Money is the lifeblood of all small business operations. Access to adequate capital within reasonable timeframes allows small business to capitalise on opportunities, cover expenses as they fall due and provide the means for the ultimate goals of expansion and growth. As with all matters the more research undertaken by the borrower, the greater their chances of securing the best possible form of finance.
What does a small business loan involve?
A small business loan is an additional funding stream that goes over and above your traditional bank facilities and can be completed within a swift timeframe (approx 1 week). It provides small business operators with access to capital that would otherwise take months for a traditional lender to organise. Garnering to obtaining finance for small business has always been a notoriously difficult task; however suitable options do exist and are available to those who require funds for any legitimate business purpose.
What kind of security do I need?
Security is required in almost all cases when advancing funds for business or investment purposes. This will take the form of property and may vary from a principal place of residence, a residential investment property or the commercial premises out of which business activities are conducted. A small business loan will be advanced based on a registered caveat/2nd mortgage or a 1st mortgage if the allotted security is unencumbered.
Why choose a small business loan over inventory or debtor finance?
Many small businesses who feel they are undercapitalised gravitate toward inventory / debtor finance as a means to sustain their cash flow. As a rule this type of financing is promoted on the basis that security for the loan will take the form of a charge over the business and their receivables. Invariably, however, the borrower ends up providing real estate security to support the application.
It also has the negative effect of ‘telegraphing’ your customers that your day to day cash flow position is weak – this can lead to an inequality of bargaining power down the line. Furthermore inventory financing can be restrictive – it does not offer the flexibility of funding other business related expenses such as BAS and tax payments, wages, stock etc
If you prefer to keep your business affairs confidential an asset based flexible business loan may well be a more suitable alternative.
How much can I borrow?
The amount that a lender is willing to offer will be pegged to a fixed percentage of the value of a property. Prior to the GFC, property market sentiment was strong and lenders were willing to lend around 80% loan to valuation ratios (LVR’s). However, due to a globally depressed market, lenders were forced to drop their LVR’s in accordance with domestic property outlooks. In the current climate lenders providing short term business finance now tend to limit their LVR’s to a maximum of 75%.
How much should it cost?
It is a well known fact that Commercial loans come to bear a higher interest rate than that of their Residential counterparts. Simplistically this occurs for two reasons. Financial institutions continue to view commercial property as more volatile and lending to individuals for business purposes is perceived has more hazardous due to the high failure rates of small business and the seasonal/cyclical nature of demand that often causes small business to fall behind on their facilities. Bearing this in mind, a risk premium is applied to these loans and they should cost between 2.00% and 3.00% per calendar month. Any rate outside of these figures should be considered with deliberation.
Are business loans available for both short and long terms?
Yes small business loans provide reasonable flexibility when it comes to choosing loan terms. All small businesses will need funds for varying time frames and as such business loans are available for a minimum period of 2 months and are available for up to 3 years.
What to be wary of?
If you are considering a short term business loan then any of the following should arouse caution:
- Monthly interest rates in excess of 3.00%.
- Weighty upfront fees and fees that are ‘capitalized’ into the loan.
- Any lender that claims to settle in 24 – 72 hours.
- Any lender who does not have a physical address or place of operation advertised.
Generally speaking, borrowers will obtain better deals from the companies that are privately funded rather than individuals who represent investors. This, however, can be a hard thing to determine as practically all firms who operate in this area claim to be ‘the lender’. If you are uncertain, calling for a finance quote for your proposed borrowings should give you ample information to make an informed and sensible decision.