You’ve probably heard it said that “you need to speculate to accumulate” or should “reap before you can sow” and this has never been truer than in business. Indeed, even the most humble of business ventures will require some kind of initial investment to get started whether it needs cash to buy equipment or a cash pool in order to run an account float. Whereas some businesses are established via private savings or by investment group jump-starts, the majority need some form of business financing.
And it’s not just new businesses that may need to borrow money. Existing businesses seeking to expand or going through rough times may also wish to consider taking out a loan or form of other financing to help them long.
In this post, we are going to look at the top 5 most important things to consider when considering a business financing opportunity. These small business financing tips are mostly provided by SmallBusinessLoans (Australian guide).
Should You Even Bother Applying?
If the answer is going to be a straight up no, then why even waste your breath in asking right?
Well, it is important to note that being turned down for a loan does kind of have some consequences. If a business is refused a line of credit, this does not negatively impact their credit rating but will still affect the way other lenders view a subsequent application. Lenders do tend to indulge in a bit of social proofing and can be guilty of groupthink and as such, if Bank A turns a company down for credit, then this increases the likelihood that Bank B will also turn them down.
Therefore, the key thing here is to try to identify the correct bank to apply to before you make your application. A business can do its own research here by looking into the banks’ published lending policies and looking at which bank has lent to similar businesses. Alternatively there are business lending brokers who can provide all manner of tips for business financing – they can help out both by identifying a suitable lender, and by assisting with the presentation of the application.
And remember, even when you think the answer will be no, you never know.
What Is The Interest Rate?
In order to work out whether it can repay a loan, then any business needs to pay close attention to the interest rate. Interest will be charged on any loan made and will impact the total sum payable as well as the monthly repayment amount. A high interest rate will make the loan harder to repay, and a low one will make it easier to repay.
Businesses also need to decide whether the interest rate is reasonable and proportionate. For example, if the prevailing rate of inflation is 2%, is it really all that reasonable for a lender to ask for a 15% rate of interest?
Any prudent business also needs to establish whether the prospective interest rate is fixed or variable. A fixed rate will remain constant throughout the entire term of the loan whereas a variable one will change over time usually tracking the official interest rate.
Finally, it is important to note that in many cases a business loan interest rate will be higher than a personal loan interest rate on account of the respective lending risks the bank is taking.
Fine Prints
Before accepting a loan, any business should take care to establish what is in the fine print regarding interest rates, early repayments and how exactly does any of this impact the monthly payments.
As we touched on above, some loans come with fixed interest rates, and fixed loan repayments across the entire lifespan of the loan. Others have variable interest rates which will/or may change over time. This means that the monthly repayment amount will also fluctuate and change over time. A sharp increase in the interest rate for example will usually mean that the monthly payment jumps too. As much as possible, any shrewd business needs to be sure that it could afford to maintain higher repayments.
Most loans also come with early repayment clauses built in. For example, if a business has an especially successful trading period and decides it wants to fully repay the loan in one lump sum, then there may be a ‘penalty’ for repaying the loan only! In some cases it is not even cost effective for a borrower to repay a loan early. One of the tips for business loans is to try and find a deal that does NOT have early repayment charges written into the terms.
Are You 100% Sure You Can Repay The Loan?
A lot can and does change in business and there is no such thing as 100% certainty. Therefore, a business simply needs to make a decision and take a calculated risk when obtaining finance.
The penalties for falling behind on payments and defaulting on loans can be severe. At the very least, additional charges will be levied for late or missed repayments. The worst case scenarios for non-payment involve legal proceedings being brought and court enforcements such as the seizure of goods and even bankruptcy.
As such, before borrowing a business needs to be confident it can make the repayments or else, it could well spell the end of the business.
Are Government Grants An Alternative To Business Financing?
Let’s be honest, being given money is always preferable to having to borrow it. Whereas loans must be repaid (and there are consequences for failing to do so), a grant does not. Therefore, any business that can access governmental support grants would be wise to try and do so.
However, in reality governmental grants for business are few and far between. Whilst most world governments (including Australias) did roll out extensive support schemes during the peak of the COVID-19 pandemic, these have been seriously scaled back and are being wound down completely. Still, some businesses may be entitled to them if another lockdown is ordered.
There are however some start up grants intermittently available to businesses operating in certain sectors (such as education) or in economically deprived geographic areas.
Ultimately, whilst it is always worth exploring the possibility of getting a government grant, don’t ever count on it happening.
Final Thoughts
The world of business lending and financing may seem intimidating but in truth, it isn’t. There are simply processes that need to be followed and factors that need to be taken into account. Remember that a bank’s business is to lend money and as such, they are always looking for new opportunities to do just that.