Business Finance

Where can I get finance for a small business?

Many people in Australia dream of running their own small business but four out of five never do it. If you’ve got a good idea, develop a business plan, then talk to an MFAA Member about your small business finance options.

Your small business finance or commercial finance options include:

• Business loans
• Commercial loans
• Lines of credit
• Home equity loans
• Franchise funding
• Venture capital

How much money does your business need?

A lot of small businesses fail not because they’re offering a poor product but because they run out of cash. How much money do you need for your business? Not just to pay for set-up costs but to cover your living expenses while you get established? Don’t even think about going into business until you’ve done a detailed business plan and cash flow projection. Otherwise you’re planning to fail.

Business finance vs commercial finance?

Both business finance and commercial finance are generally secured by either commercial or residential property. However, business finance is probably more associated with small business or SMEs (Small to Medium Enterprises). Commercial finance tends to relate more to the financing of commercial property.

Business loans

Business loans are where the finance is for business purposes and the interest cost associated with the loan is tax deductible against the profits of the business. Small business operators provide security by way of residential or commercial property.

Commercial loans

A commercial loan is where the finance is for the purchasing of a commercial property, commercial property development or business purchase.

Similar lending requirements apply to both business and commercial loans. Commercial loans are secured either by commercial or residential property. With larger corporate borrowers, lenders can rely purely on the assets of the company as loan security e.g. trade debtors.

Lines of credit

With a line of credit, you’re given a borrowing limit by the lender and you draw down money – up to that limit – as you need it. The advantage of a line of credit is that you only pay interest as you draw down money. The disadvantage is that the rate of interest may be higher.

A line of credit should be “fully fluctuating”. ie It should only be used as a short term financing option rather than for the purchase of major commercial plant or equipment.

Home equity loan

Many people have limited cash reserves but have built up equity in their homes. That is, their homes are worth more than they still owe on their mortgages. You can tap into this equity to help finance your business or investment by taking out a home equity loan.

Start-ups versus existing businesses

If you’re thinking of running your own business, you should be aware that it’s generally easier to get business finance for an existing business rather than a start-up. Lenders tend to view start-up businesses as inherently risky whereas an existing business has a track record they can review. However, there are business finance options for start-ups.

Franchise finance or franchise funding

To meet an emerging need, new business finance products have come onto the market to help people buy franchises. Lenders can be more inclined to provide franchise finance because, while your business might be new, it could be based on a proven formula.

Venture capital

Venture capital (VC) describes where a lender gives you funds in return for a stake in your business. The further your idea is from fruition, the less likely the venture capital or VC firm will be to give you the money, and the more equity they’ll want in return.

Business Loan Process

Applying for a business loan can be intimidating to borrowers new to the process, however, the loan application process is fairly straightforward.  Although the specific steps can vary from lender to lender and business to business, most business and commercial financing will follow a similar process.

Business owners will have a much easier time navigating the business loan application process when they know what to expect and are armed with the right information and documentation.  An MFAA Approved Finance Broker can help.

Step One: Speak with an MFAA Accredited Finance Broker.

Having a one-on-one discussion with a credit expert can help borrowers to quickly identify eligibility for the types of business loans, leases or line of credit products available to suit the unique needs of their business.  The finance broker can also recommend a specific lender based on the funding scenario and help the borrower estimate how long it will take to obtain funding, an important requirement, especially if time is critical.

Step Two: Apply for the loan or lease.

Your Finance broker will help you with loan or lease application and verification documentation including a business profile.  In general, the business profile should include: the type of business, the company’s annual sales, the total number of employees, a profit and loss statement, information regarding the length of time the company has been in business and details about recent ownership history.  A lender will usually want to see a business plan, particularly for a start-up company.  Lenders would also require personal financial statements and available business financial statements.  If the loan is secured, the borrower will also need to provide information about the collateral being offered.  Collateral can include personal real estate, property, business equipment, accounts receivable, inventory and supplies, or business real estate.  Your finance broker will have access to a number of potential financiers.

Step Three: Wait for the lender to assess documentation.

The lender will then verify the authenticity of documents and review the applicant’s credit file, credit rating and background as well as the financial history of the business.  Your finance broker will update you as and when necessary.

Step Four: Receive loan approval or otherwise.

After assessing the application, if approved, the borrower and lender will sign all necessary paperwork, then the funds are disbursed or the loan settles (if for a property purchase).

How long does it take to get business loan or lease approval?

The length of time to approve a business loan varies depending on the chosen lender and the business’ unique circumstances.  Approval can be completed within a matter of days or can take several months usually depending on the complexity of the transaction.  A finance broker can help borrowers estimate the length of time to get loan approval at the outset of the application process.

What types of business loan and lease financing are available?

The majority of funding these days is secured.  Although specific financing offers will vary, most lenders offer a variety of financing options for business owners.  Below are a few of the most common financing options:

• start up financing;
• business growth financing;
• debtor / inventory financing;
• motor vehicle financing;
• equipment and plant/tools financing;
• business property financing; and
• trade financing.

How much can my business borrow?

Borrowers with a good credit rating, offering good security and supporting their application with good background and financial history or projections will have a good chance of success with their application.

How long will I have to repay?

Generally, business loans are set for a term of one to fifteen years, however, this can vary from lender to lender.  The amount of money being borrowed will also affect the term of the loan.  A business loan with residential property security can have a term as long as thirty years with some lenders.  A loan can also be structured on an interest only basis but be cautious as the principal will still be owed at the maturity of the loan.

Seven Tips For Securing A Business Loan

Securing a business loan in Australia isn’t necessarily difficult but knowing how to navigate your way can be the difference between success and failure.

Banks and other financial institutions offer a wide range of business finance options, from commercial property loans, commercial vehicle leases, and commercial and equipment leases, to simpler options such as letters of credit, overdrafts and lines of credit. Here are some tips on how to improve your chances of success.

1. Work out what is realistic

It’s a good idea to find and compare credit options based on the amount of money you need to borrow, how you want it supplied and the type of security you want to provide (residential, non-residential or none at all).

2. Find a Finance Broker

The next step is to speak to an MFAA accredited finance broker , who can help you work out what loan type and lender are best for your business and you. finance brokers work with clients to determine their borrowing needs and abilities, select a loan suited to their circumstances and manage the process through to settlement. They also do a lot of the legal and other paperwork, they have access to a wide range of loans and are experts in the area.

3. Have a credit history and make it good

Lenders are looking for two things when it comes to your credit status: an existing credit relationship and a relatively clear history. If a borrower already has an existing loan which they’re servicing on time, they are much more likely to be successful. Of course, there are options for those who are either credit impaired or just don’t have a documented credit history, and a finance broker can help clarify these.

4. Actively show how risk will be minimised

Demonstrate how you will lessen the risk to you and to the lender. Your finance broker can help.

5. Be prepared

For your first meeting with your finance broker , have up-to-date paperwork and tax records, make sure you’ve done your research and have a fair idea how much you want to borrow and how you plan to spend it. You should also know your total worth, listing your assets and liabilities.

6. Have a plan

Lenders like to see a business plan that shows that you know what you want to achieve and have a clear idea of how you can achieve it.

7. Provide more than one exit strategy

Lenders want to know how they’re going to get their money back and some want up to three scenarios for what is called the ‘exit strategy’.

To give your business the best chance of success, talk to us about finding the right commercial financing options for you.

Purchasing your own Business Premises

Some businesses choose to buy rather than rent their business premises. To do this, they take out a commercial property loan.

Commercial property loan repayments – effect on cash flow

Many small businesses prefer to rent rather than buy for cash flow reasons. However, there are a number of factors that can make buying your business premises an attractive option.

Commercial property – self managed super funds

Many businesses these days have their own self managed super funds. Rather than invest in a share or property trust, some of these businesses choose to invest their super funds in their own commercial property.

Commercial property – interest is tax deductible

If the property financed by a commercial property loan is used entirely for business purposes, the interest charges on the loan are wholly tax deductible – as are any maintenance charges. If the property is partially used for personal purposes, only a commensurate proportion of your interest and maintenance charges is tax deductible.

Your commercial property could make a capital gain

Over recent years, property prices have appreciated markedly. If this trend continues, you might make a capital gain on your commercial property.

Five Rules for Your Business Plan

Preparing a detailed business plan will inform the lender about your business proposal so that it can assess your application as favourably as possible.

1. Know your numbers.

In order to inspire confidence in you as a borrower, it’s important you are familiar with your key financial figures, even if you don’t prepare your own financial statements. This includes current income, net profit and expenditure.

Include a profit and loss budget, and, if your business is new or you are starting a new business, prepare your personal credit history.

2. Estimate how much funding you need.

Are you looking for funds to help with cash flow and operations on a regular basis, with a larger overdraft limit for occasional use? Or do you need one-off funds to open a new branch or purchase additional equipment?

Prepare an updated business plan to establish all of the factors in your application, including any partners and strategies.

3. Project your cash flow.

You can use this to prepare pro-forma statements, or projections of what your business will make going forward, making adjustments based on past trends.

4. Provide proof of loan security.

A lender will evaluate your risk factors to determine if you and your business are a good investment. Consider the maximum payment you can afford before meeting with your finance broker , who can advise you on whether you should offer collateral (assets such as property to secure your loan) or a third party willing to guarantee the loan on your behalf.

5. Ask questions.

Your finance broker will shop around on your behalf to find out what products are on offer. If you’re already a customer with one lender, discounts may be available. If one option is much cheaper, your finance broker will be able to tell you whether it carries higher fees or a likelihood of the interest rate changing.

Improve the Cash Flow of my Business

If you’re running a small business, one of the biggest problems you face is cash flow. Here we look at some of the ways in which you can improve the cash flow of your business, including:

• Overdrafts
• Credit cards
• Factoring, debtor finance or invoice finance
• Trade finance or stock finance
• Car leasing
• Equipment leasing

Overdrafts – traditional but declining

The traditional way for a business to improve their cash flow was to run an overdraft. However, you’re charged a fee to get an overdraft and ongoing fees to maintain the facility. Also interest rates on overdraft facilities tend to be higher than for residential home loans. With more flexible business finance products emerging, overdrafts are becoming a less popular way to address cash flow issues.

Credit cards – expensive money

Credit cards are easy to get, easy to use, and can be a good way to finance and monitor employee business expenses. However, they are generally not the most economical way to deal with cash flow problems. The interest rates on credit cards tend to be higher than for residential home loans, and you can quickly get in over your head. There are other specialised ways to improve your cash flow.

Factoring, debtor finance or invoice discounting

You’ve done the work and sent the invoice but you don’t have the money. This is particularly frustrating when your debtors don’t pay on time – which is most of the time.

With factoring (also known as debtor finance, invoice factoring, invoice discounting or invoice finance), a lender gives you a percentage of the invoice (usually 80%) in cash, then the remainder when the invoice is paid. This service incurs a charge but can save your bacon in cash flow terms. Beware that if the debtor ultimately does not pay the invoice, you must repay the lender all the money you’ve been advanced.

Trade finance, stock finance, export & import finance

If you’ve bought stock, it can be some time before the finished goods are sold and this can have serious cash flow implications – particularly for importers and exporters.

With trade finance (also known as stock finance, inventory finance, export finance or import finance), the lender gives you a percentage of the money against the stock you’ve purchased. Again, you pay for the service but it can make all the difference in cash flow terms. Lenders are much less inclined to loan money for stock sitting in the warehouse than they are for confirmed orders.

Car leasing & equipment leasing

For many small businesses, leasing cars, computers and equipment is preferable to outright purchase because it improves your cash flow.

Should I Lease my Company Cars?

Many small business operators choose to lease rather than purchase their company cars because it’s better for their cash flow. Some of the common vehicle finance options include:

• Car lease
• Operating car lease
• Novated lease
• Chattel mortgage finance
• Hire purchase
• Car lease

If you take out a car lease, the lender agrees to rent the vehicle to you for a set period for an agreed (generally monthly) amount. If the vehicle is entirely for business purposes, the lease payments are completely tax deductible.

Operating lease vs finance lease – what’s the difference?

With a car lease, you have two options: an operating lease or a finance lease. At the end of a finance lease, you pay a residual lump sum – an agreed value of the depreciated cost of the vehicle – and assume ownership. At the end of an operating lease, you return the goods and do not have to pay the residual payment and the lender retains ownership.

Operating lease vs finance lease – which is right for me?

Choosing between an operating lease and a finance lease depends on your situation. An operating lease is effectively a rental arrangement with no liability to you at the end of the term, whereas a finance lease has a residual amount that is your responsibility whether you retain goods or return them to the lender. There is also an accounting difference, with operating leases being off balance sheet while finance leases are recorded on the business balance sheet. To understand which car leasing option best suits your business, talk to an MFAA member.

Fully maintained car leases

With a fully maintained car lease, the ongoing vehicle maintenance charges are included. You can also include tyres and fuel and you pay a higher lease rental.

Novated lease

Under a novated lease, an employee makes an agreement with the Lender for the finance of a vehicle. The employer then takes the repayments out of the employee’s pre-tax salary. If the employee changes jobs, they take the car with them.

Commercial hire purchase

Commercial hire purchase is like a car lease in that you pay “rent” over the repayment term. The difference is that you gain equity as you make payments and title passes to you with the last repayment. A commercial hire purchase agreement can be structured with or without a “balloon” payment ie an additional lump sum payment to be made at the end of the lease.

Chattel mortgage finance

Chattel mortgage finance is a car loan that allows a business using the “cash” method of accounting for the Goods & Services Tax to claim back the GST on the vehicle purchase price in their next Business Activity Statement.