5 steps to getting a business loan to expand your business
Around half of Australia’s two million small businesses have a business loan facility, and there are many reasons why you might need to join them.
A business loan can enable you to buy essential equipment, keep up with advances in technology, or invest in the growth of your business through expansion or acquisition.
To get a business loan there are 5 key steps you’ll need to follow.
1. Prepare a robust business case
Borrowing isn’t always the right decision for a small business. Growth doesn’t always lead to extra profit – in fact, the extra costs of borrowing can easily outweigh the benefits of growth, especially if it takes a while for your investment to start generating extra income.
While you’re waiting for the additional cash to start flowing, you’ll have to meet all the costs of borrowing, which may include a range of fees and charges on top of interest.
Depending on the type of finance you opt for, it may be difficult or expensive to terminate your facility if you no longer need it, so it’s vital that you prepare a business case before you apply.
Your business case should include details of how you intend to use the loan funds and how you anticipate your borrowings will help you to expand your business. As well as outlining your strategy, you’ll need to create financial forecasts, based on your anticipated income plus all the costs associated with your borrowing and expansion.
This business case if mostly for you. You need to make sure you are making the right decision. You may find through this discovery process that you do not require a loan.
2. Calculate how much you can afford to borrow
Lenders will use a variety of criteria to assess your loan application, the most important of which is capacity. Basically, this means how much free cash you have available to meet your loan obligations. The amount you can afford to repay will dictate how much you can afford to borrow.
While the lender will use their own formula to assess your capacity, it’s absolutely vital that you produce your own cash flow projections first. Remember that more businesses fail because they run into cash flow problems for any other reason.
Be sure to consider the impact that increases in interest rates might have on the size of your repayments and your ability to meet them. Remember to leave a working capital buffer in your calculations, too, for unexpected costs, sales fluctuations or late-paying customers.
If you generate enough profits to service a loan but your income fluctuates, don’t despair. Some lenders will allow you to set a repayment schedule that matches your cash flow rather than insisting on regular monthly payments.
3. Choose the right type of finance
The most important factor when choosing your finance is to match the term of the loan with your business need.
If you’re investing in growing your business, you’ll probably need medium-term finance which you can pay back over time. Having a loan in place and funds at your disposal will mean you can act fast when the right opportunities come up.
It’s vital that you don’t use short-term unsecured business finance like an overdraft, line of credit or credit card to finance your expansion – not just because flexible finance is more expensive, but because there’s a serious risk that your facility will be withdrawn before you are ready to repay it.
4. Choose your lender
These days there are scores of lenders to choose from, especially if you’re looking for an unsecured business loan.
Getting a business loan from a high-street bank can still be difficult – you’ll have to meet their rigorous eligibility requirements, which usually include a high credit rating and at least two years’ trading history. Even if you qualify (and very few small businesses do) it can be a slow and time-consuming process.
Fintech lenders are generally much quicker and more accessible, but they also tend to be more expensive. It’s the quick access to capital that you are paying a premium for. Take time to compare your options (there are 5 unsecured business finance products in Australia), making sure you know all the terms and costs associated with each product
5. Apply for your loan
If you’re applying for finance from a bank you’ll probably have to provide comprehensive supporting documents, including full financial statements for the past two or three years and detailed strategic plans. You may need to submit your application in person.
If you opt for an alternative lender there will probably be a simple online application process. You’ll still need to supply supporting documentation, but the requirements are usually much less onerous. Expect to be asked for six months’ bank statements and trading records, plus personal and business identity documents.
With online lenders, your application may be assessed on the spot, or via a follow-up call from a lending advisor. If your application is approved, you could have the funds in your account within days or even hours.
Of course, with any finance product if you are unsure, seek professional, independent advice.