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The Small Business Loan Guide
By: Tracy Kearey, Finance Broker and Director, Home Loan Connexion Pty Ltd | Thursday 4 May, 2017
Whether you need finance to start a business or extra funding to expand and grow an existing business, at some stage you will most likely need financial assistance from a bank or financial institution. In this article, TRACY KEAREY, provides much needed advice on what’s involved and how to prepare when applying for a small business loan.
A business loan is really nothing more than a lender investing money in your business. For you, the benefit is the money you gain to help with establishing or improving your business. For the lender, the benefit is a fair return on their investment, via the interest payments made over the life of the loan. Most small business owners, especially first-time applicants, dread the process of applying for a loan. Believing the entire process will be difficult, time-consuming and nerve racking they tend to put it in the too hard basket.
The truth is, by building a relationship with a finance and mortgage broker, you can take most of the hard work, research and application process off your to do list.
When applying for any type of business loan, your broker will help with evaluating your current position and determine what the various lenders require from you and your business.
There are 4 key factors lenders look for:
- Sufficient ability and cash flow to repay the loan;
- Adequate security or equity in the event that you can’t repay the loan;
- The quality and management of the business applying for the loan; and
- A clean credit rating.
What should my application include?
It is no surprise that all lenders want to know that any business they invest into offers them a solid and reliable return. It rests with you to ensure that your broker fully understands the nature of your business so they can pitch to various lenders on your behalf.
You will need to prepare and have the following information on hand:
- Trading history if you own an existing business;
- Future outlook;
- Products or services;
- Customers and suppliers;
- Actual or the potential profitability if a new business;
- How you intend to spend the funds being borrowed; and
- How are you are going to repay the loan.
The more relevant and up-to-date the information provided, the easier and faster the approval process will be. The idea is to impress lenders, because missing important details and a lack of clarity surrounding the information provided will only slow down your application being assessed.
Your application should include at least the following documentation:
- A comprehensive business plan;
- A precise explanation of how the loan will be used and repaid;
- A cash flow forecast for the business for the next 12 months;
- Financial statements and company returns for the business for the past two years;
- A statement of assets and liabilities for each individual borrower; and
- Personal tax returns and tax assessment notices for at least the past two years.
With your accountant’s help your broker will assist with ensuring all the required documentation is in place before approaching lenders.
Why the inquisition?
When it comes to a small business loans, lenders rarely distinguish between the actual business and the owner. Lenders need to fully understand the personal financial circumstances of the owner, including their net worth and cash flow, as much as it does the business. This is why it is so important to keep your personal credit history file clean and in order as most lenders make the assumption that an owner will manage their business’ debt in the same way they manage their personal debt. In addition, lenders also take into account the business owner’s character, history, skills and experience.
What guarantees do lenders need?
Most small business lenders require to guarantee the loan with security. This loan security would be used to reimburse the lender in the event the loan cannot be repaid.
Typical assets used for security can include:
- Residential property;
- Commercial premises;
- Vehicles; and
- Business equipment.
Before you apply for a business loan, you and your broker will decide the best options available for you or your business to obtain finance.
There are many avenues open to you, including the following:
- An overdraft can assist you to manage your business cash flow;
- Debtor finance - borrowing against the value of your outstanding trade debtors;
- Term loans are an option for major business borrowings; and
- Equipment finance for the acquisition of business equipment.
Choosing a lender
Deciding on a lender is more involved than finding out which institution is offering the lowest interest rate, Your broker will be looking at a vast range of lenders and assessing how each of them rate when it comes to helping grow your business well into the future. Your broker will also ascertain which lender will view your current financial position in the best light so that your application has the best chance of getting over the line.
Lenders interest rates differ and they can also vary depending on:
- How much you are borrowing;
- The term of the loan;
- The amount of security being offered; and
- The risk factor involved in what the loan is being used for.
Lodging your application
After your broker submits your application, the lender then considers whether you represent a satisfactory investment. This can take up to a week or more assuming the lender has all the information it requires. If not, the lender will notify your broker of any further documentation required. At this point in time your application will remain on hold until all outstanding requirements have been supplied.
If you prefer the personal touch of face-to-face communication when organising your finances and loans, opposed to working with the banks automated call centres, then seeking the services and support of an ‘on the same page’ finance broker is your best option.
A professional broker will assist in helping you pull all of your documentation together, research all of the lenders, present you with a range of options and explain all fees and charges that you will be paying on top of the interest so that you understand how much the loan will cost you over its full term. With their guidance, you can then make an informed decision as to which lender you wish them to place your loan with.
There is no cost to you for using a finance and mortgage broker to find you the best deal as they are reimbursed by the various banks and lenders they place your business with.
And remember, a good broker will take an active interest in your business and help by working through all of your financial issues to ensure your small business succeeds.