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If you’re looking for a small business loan, you’re absolutely not alone. More than half of Australia’s 2,066,523 small businesses have a loan facility of some description, and only 30% are completely free of debt.
Among the top reasons SME’s seek financing are that they need to:
- Provide a buffer against fluctuations in cash flow
- Buy property, equipment or machinery
- Buy inventory or stock
- Pursue important, one-off business opportunities, such as buying out a competitor
- Advertise the business to reach new markets
- Hire new employees
- Pay staff or suppliers
Despite the vital role financing plays in the success of SME’s, a large percentage of small business owners believe that business funding is not easily accessible. If you’re among them, and you’re wondering how to go about securing the finance you need to take your business to the next level, this article is for you.
The first step
In order to secure financing, you’ll need to convince a lender that your business presents a good risk – i.e. that you’ll make good use of the funds and be able to pay them back on schedule.
Your first step should be to make a business case for seeking a loan, so you can satisfy yourself that borrowing really will help you to grow your business or boost your financial performance.
You’ll also need to make cash flow projections to establish how much you can afford to borrow and repay – making provision for factors that can affect your liquidity, such as late-paying customers or seasonal fluctuations. When working out a viable repayment schedule, be sure to leave yourself a buffer for any unexpected costs.
Choosing your lender and product
The next step is to decide what sort of financing you need. You may be surprised at how many types of business finance are available, all suited to different purposes.
Each finance product has a unique set of considerations – including eligibility criteria, costs, pros and cons – so it’s important to get a good understanding of your options before you start preparing any applications. A good place to start your research is with this comprehensive “Guide to Australian Small Business Loans”.
There are a couple of fundamental principles you’ll need to bear in mind when choosing the right type of finance:
It’s crucial that you match the term of your finance with the business need – for example, cover long-term needs like buying property with long-term finance, so that you won’t be stuck having to find new finance for an existing debt when the loan matures.
Cash flow failure is the single greatest reason small businesses go down. So if you’re taking out a loan, be certain that the repayment schedule matches your cash flow. Meanwhile, if your working capital isn’t stable, flexible short-term financing like an overdraft facility or business credit card can help you ensure you have cash on hand for those unexpected costs.
Another important factor in your decision process is accessibility. Unfortunately, the majority of business loan applications from SMEs get rejected by big banks because they do not meet their strict lending requirements. Unless you have assets to offer as collateral, several years’ established trading history, and a strong credit rating, bank finance simply may not be available to you – restricting your choices to alternative finance providers like online lenders.
Before settling on a lender and specific product, it’s vital that you research them thoroughly to make sure you understand all the costs, terms and conditions that apply to your loan, so that you won’t be caught out by unexpected penalty charges or restrictive conditions.
Prepare to apply
Once you’ve decided which type of finance to go for, you’ll need to compile the supporting documents to provide with your application. The requirements will vary widely depending on whether you are seeking finance from a big bank or an alternative finance provider, and on the type of funding you’re seeking.
Among other things, you can expect banks to ask for:
- Full business financials for up to three years, including your profit and loss statements, balance sheets and cash flow statements.
- A detailed business plan, including a strategic plan and thorough SWOT analysis.
- Cash flow projections and trading forecasts, including your assumptions.
They will also want details of any business or personal assets you are offering as security for the loan, and potentially details of your personal financial position.
Online lenders tend to have less rigorous criteria, and require much less documentation in order to assess your application. Again, depending on the type of finance you can expect to be asked for:
- Bank statements for the last 4 – 6 months.
- Credit sales / merchant statements for a similar period.
- Evidence of how long you have been in business.
- Information about your personal financial position, as you may be expected to provide a personal guarantee of the loan.
Application
The actual application process will vary by lender. For a bank loan the process may include a paper application form and meeting with a bank representative, while fintech lenders usually collect, evaluate and respond to applications entirely online.
Expect a bank loan to take several weeks or even months to pass through the approval process – while with some online lenders you can get approval and receive the funds within a matter of hours.
Shaun McGowan is the Co-Founder of Lend. Lend provides small business loans to Australian businesses looking to grow.