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Published on
23/02/2019
by Any Business.Com.Au
Banking Royal Commission: Should I Still Apply for a Small Business Loan?
With findings continuing to filter through from the recent Banking Royal Commission in Australia, you could be forgiven for thinking that it may becoming harder to secure any type of loan, let alone a small business loan - and you may just be right.
We thought we'd run through what some of your options are should you begin to find your small business in need of a financial boost.
Financial Options
Once you assess your needs, you should examine which finance product is the right one for your business.
Analyse the potential costs, interest payments and any hidden charges or terms. Each option will have different tax and GST implications, so it's wise to discuss this with a business adviser or accountant.
It's best to shop around and find out what products are on offer when seeking finance. Although there can be discounts for existing customers, you may find a cheaper option with more flexible terms elsewhere.
Below are some common products available to help you get started:
- Loans - can vary in the amount, loan term (the period in which you repay the loan), interest rate, interest rate type (i.e. fixed or variable), fees and security. It's best to check the product disclosure information carefully before you apply, regardless of which product you choose.
- Overdraft facility - links to your business account with an authorised overdraft limit. Security is usually in the form of a credit assessment of the business viability. The purpose of an overdraft facility is to provide working capital for the business before it receives income. It should not be for capital purchases or long-term financing needs.
- Line of credit - provides access to funds by allowing the borrower to draw on an account balance up to an approved limit. As long as the balance does not exceed the approved limit, you can draw funds at any time.
- Fully drawn advance - provides access to funds upfront for long-term investments such as a new business or equipment that expands the capacity of the business. The advantage of using a fully drawn advance is you can fix the interest rate for a period, providing certainty and stability for repayments.
- Commercial bill (also known as a bill of exchange) - a form of commercial loan suitable for short-term funding needs such as inventory. A commercial bill offers a fixed sum advance, with a regular interest payment. The final amount is then due at the end of the term.
- Rent to buy - you pay an initial deposit and then lease the good until you pay it off. Options such as lay-by can be a cheaper solution.
- Commercial hire-purchase - you purchase a good through an initial deposit and then lease while the good while paying instalments plus interest charges. The purchaser may also reduce the instalments by opting for a larger final payment often called a 'balloon' payment.
- Chattel mortgage - is similar to a hire-purchase agreement, although the purchaser owns the asset from the start. Chattel mortgages require regular ongoing payments that can reduce by opting for a larger final payment.
- Factoring (also known as debtors finance and accounts receivable finance) - is when a factor company buys a business' outstanding invoices at a discount. The factor company then chases up the debtors. Factoring is a way to get quick access to cash, but can be more expensive compared to traditional financing options.
- Invoice finance - is similar to factoring except that the invoices or accounts remain with the business.
Apply for a business loan
Before you approach a lender, broker or investor, make sure both you and your business are in the best position to seek finance. Below are things to consider before you apply, to help you be more successful in your application.
Prepare your business plan
Your business plan and its attachments must be concise, yet include enough detail to motivate a lender or investor to finance your business.
It's important to know your key financial figures even if you don't prepare your own financial statements. These figures include your current income, net profit, expenses and future projections. If you aren't confident answering financial questions, either practice answering these questions beforehand or bring along a business adviser or accountant who can help you.
Know your limitations
Once you know what you want, you need to work out your limits for finance and your ability to repay any money you borrow. Some questions to ask yourself about your financial position include:
- Do you need the money up-front or on a needs basis?
- What is the maximum repayment you can afford?
- What is your loan to value ratio (LVR)?
- If you need collateral, what assets do you have to offer?
- If you need a guarantor, who will be willing to guarantee your loan?
- How much equity do you have?
- What is the maximum percentage share of your business you are willing to offer investors?
Tips for applying for a business loan
- Dress to impress - a professional first impression sets the tone and shows you mean business. The way you present yourself and present your business plan can help impress both lenders and investors.
- Practise your business presentation - this will help you appear more efficient, alert and confident. Be concise and specific when practising your answers and deliver them in a professional and persuasive manner. You can role play an interview with a business adviser or accountant to build your confidence in answering the hard questions.
- Be prepared - before your initial discussion, speak to your lender, broker or investor and find out what information you need to bring. Your business plan, key financial reports for the last three years (if available), financial forecasts, ratio calculations and personal financial information are all essential.
- Check the finance details carefully - if you find a much cheaper finance option that sounds too good to be true, find out why it's cheaper. Are the fees higher? Does the interest rate change at any point? Is it from a reputable finance provider? What happens if your LVR gets too high?
- Managing refusal of finance - seeking business finance may not always lead to successfully applying and obtaining the finance. If you are unsuccessful, seek feedback and make changes to potentially overcome this refusal next time.
While ultimately you're responsible for the financial wellbeing of your business, it's important to use professional advice and services when needed.Alternative Options
Small businesses can register for business assistance at the ATO for help with your tax and super obligations, activity statements and the ATO's digital services.
Financial counsellors
If you're experiencing financial difficulty, a financial counsellor can help you manage your affairs in the short-term and plan for the future. Financial counsellors provide a free, confidential and independent service.
Rural financial counsellors
The Rural Financial Counselling Service provides free financial counselling to eligible rural businesses dealing with financial hardship. Counsellors can visit your farm or business and provide you with information and referral services.
Free business adviser visits
Some advisory services offer free or low cost advice with finances.
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23/02/2019 by AnyBusiness.com.auWith findings continuing to filter through from the recent Banking Royal Commission in Australia, you could be forgiven for thinking that it may becoming harder to secure any ty... Read more