Sarah Eifermann has worked in lending for 19 years but the SFE Loans founder now specialises in helping small businesses, guiding them through the basics of working capital, commercial lending and equipment finance. “It's an area where people struggle,” says the Melbourne-based business strategy and finance advisor, who also co-hosts the Financial FOFU podcast. “There’s a lot of information but not necessarily a lot of financial literacy.” For anyone considering small business loans, she urges small businesses to develop not only industry expertise but “a business owner’s mindset… to see future cash flow needs in terms of where you want your business to go.”
How Do I Apply for a Small Business Loan?
You have two pathways: through a finance broker or direct to an institution – a bank or a second tier lender.
What Process Can I Expect?
You need to show how creditworthy your business is. Sometimes you’re required to demonstrate creditworthiness in your personal life too. What are your assets and liabilities? Do you own property? How much do you have in other debts? After you fill out forms online, there’ll usually be a pre-assessment. If you qualify to move to the next stage, banks will ask for documents to support your application, which may include financial statements. If you’re not set up to give that information – if, for example, you’ve held off doing the previous financial year’s accounts to delay a tax bill – you may be looking at using a second tier lender.
How Do I Choose Between a Bank and a Second Tier Lender?
Interest rate versus speed and convenience. Major banks usually have more competitive interest rates, but their small business loan approval process can be more involved documentation-wise and take up to two months at a minimum – and they still might decline your application. Second tier lenders, usually fintechs such as Moula, Lumi and Banjo, generally calculate your borrowing capacity based on six to 12 months’ worth of your business’s bank statements, not your personal finances, and often you get money within days. You need to consider what's most important for cash flow. Is it the interest rate or the timing?
How Do I Prepare for a Successful Loan Approval?
Do your research. Understand a lender’s policies and target market, because you can waste time, energy and money if you’re paying application fees for loans that won’t be approved. Do your tax early. Know exactly what you're borrowing for because if you want working capital and you apply to a funder that doesn't provide it, your loan will be declined. This may impact your business and personal credit score. With that, if there's a data field in an application for a home phone number or for personal savings, put something in; the lenders’ internal credit score may mark you down for a blank field.
What Do I Need to Apply for a Loan?
Have all of your personal and business identification documents ready. You might need a company constitution or a bill that shows the business address. If you're operating as a trust structure, and borrowing within that entity isn’t allowed based on the terms of your Trust Deed, you might need to create a Deed of Variation with a solicitor.
What Do Banks Look for in the Application?
They're looking for a profitable business that can demonstrate capacity to repay the loan. Usually they use the policy of around two times interest cover in business lending. So if the loan is $100,000 and the interest rate is 15 per cent – $15,000 per year in interest – they want to see $30,000 in profit minimum.
What if My Business Isn’t Profitable but Has Potential?
A lender is going to want that explained with a business plan showing projected cash flow. They want to see what’s changed and whether it’s sustainable.
How Many Loans Should I Compare Before Making My Choice?
A good rule of thumb is three to five. Best practice is to only apply for one as more could affect your credit score. You have to know what features you're looking for. Do you have multiple little loans you need to consolidate into a short-term loan you can pay out in full when there’s cash flow? Or do you need a small business loan with set repayments over a long term, versus an overdraft or a line of credit that has a much higher interest rate and no set repayment schedule? It's also important to understand how debt fits into your business. If you borrow to buy equipment, is the subsequent income enough to afford repayments? Cash flow is not profit.
How Do I Know How Much to Ask For?
It's about the purpose of the funds. A bank might give you what they think is fair and meets their policy on the basis of your existing business and how you describe future needs. It’s like a mate asking to borrow $50; if he explains what it’s for and when he can repay it, you’re more likely to hand over the cash.
Should I Borrow More Than I Need?
That could grossly affect the ability to trade. High repayments can become a stressor for a business, especially if there’s also a company credit card. I’d suggest making sure the debt ratio to your income is sustainable, so it isn’t the end if one customer doesn't pay you.
What Interest Rates Are Typical for Business Loans?
The major banks’ rates for unsecured small business loans – which usually require a personal guarantee – range from about 12 to 18 per cent. If it's a secured business loan, which means you're giving your house or investment property as security – the rate will be around four to seven per cent.
What’s the Average Term of a Small Business Loan?
Some banks can go up to five years, but usually like to schedule small business loans over a two- or three-year term. Second tier lenders’ terms often range from a month to six months to 12 months; some will go to three years. In most cases, rates change based on the term.
Is a Business Loan Better Than a Small Business Grant?
If you qualify for a government grant to develop your business, and your business is set up to meet its terms and conditions, it’s worth considering applying for a grant. A small business loan could be faster but it can be seen as money that costs more money.
What Role Does a Business Plan Play in a Loan Application?
A business plan is more than just a document. It’s a mindset of knowing what's coming in a month and three months and where you want to be in five years. When I've seen business owners put business planning and lending together, when they have the right financial product for their needs and can grow sustainably, they’re happier.