Growing too fast? Successful small businesses and tradies often run into the issue of being ready to expand, but lacking the necessary funding. Fortunately, there are a number of small business financing options available, so make sure you choose the right one with these tips.
Know your timing
An important factor in choosing the right financing method is how you will use the money. If you want to take advantage of an opportunity with a deadline attached to it, then you need to look at a non-bank lender that can make fast decisions and deliver funding within 24-48 hours.
Likewise, if you’ve been looking at your cashflow and know there will be a temporary shortfall for a few weeks/months – either while you’re waiting for an invoice to be paid or when you invest in stock or staff up for the upcoming busy season. If time is important, you don’t have time to fill in endless paperwork or stand in queues at the bank trying to get a five year business loan.
Know your repayment obligations
If you need finance for your business, it really helps to know the amount you have to pay back upfront, so you can make a decision about the real value of the loan. Using your credit card might seem like a good idea at the time, however with most cards the interest is calculated daily on the outstanding balance. This means the interest costs will be compounding daily. If you don’t remember to pay regular amounts, and keep using the card for other purposes, you can easily lose track of how much of the loan you have repaid or what it cost you. This type of finance can end up being a very expensive exercise!
Some non-bank lenders use a factor rate not an annual interest rate. This is applied to the loan amount at the time you settle the loan, and then divided into equal repayments over the term of the loan, so you know the total amount due from the very beginning. In very simplistic terms, (loan) + (interest factor) = (total amount due) / (no. weekdays or weeks in term) = (daily or weekly repayment). Once you know the total amount due you can calculate ROI, factor your repayments into your cash flow forecast, set up automatic repayments and start growing your business.
Read the fine print
Traditional lenders often surprise borrowers with hidden application fees, origination fees, brokers’ fees and even variable interest rates which may increase throughout the term of the loan. These can all add up, even if the headline interest rate appears attractive.
In contrast, non-bank lenders have lower overheads and make clever use of technology to reduce the cost of processing your loan application. There is usually only one origination fee and this can be added to the loan amount so you don’t have to pay cash upfront in order to borrow.
Secured, or traditional, loans typically require the borrower to offer an asset as collateral for the loan, such as property or business-owned equipment such as a car. It is important to thoroughly consider the risks associated with using your house or other key assets as security, especially if you are only one of several directors of the business and the only one with an asset. If things don’t work out as planned, you could be forced to sell your family home, so this decision needs careful thought.
However, there are benefits to using property security if you are lucky enough to have it, especially if you are borrowing a significant amount of money. Offering security will reduce the cost of your loan, as it reduces the risk to the lender (and puts it on you).
Many small business owners don’t have security to offer in the first place, so an unsecured loan from a non-bank lender is a very good option. With an unsecured business loan, lenders like Prospa assess risk by looking at the quality of your business, the length of the loan, the industry sector and a host of other data points to tailor a solution to the risk profile of your business.
Seek professional advice
Many small business owners turn to their broker or other financial adviser when looking for a business loan. It’s hard for someone without financial training to accurately compare the features and benefits of all the options available – from traditional solutions like a credit card or overdraft, to an unsecured loan from a non-bank lender, to borrowing from the bank of Mum and Dad. Use their industry knowledge and expertise to guide you towards the best solution for your business scenario – the one that saves you time and money in the long run.
Growing your business is an exciting prospect, so put some effort in to choose the right finance solution. And if you do decide on a small business loan from a non-bank lender, talk to Prospa on 1300 882 867 – we’d love to help.