Credit is an essential business resource. It’s one of the main vehicles businesses use to fund growth and an important cash flow management tool. So what’s the best way to get the best terms and how can you ensure you can meet your repayments? Here are our five top tips.
1. Stay on top of financial admin
If you’re a small business, keep up-to-date with your tax returns, Business Activity Statement (BAS) and tax payments. You’ll be able to achieve a much better interest rate if you can show your full financial history going back a number of years.
2. Compare apples with apples
“Ensure you’re comparing similar products when comparing rates and repayments,” says Melissa Browne, founder of accounting firm Accounting Taxation and Advantage and the author of More Money for Shoes and Fabulous but Broke.
For example make sure you’re comparing the same repayment, loan term, balloon payment and loan amount, rather than just comparing interest rates.
3. Make sure you can meet repayments
Before applying for a loan Melissa notes it’s important to look at your current profit and loss as well as your cash flow projections so you can understand whether you have enough cash flow to afford the loan repayments. “If there’s a shortfall it’s about understanding what benefits the loan will bring in terms of increased capacity,” she says.
For example if you want to finance a new machine, work out how much extra the business needs to produce to fund it. “Once you break this down in terms of sales then it’s easier to understand how much extra you need to make to fund the repayments. If you’re financing a new car, say, that’s not going to produce income and your cash flow won’t support the repayments then you need to question whether you really need it,” she adds.
4. Negotiate terms
‘The Bank Doctor’ Neil Slonim reminds business owners that credit decisions including the terms and conditions the lender is prepared to offer are largely automated and based on data such as bank account statements, accounting records and other inputs such as credit ratings.
“Despite the highly automated process there may still be the capacity for you to negotiate terms and conditions, depending on the size and quality of your loan and the keenness of the lender to win your business,” he says.
5. Understand the structure and terms of the loan
Different types of lenders tend to use different fee structures, so it is critical that you understand exactly how much you need to repay and when.
This is especially the case when it comes to loans whose duration is less than a year. Many lenders quote for the period of the loan, rather than quote a rate across a 12-month period. For example, you may be quoted a rate of five per cent for a loan that has a term of three months. This actually means the annual interest rate is 20 per cent!
Other lenders might hit you with additional fees such as early exit fees. But in funding from alternative financiers such as Banjo, you don't get penalised for paying back your loans early.
The message is: check the fine print and ensure you understand the full loan terms before signing on the dotted line.