Financial institutions like to sign people up for large slices of debt, especially multi-year, variable interest deals. There’s a vast pool of money just waiting for someone with a business idea, a strategic plan, and some hopes and dreams.
That’s not to say that borrowing is purely for those that are starting out. There may be solid reasons to take out a loan in an existing business, for example to increase cash flow for the business. While it can be a little daunting to put yourself in the red, there are a number of unique loan options available for small businesses.
“Sustainable borrowing is a great way to grow your business,” says Mark Harper, executive manager of business lending at Suncorp. “Managing cash flow is one of the greatest challenges faced by rapidly growing businesses and without proper management, poor cash flow can stunt, or even end your growth before it’s reached its potential.”
As Harper explains, when you’re a rapidly growing business, there is often a need to pay out big bucks on a continual basis for buying more stock, hiring new staff and opening new premises. Even if your business has been successfully running for some time, investments can take while to pay off, which exerts pressure on cash flow.
Plan for the loan
Before you jump in and sign on the dotted line, have a long, hard look at your business plan. It’s important to consider how you will use your loan in the future and how it will affect your business and finances. What are the pros and cons of receiving a loan? What will you spend it on? How do you plan to make the repayments?
“Make sure you’ve thought through how you will use the money and what the potential risks might be. For example, there’s a big difference between short term working capital to buy supplies and financing a piece of equipment,” says Nick Reade, general manager at ANZ.
It’s important that you gather the correct documentation before you approach a bank and get your head around your current financial state. Make sure you prepare by bringing along a business plan, a cash flow forecast, a current balance sheet and your historical profit and loss statements. If you’re able to clearly articulate your business’ needs, you’ll be in a good position to negotiate financing. It will also help the bank understand your business and what your needs are.
“Small business owners really do need to spend the time to understand their business’ results and also highlight issues with the accounts,” advises Anna Kyriacou, director at AKA group. “There might have been bad debt along the way, so they need to get in the head space of the bank manager and think, ‘OK, if I was looking at these accounts for the first time, what would stand out?’ Small business owners need to go through their profit loss statements and their balance sheet and really understand what caused the figures.”
Matt Comyn, the executive general manager for local business banking at the Commonwealth Bank, believes there are a few considerations that your banker will think about when you apply for a business loan. Firstly, you will need to prove the operational strength of your business or at least show that it’s a start-up with great prospects.
“Customers that have a financial year ending in June should be thinking about putting forward trading results to June 2011, and also management figures, if available for the months between June and the current date,” advises Comyn.
“Businesses [that cover this] are clearly well organised and on top of their affairs which is always a sign of strength. Secondly, your banker will check that you’re able to meet ongoing repayments, which can be a problem for some businesses,” adds Comyn. “Put together a realistic cash flow forecast and in order to manage your cash flow, keep on top of debtors and be clear about your terms of trade.”
Lastly, it is ideal if you have some kind of security behind your business, such as a property mortgage.
“This is all about risk. Contrary to popular belief, you don’t need to offer property as security for a business loan – indeed, with strong cash flow, you don’t need any security at all. That said, you will enjoy a lower interest rate with residential property as security,” he says.
What loans are available?
Suncorp’s Harper explains that it’s not as simple as finding a business loan for a certain dollar amount. Rather it’s about finding the best loan match for your business needs.“What are the funds going to be used for and how long do you need them? Are the funds for short-term applications like the purchase of inventory or for a long-term building extension?” asks Harper.
According to AKA Group’s Kyriacou, one of the biggest downfalls for small business owners is the fact that they are often cash-strapped. “They’ll bank with one bank, but get a loan from another. They don’t think of the logistics of getting money across, so they end up paying substantial fees in transferring between the accounts. In some instances, they may even go to a lender who doesn’t have any branches or internet banking and literally have to draw cheques when they need to draw from a line of credit,” she says.
Fixed or variable rates?
Choosing between a fixed and variable interest rate for your business loan is like “looking into a crystal ball or throwing a coin up in the air,” according to AKA Group’s Kyriacou.
In fact, in some cases, you may not be given the choice of interest rates. Leases are usually set at fixed rates and overdrafts are at variable rates. But if you were to take out a standard business loan, you can decide between the two. The key is deciding how much risk you are willing to take on. Look at your specific needs and consider whether or not you could afford an interest rate hike. If not, a fixed loan may be what you need, or maybe you are not ready for a loan yet. Businesses that have taken on large loans may be able to do a combination of a fixed and variable rate to allow some flexibility.
However tempting it may be, avoid signing up with a bank or lender simply because they offer rock bottom rates, warns AKA Group’s Kyriacou. Most lenders that offer rock bottom rates wouldn’t offer you any flexibility and while some banks may charge a slightly higher fixed rate, you’d be able to make late repayments without penalties.
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