credit cards, mortgages, investment options, wealth management services, and corporate banking solutions.

Risk Management: Banks have a conservative risk appetite and implement stringent risk management practices to ensure stability and liquidity. This often means tough lending criteria, longer approval processes, and higher credit standards.

Customer Relationships: Traditional banks prioritise building long-term relationships with customers, emphasising customer loyalty and comprehensive financial solutions.

Non-Bank Lenders:

Regulatory Flexibility: Non-banks are outside the traditional banking framework and tend to have less stringent oversight compared to banks. They often have more flexibility in their lending practices and compliance.

Funding Channels: Unlike banks, non-bank lenders do not accept deposits. Instead, they raise capital from alternative sources such as institutional investors, private equity firms, and securitization of loans. They may also use lines of credit from banks or other financial institutions.

Product Specialization: Non-bank lenders typically offer a narrower range of financial products compared to banks. These may include personal loans, small business loans, merchant cash advances, invoice financing, and other alternative financing solutions tailored to specific customer segments or industries.

Risk Appetite: Non-bank lenders tend to have a higher tolerance for risk and be more willing to extend credit to borrowers who do not meet the stringent requirements of traditional lenders. They often serve niche markets or under served segments, providing faster approval times and more flexible terms.

Transactional Focus: While customer service is still important, non-bank lenders often have a more transactional relationship with customers, focusing primarily on financing solutions rather than providing a full suite of financial services. They prioritise efficiency and innovation to meet customer needs in a rapidly evolving financial landscape

7. The Perfect Loan

Congratulations! You’ve been approved for a business loan.

But how do you figure out if it’s the perfect loan for your needs?

While your interest rate is important, it may not be the critical factor in judging whether your loan is worthwhile.  In fact, obtaining the cheapest rate may be counterproductive to finding the best loan.

A superior business loan should not only be reasonably priced but should also be structured to enable your business to grow, ensuring that the benefits outweigh the costs.

Does it Fit?

Think of it this way: buying a pair of shoes solely based on price, without considering the fit, can lead to discomfort and regret.

Similarly, selecting a business loan solely based on the lowest rates may result in a mismatch for your business’s unique requirements.

For example, if you’re seeking funds to purchase a vehicle or equipment, your initial choice might be asset finance.

However, if you are considering selling or renting your new purchase then alternative loans like trade finance or a blend of debtor finance and an asset loan might be more suitable.

If you are going to resell the vehicle or equipment, then supply chain finance could offer a better way to use your funds.

A well-suited business loan should seamlessly blend with your unique business needs, like a perfectly fitted pair of shoes.

Due Diligence

As we said previously, all lenders check you out. 

You should subject them to equal scrutiny.   

Does your lender hold a credit licence?   Is your broker a licensed credit representative?  While these are not yet needed for those providing solely business loans, they do show a commitment to Responsible Lending procedures.

Is your lender a member of a registered disputes resolution provider such as the Australian Financial Complaints Authority?  Have there been any complaints?

Check the online reviews.  Do they raise concerns about access to the lender or its account managers?   Are they slow to respond to questions or issues? 

A good lender will address your queries promptly, without the need for you to shout to be heard.

Price

Unlike home loan lenders, business loan providers are able to exercise a certain degree of “creativity” when pricing their products.

They might bait you with an appealing headline rate that does not reflect the actual cost of the loan.

Hidden fees can significantly inflate the overall expenditure.

Establishing the true cost of a loan is imperative. Particularly, if you are borrowing funds to buy a car.

Flexible

As time passes, the needs of your business will change, so you want a lender who can adjust to change along with you.  If you need an extension on the existing loan, seek added financing for expansion, or require a secondary funding facility, your lender should seamlessly accommodate these changes.

Exit

Ending a loan should not become a legal battle or be obscured by a tangled labyrinth of terms and conditions. It should be straightforward.

Once you have completed payment of the borrowed amount plus interest you should be able to wander off happily into the sunset.  

 Unfortunately, certain lenders complicate this process, introducing restrictive clauses or seeking more fees.

Before committing to a loan, find out how easy it will be to end the agreement. A business loan should offer an exit strategy that aligns with your needs, without entangling you in a drawn-out separation process akin to a nasty divorce.

A truly beneficial loan allows for a graceful exit, giving you the freedom to move forward on your own terms.

The Wrap Up

Here are my top ten tips, in no particular order of importance, to ensure that if you need to borrow to support your business, you are approved for the best loan available for your circumstances.

  1. Watch your cash flow like a hawk.
  2. Act before you need to, don’t leave your loan applications to the last minute.
  3. Be precise about what you need, when and for how long.
  4. Keep you financial reports up to date.
  5. Monitor and protect your credit file.
  6. Pay suppliers and other creditors on time.
  7. Proactively manage your tax arrangements.
  8. Find a reliable and experienced business finance broker.
  9. Choose the right loan
  10. Do your homework on the lender

Get all these things right and you will have the finance you need to sustain and grow your business



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