How do you choose the right loan for your business?
I was talking to a friend the other day - getting the right business finance is hard. With so many loan products on offer, how do you go about selecting a product that is right for your business? Is it the bank or financial institution and their reputation, or perhaps it's the features you look for (e.g. overdraft, line of credit)?
Who has the best business loans? And are there other considerations or experiences you've had that we should know about?
This is a complex question to answer as the solution is highly dependent on your situation. i.e. do you have a residential/commercial property that you are willing to use as security? Are you looking for working capital facility, or trade finance facility to buy stock, invoice financing facility to manage cashflow, or are you looking to secure a business loan to buy an existing business? In addition, there are many different policies and niches at each bank/lender on what type of loans they are willing to give out to SMEs. The number one key to secure financing on competitive terms and rates is to be able to match your individual circumstances with a bank that has the risk appetite to lend to you for your business needs. The second most important thing to consider is how to present yourself to the bank/lender, the same set of information can be presented in different ways and yield vastly different results.
At the end of the day, it's always good to speak to a professional about securing business loan as they are vastly more complex than a residential homeloan and banks/lenders have significant discretion on whether they are willing to provide the loan or not, so it's not a matter of ticking the boxes and putting in an application form, a lot of care and finesse needs to go into the application to ensure financing can be secured competitively.
Phil, it is important to use a bank that has experience in your sector as often loans products are adjusted to suit certain sectors like retail, trades, professional services. The problem with applying for a general business loan is that your business cash flow or seasonal changes in running costs may not fit a standard valuation or repayment model. You just take control and not act like you are willing to accept what is offered.
So check the lender has experience in your industry and even ask for references.
Ask others in your industry what are the important features they have needed in a loan. don't be afraid to ask as most small business owners will be happy to discuss this issue. Make your own list of "must haves" and "negotiable" features.
Talk to your accountant, advisor and lawyer before signing anything and don't be afraid to use a use a broker if you need support but again seek out someone who knows you industry.
Hi Liam,
If you are selling higher value items to clients you may want to consider offering your clients finance.
One small business I know sells thongs (yes - shoes) to small retailers and offers 6 months interest free finance for their stock while getting paid the very next day and not wearing the risk of factoring (where you still own the debt after three months). This allows him to win a lot of new business and get stock on shelves without owning the finance risk.
Try Scott McNally at ASM Money 0438 680 898 and use my name as an introduction or email me and I can send over more details
Greg Ferrett
Phil Khor, Founder at SavvySME
Wow, this is great advice Liam. Thank you! It goes to show that finding the right banker is not so different to shopping around and compare based a set of 'must haves' and 'nice to haves' features. It also shows a banker who has experience in the particular sector we work in, can add significantly more value than one who doesn't, irrespective of how attract their features or interest rate may be. I'm thinking now that perhaps it's also about willingness of the banker to build a healthy working relationship, especially tougher times. What do you think about the big 4 banks in comparison to smaller lending institutions in this regard? Is our small business likely to 'get lost' in larger institution and treated as merely a number?