How can I get a loan for my business?
You’ve decided to embrace the entrepreneurial spirit and give it a go with your start-up. Access to capital is one of the key ways to get your business going, growing and ensuring its continued success. But, many new start-ups and small to medium sized businesses can find it a daunting task to get the correct loan for their business needs. Do you go with the traditional bank option or are there other options?
Bank personal loans
One of the easiest ways to get hold of an initial sum of money is a personal loan from your bank – banks will have a set maximum personal loan amount. You can treat this as a business loan and repay it once your business has income coming in. This may be good for the start up of your business.
Bank business loan
To qualify for a secured small business loan from a bank you may need to provide collateral to back the loan. And, banks are often slow and difficult to deal with – and of course there’s the endless paperwork. Also, interest rates can be higher for small businesses. The SME 2016 Survey shows that 60% of businesses are looking for working capital support. From the recent Survey, it shows that it can take up to 20 days for a bank to approve a small business loan and if you don’t have the required assets, security and documents chances are that your loan will be rejected.
The Australian Small Business and Family Enterprise Ombudsman (ASBFEO) has conducted an inquiry into how banks treat some of their small business lending customers with the intention to ensure that small businesses are given the help they need to survive and thrive. Have a look at the outcome here.
The report highlights the challenges that small businesses face getting the finance they need on fair terms from the banks – with the terms difficult to negotiate during hardships. This report has resulted in banks reviewing and easing their terms on current loans. Although the terms and conditions of current loans have been improved for small businesses, it doesn’t necessarily make it any easier to get the initial loan.
What do banks assess when they’re looking at your loan application?
Besides looking at the purpose of the loan and how much you need, banks will also look at “the Five C’s of credit”, when deciding whether to accept or reject an application character, capacity, capital, collateral and conditions.
Here they look at your financial track record – credit history, financial history, personal and professional stability and whether you’ve had any legal issues.
Capacity measures your ability to repay a loan. They will look at your debt-to-income ratio – so if your personal and business income is less than the requested loan interest rate and other recurring debts then this would be a capacity failure.
Banks consider any personal and business assets, as capital can liquidated to meet loan repayments if necessary.
Collateral such as a house or car, gives the bank the assurance that, if you default on the loan, they can repossess the collateral. They will assess the type of collateral and its current and future market value.
The conditions of the loan refers to its terms, interest rate pricing, repayment schedule and other conditions. Some banks may have certain conditions that may place an added burden on you.
Make sure that you understand all terms and conditions of the loan, and if you’re unsure of anything, you should contact a professional financial adviser – also the bank must honestly answer any of your questions, so do ask questions.
Unsecured small business loans
But, what if you don’t have the necessary collateral or meet the criteria for a bank loan?
Thankfully, other alternative solutions are available – Unsecured business loans can be a good way to borrow without needing collateral. However as Shaun McGowan from business loan comparison site Lend says “The risk will dictate the rate so you only want to borrow what you know you can afford to repay comfortably.”
Who provides these loans?
Generally, these lenders are not banks. Rather they are specialised business loan providers. There are also merchants who match businesses to relevant lenders.
So how do you know if an unsecured loan is right for you?
One way is to calculate the potential extra profit you think you will make if you have the loan – and whether the profit is greater than the interest on the unsecured loan. There are many online business loan repayment calculators that you can use. Providers of unsecured loans normally have a maximum loan amount, depending on the size of your business, with a repayment term of between 3 and 12 months.
What to look out for
Interest rates and fees
Always look at the interest and fees you will pay. Make sure there are no hidden fees – such as establishment fees and direct debit fees. Daniel Hewitt, Director at financial advisory group Financial Framework, suggests looking at the various lenders “comparison rates”. Daniel says “This is the rate lenders are required to provide by law which helps you work out the true cost of a loan. It reduces to a single percentage figure the interest rate plus most fees and charges relating to a loan. The comparison rate allows you to compare loans from different lenders to find out how much it will actually cost you.”
The approval time
Even though most loan providers have an online application form it may still take a while for the loan to be approved – so a loan provider that uses smart technology to make decisions means you won’t have a long waiting time to access funds.
Penalties on early repayment
Look closely at the terms and conditions and for companies that won’t penalise you for early repayment.
Ensure you give your consent before any credit checks are run.
Transparent application process and customer service
Make sure that you understand how long will it take, what you will need, and that you will have a regular point of contact.
Need more information?
Financingyoursmallbusiness.com.au – this website has been developed by Australian Bankers’ Association with the Council of Small Business Australia. It has a guide and suggestions for completing small business loan applications.
Remember, if there’s anything that’s not clear in your loan application then speak to a professional financial adviser to make sure that the loan will meet your business needs.