Wondering How to get a Small Business Loan in 2020?
It’s been tough for Australian small businesses to secure credit in the last several years. Big banks have tightened their terms and conditions, which smaller businesses cannot afford to meet, especially the demand for collaterals. To add to it, the application process for small business loans is lengthy and time-consuming.
As a business with fast-paced expansion plans, you need to get cash when you need it! And as a loan applicant, you get only one chance to pitch to a lender.
This essential 7-step guide will make it easier for you to get a small business loan in 2020. Read on.
1. Be clear about the different types of small business loans or small business startup loans in Australia
You will need to choose among the various types of secured and unsecured loans, some of which are:
Secured business loans: This is a good option if you have an asset to pledge as security. The application process involves substantial paperwork. You have to show a business plan and detailed financial statements. The interest rate will be lower but this loan needs collateral.
Unsecured business loans (from $5,000 to $500,000 with no collateral): This type of loan is the quickest and easiest to get for small businesses. The application is simple, and the lender looks at your projected income and business health to assess how much you can borrow. These business loan interest rates in Australia are reasonable and the lending process is straightforward and uncomplicated.
Invoice financing: You can sell your invoices to a third party in exchange for advance cash of what the invoice is worth.
Equipment finance: This a loan applied to buy a piece of equipment for your business, including vehicles, machinery or technology.
Business credit cards: These can be enough to fund short-term cash needs if used sensibly.
Line of credit: You get approved to borrow a certain amount, but you pay interest only for what you use.
Overdraft: This allows you to run a negative balance on your bank account up to a certain amount. You will have to pay interest on the amount you withdraw, and other fees.
Equity loan: This is a line of credit or loan secured against residential or commercial property. It allows you to borrow 100% of the value of the property putting your property at risk, of course.
- Others including Purchase Order financing, Trade finance, and Equipment finance.
2. Know the lender landscape
You have plenty of options when it comes to business loan lenders.
- Large, national commercial banks
- Small regional commercial banks
- Peer-to-peer lending sites
- Direct online lenders
- Credit unions
Be wary of the fact that if you approach a lender that’s not an ideal fit for your business, it not only causes rejection but also affects your credit score and wastes your time.
If it’s overwhelming to choose a lender, your best bet is to go through a small business loan brokerage firm that will give you personalized advice on your best options. They have a solid understanding of various lenders and their loan criteria. By understanding your specific needs, they will connect you to the right specialist lenders to ensure a higher rate of approval. This way your application gets approved faster, and your credit score stays intact.
3. Know what criteria lenders use to evaluate your business
It is important to know this so that you can scrutinize your business and take corrective actions as quickly as possible.
All lenders evaluate these factors:
Credit history: Credit score, and history of making credit card payments, loan payments, and payments to vendors.
Outstanding loans: Your outstanding loans and debts are a clear indicator of whether your cash flow will be sufficient to pay existing debts and the new loan that you’ve applied for.
Business assets: Current assets such as cash and accounts receivable will be scrutinized to see if there are assets to go after in case you default.
Investors: You will be viewed more favorably if your business has prominent venture capitalists or angel investors.
Financial statements: This will be viewed to assess prudent spending, and organized financial management.
Your task now is to review all this carefully to anticipate any issues a lender may raise.
4. Gather information for the application
The most basic details that you need for a small business loan application in Australia are
- Australian Business Number (ABN)
- GST registration
- Permanent citizenship or residency
- A minimum business-operating time of six months
- Business bank statements
- Profit and loss statement
- Access to the Australian Taxation Office (ATO) portal
If your business has operated for less than 12 months, you have to submit a
- Business plan
- Lease agreement
- Cash flow projections.
Be prepared to answer questions such as:
- Why do you need the loan?
- How much do you want to borrow?
- By when do you need it?
- How will the loan proceeds be used?
- What repayment plan do you prefer?
5. Prepare a business plan (for startups)
A good business plan should include a profit and loss budget and a cash flow forecast. It should also contain the future plans for your business, key employee details, and the market itself.
This gives the bank a reason why you need the money and how much you need it. It will also give you clarity on why you need the loan and how much you need.
Usually, a convincing business plan projects financials that show an ability to service the loan amount, a good customer portfolio not too dependent on a few customers, and a positive market outlook.
6. Prepare a thorough pitch with your business plan and application
You’ve got to sell yourself and the business well. Your presentation to the loan officer should give a detailed account of how the money will be spent.
Ultimately, the pitch should convince the officer about your business potential, the amount you need and the timeframe you need it for.
7. Understand the key terms in the proposed loan, and challenge them if need be
Once you get the loan proposal, read the fine print and understand the terms and clauses. Look closely at the
- Interest rate on the loan, and whether it varies over time
- Interest payable frequency
- Principal due date, and how it is amortized over the life of the loan
- Fees such as underwriting fees, administration fees, loan processing fees, establishment or application fees, exit fees, early termination fees, and other service fees
- Operating covenants imposed on your business (e.g. maximum debt-to-equity ratio)
- Situations when the lender can call a default on the loan
- Security or collateral
- Any periodic reports to be provided to the lender
- Limits on how loan proceeds can be used
- Loan prepayment possibilities, penalties
You can always challenge the lender if you’re dissatisfied with any of the terms and conditions. The lender has the obligation to answer your queries honestly. If the contractual terms are confusing, your trusted broker or a financial adviser should be able to help you.
Researching lenders and approaching them on your own can be a daunting process. Why not partner with a brokerage firm like Capital Boost to take the stress out of borrowing?
Tagged in: Small Business Loans, Unsecured Business Loans, Short term loans, Secured Loans, Types of Business Loans, No-collateral Business Loans, Apply business loan online, Application process for small business loans