Expanding your business? Renovating the shop? Hiring new staff? Like 75% of Australian small and medium sized businesses (SMEs), you may have decided it’s time to look for external finance to fuel your growth plans. But before you sign up with the first available lender, here are five questions to ask when it comes to small business finance.
1. How do you choose a good provider?
Once upon a time, you didn’t have a whole lot of choice. You could go to one of the major banks, a building society or a credit union (known as Authorised Deposit-taking Institutions). The landscape has shifted significantly since then. Thanks to technology and innovation, you now you have more choice and alternatives than ever before as non-bank lenders successfully challenge the traditional banks on speed, technology and customer service. Small business owners now want:
- More flexibility: a product that offers a specific solution to a business problem – such as a flexible business loan with a redraw option for working capital or to purchase additional stock.
- Speed and convenience: a quick and easy online application process, fast approvals, rapid access to funds, and convenient repayments.
- Personalised service and transparency: great service from a dedicated Relationship Manager – a readily available resource, now and in the future.
The lender who can provide these is the lender for you.
2. What type of security, if any, do you need?
In return for providing a loan, lenders need to know business owners will honour the capital and interest repayments. Before they approve your finance, they may require some form of security.
- Tangible assets: As security against higher denomination or longer-term loans, banks often require you to put up your valuable assets – usually your home or investment property, but sometimes vehicles, equipment or other possessions.
- Personal Guarantee: This is a written promise of repayment from a business owner, senior executive, equity holder (20% or more) or even a spouse. It is unsecured (not tied to a specific asset), so if the business can’t pay, as a guarantor you are personally liable for repayments, interest, legal costs and other fees. If you sell your business, or your share in it, make sure you are released from the personal guarantee. Personal guarantees work well if you need smaller, shorter-term loans. Non-bank lenders can arrange them rapidly, and often online.
Increasingly, however, many lenders are offering low-doc, alternative doc (“alt-doc”) or no property security alternatives, depending on the nature of your business and the type of facility you require. You may need to show bank statements but no financials up to a certain amount, sometimes $100,000 or more.
3. How important is my credit rating?
Credit assessment is part of the loan process. But it doesn’t have to be complicated and new specialist lenders are taking advantage of technology to vastly improve and speed up the process. Lenders often use your business credit score (or Equifax Score, formerly known as the VedaScore) when deciding whether or not to approve finance. It’s basically a number between 1 and 1200, and it’s calculated using factors from your credit report. The higher the number, the better your credit rating. Checking your score for a loan application no longer has a negative impact on your credit rating.
4. What about the interest rate?
As with every other product, shop around and compare prices.
- Comparing interest rates: consider the relative benefits of fixed or variable (market) rates, understand the type of rate you are quoted, and calculate total repayments over the life of the loan, including all costs and fees.
- Check for flexibility – just in case your needs change over time.
5. Any hidden costs?
Do your homework, choose a reputable lender you can trust, and there shouldn’t be any surprises. Always check for:
- Fees: establishment (set-up), direct debit, or exit fees
- Penalties: for early (or late) repayments, or changes to repayment schedules?
- Product disclosure statements
- Lenders’ credentials and licences
- The time the process might take – which could be another hidden cost. Reputable lenders should be transparent about this information and provide it to you clearly.~ A good business loan should help your business grow. Armed with better information, business owners can seize opportunities as they arise, spend less time shopping around for credit and make decisions with greater confidence.