As few as one in five SME's actively review their funding arrangements and shop around for a better deal. Perhaps some are already receiving what they need from their funding provider, or maybe they simply don't believe better deals exist. We believe that, for many, they simply do not have the time or the necessary insight to find the right funding. However, we believe that all SME owners should be reviewing their finance options every three to four years. This is why we have crafted this easy checklist for helping your small business to be ‘finance fit’.
Preparing your application
Before you apply for a business loan, there are things you can do to improve your chance of success.
Start by considering these factors before you approach a lender:
- How much do you need to borrow?
- What do you need the loan for?
- How long will you need the loan for? Or will you need ongoing funding?
- Do you want to offer an asset as security?
It is also recommended to get professional advice from a qualified accountant or a finance/commercial broker.
Supporting your loan application
Lenders will need to see documentation to support your application for business funding. Take a look at the list below and make sure your application is properly supported:
- Business account books
- Six months of bank statements. You may be able to permit the lender to connect with your bank and acquire this information digitally
- Know your Credit history. You can check your credit history by visiting Get Credit Score
- Proof of up to date ATO or BAS payments
- Profit & loss and balance sheets from at least the previous year, or from the previous two years if possible
- Cash flow forecast statement, including all of your current and upcoming financial commitments
- Proof of Personal Property Securities Register for any assets you want to put up as security. This proves that the assets are not already subject to interest from a financial institution. Check PPSR status by visiting ppsr.com.au
Choosing the appropriate business loan
When it comes to streamlining your cash flow. There are two major types of business funding to choose from:
- Line of Credit
A line of credit facility allows you to draw on credit up to a pre-approved limit at any time. This type of loan can be beneficial if your operating expenses are increasing, and you need to access funds on a semi-regular basis to help with your cash flow. There is a maximum limit to what a bank or an alternative finance lender will lend you for Line of Credit. Average credit limit ranges between $10,000 to $500,000 depending on the size of the company.
Common examples of when you may require line of credit funding include:
- Hiring additional staff to deliver new or existing work
- Purchasing inventory
- Paying ATO & Bas
- Developing and launching marketing campaigns and growth initiatives
- Term Loans
This type of funding provides you with a loan upfront, and is generally for a term of 12 months or more. You are then required to pay back the loan amount at regular intervals, covering both the principle and the interest. The length of the loan term determines the repayment. Common situations in which term loan funding is suitable include:
- Renovating or moving into a new premise
- Purchasing new equipment
- Debt consolidation
- Acquire new businesses
- Fund a management/shareholder buyout
Deciding on a loan term
Generally, deciding on a loan term is relatively straightforward. The shorter the loan term, the less you will pay in interest, so aim to make your loan term as short as your capability to make the repayments allows. Often, term loans are used to fund some kind of business asset, and the term of the loan will typically match the life of this asset.
Of course business cashflow is important here, as this is what will be used to make the regular payments. The cashflow available for debt servicing (CFADS) is the available cashflow after deductions of working capital, financing costs and taxes. This will be used to determine the amount the business is able to repay monthly.
The final decision should be taken based on what suits the business' cash flow conversion lifecycle. For example, if a business takes out a loan for 24 months with a cash flow conversion lifecycle of 60 days, this can create an additional burden as the business will need to constantly boost cash flow to keep up with repayments. It is vital to take your own business' conversion lifecycle into account before deciding on a loan term.