7 Considerations For Your Small Business Loan In Australia
It’s no secret that many Australian small businesses are struggling in 2021. While we’ve come through the pandemic better than many other countries, our economy does not exist in a vacuum. A lack of international tourism and the fact that many multinational businesses have collapsed has left a gaping hole that is yet to be filled. Also, companies that managed to just scrape through the worst of the pandemic may still need a boost.
These are just some of the reasons you may be considering a small business loan. It is important you know what to take into consideration, and we’re here to help with comprehensive information presented by Small Business Loans Australia, the most comprehensive guide for small business financing and online lender reviews.
Let’s jump right in. Here are the 7 considerations you need to keep in mind when taking out a small business loan in Australia.
Do I really need financing?
Chances are you need financing for your business to survive the next few months. Alternatively, you need working capital to get a new business off the ground. However, many business owners consider getting a loan to expand their business or try out a new avenue for extra income.
If this is the case for you, a small business loan might not be the best idea. After all, you are taking on extra debt at what is likely a high interest rate. Expansion is always worth thinking about, and you should go for it if you have the capital available. But if your only option is a loan, you might want to put your plans on hold.
Are there alternatives available? Should I sell equity?
A business loan is the quickest and easiest way to get funding for your business. When it comes to your ego, it is also the safer option – there is very little that is personal about your application for a loan. However, the golden goose of small business financing is investment from a third party. And for this, you need to sell yourself and your business to potential investors.
Venture capital companies and angel investors will be willing to invest if you can provide compelling evidence that your business is likely to bring high returns. In exchange for their investment that you will not have to pay back, they will request equity in your company. They will then own part of it and will profit from the business’s success. They may also ask to take on a consulting role and have a say in some of your big decisions.
Equity investment is certainly not for everyone. Some business owners want total control of their own ventures and would rather take on debt. But investors can also add a lot of value to your business by providing insight and mentorship. If you are not in desperate need of financing, consider looking for an angel investor or Venture Capital company.
Can I get a government grant or subsidised loan?
When you hear the term “government grant,” you probably assume it only applies to companies that provide a public service. Why else would the government get involved in your small business venture?
However, the reality is that the Australian economy is strongly reliant on small businesses. They make up over fifty percent of Australia’s GDP and employ millions of people. It is in the country’s best interests that small businesses not only survive but thrive. Before you make the assumption that your business is not eligible for a government grant or subsidised loan, do your research.
During COVID-19, the Treasury created the Coronavirus Small and Medium Enterprises (SME) Guarantee Scheme. This scheme guarantees loans for small businesses, ensuring the availability of loans with low interest rates for struggling businesses. If your business has not yet applied for a loan from this scheme, you can still apply until the end of June 2021.
Do I care more about speed or low interest rate?
Many small businesses that apply for loans are in desperate need of the cash influx. For these businesses, speed is all important. These are the businesses willing to apply for loans that will provide cash almost immediately. They are also the businesses likely to fall prey to predatory lenders who make the most of their desperation. These lenders provide immediate loans with incredibly high interest rates.
Private lenders are not regulated in the same way as banks are, and can therefore use unscrupulous practices to trap businesses in loans they will struggle to pay off for years. Ultimately, you will end up paying back far more than the loan is worth. These loans are also generally short term loans, and payments will be high right from the start.
If you are desperate and really feel you cannot wait, a quick online loan might be your best option. There are good providers available who won’t entirely take advantage of your desperation. However, it is always better to spend more time getting a solid application in order so that you can get a low interest rate loan.
Desperation is never a good starting point, and you should consider whether the loan is really worth it. Sometimes, you are only flogging a dead horse. Your business might survive another few months but ultimately collapse anyway and leave you in significant debt. In certain cases, letting it go and starting from scratch might be your best option.
Should I go for a secured or unsecured loan?
For those that do go with a non-bank provider, you will have the option of a secured or unsecured loan. The difference between these two types of loans is very important.
A secured loan refers to a loan that is guaranteed by a third party or with an asset. If you are unable to pay it back, the lender will claim from the third party or repossess your asset. An unsecured loan is one that has no one guaranteeing it and no asset attached to it for repossession.
Lenders are taking on a lot less risk with a secured loan, as even if you cannot pay it back they are getting back some or all of its value. Unsecured loans, on the other hand, are very risky.
With a secured loan, you will therefore get a much lower interest rate. The high interest rates attached to unsecured loans can be prohibitive or end up being the downfall of the business.
Ideally, every loan you take out should be secured. However, if you simply do not have any way to guarantee your loan, or cannot afford to put your assets up as security, you may have no choice but to go for an unsecured loan.
What is the normal portfolio of a borrower with a non-bank lender?
Before taking out a loan from a non-bank lender, it is a good idea to get acquainted with what other businesses are borrowing. Take a look at the portfolios of other borrowers from your industry. The reality is that the size of loans depends on what type of business you are looking at. This should not be that surprising, considering that some businesses are likely to need a lot of working capital just to get through a single project, while others only need to pay salaries to a handful of employees.
The biggest borrowers tend to be retail and manufacturing companies. They borrow an average of just under $80,000. Compare that to computing companies, who borrow an average of just $28,333 – the lowest of any industry.
Other big borrowers include import and distribution companies (who borrow an average of $73,000) and energy, automobile, and legal companies (who each borrow over $65,000 on average). Industries that go for smaller loans include travel and sports companies. They borrow an average of $35,000 and $32,000 respectively.
Which online lender should I choose?
If you have decided to go with a private online lender, the big question is which online lender you should choose. As we have mentioned, there are some very unscrupulous predatory lenders out there who are more likely to tank your business than to save it. On the other hand, there are some well-reputed companies that will give your business the best shot at surviving and thriving.
There are a number of factors you should be looking for in the best online lenders in Australia. Good customer reviews are important, as they will give you an insight into whether the lender is trustworthy or not.
It is also important that you take note of the conditions they put in place for applicants. Any lender that seems too good to be true in terms of which businesses they let apply for loans should be avoided. A lack of standards indicates a willingness to take on a huge amount of risk. And with a huge amount of risk comes massive interest rates. They clearly make money even from failed businesses.
That is not to say that a lender needs to obsess about your credit rating. There are other ways to measure risk, and when it comes to small businesses, the likelihood of profitability should be far more important than your personal credit history.
With all of that in mind, these are the best online lenders as rated by Small Business Loans Australia.
One of the biggest names in the lending business – as well as one of the most-trusted – Prospa may well be the best in the business. Prospa provides quick online small business financing within a day. Most loan applications themselves are approved or rejected in under an hour.
Prospa is a good option for businesses that have been operating for longer than six months. They will provide loans only if you have a turnover greater than $5,000 per month. Depending on the size and profitability of your business, they will provide anything between $5,000 and $300,000.
One of the reasons Prospa is so popular is that you can get a loan even with bad credit, as long as your business is showing profitability. Of course, the best interest rates will go to those with good credit scores, but they won’t punish you too much for mistakes you have made in the past.
Prospa is trusted enough to have been used as a provider of loans guaranteed under the Coronavirus Small and Medium Enterprises (SME) Guarantee Scheme.
If your credit history is particularly bad, Lumi may be your best option. They provide loans to companies that have an annual turnover of just $50,000 or more. They don’t have quite as much credibility as Prospa, and client reviews aren’t as positive, but they are a good option if other loan companies won’t approve your applications due to your credit score.
Providing working capital to established businesses, GetCapital offers a great service and is extremely well-reputed. GetCapital is perfect for any established company in need of cash flow to get projects done. They provide bespoke loans and will offer a business line of credit if you want to borrow only as much as you need.
GetCapital does have more stringent requirements than companies like Lumi. Your business needs to have been operating for over twelve months with an annual turnover of at least $100,000 to get loans up to $250,000. If you have been operating for longer than three years, they may approve you for an even larger amount.
Getting the right financing
If you require small business financing, a quick online loan might be the best option for you. However, you should take as much time as you can in making your decision. Investment is obviously the best case scenario for many businesses, but when you are desperate or simply need to keep your business alive, this is not really an option.
Since online loans can come with high interest rates that can cripple your company, it is important that you take care with which provider you choose. Think long and hard about the considerations above before making your final decision.
Advisr does not provide advice and does not hold a financial service license (AFSL). All information above has been provided by Ilan Kaps.