Business finance guide

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Financing your business with one of the many different products available across Australia’s commercial lending market is less about borrowing money, and more about making an investment in your business success.
Whether you’re starting up, sustaining success, or wanting to make the most of new opportunities, the right finance can help fund the growth you’re looking for.
Australia is indeed the lucky country. We are blessed for choice when it comes to the amount of competition that exists when it comes to the business finance market.
With so many lenders, and so many products under each of their brands, it’s important you make the most of this choice when it comes to who and what you choose when it comes to how to fund your business.

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You’re busy running a business. It can be so hard to find the time, yet it’s so important to get it right.
The right finance can help you fuel growth and help build a strong and successful business. Get it wrong and the debt can often have the opposite effect. You don’t want your earnings being exhausted by your repayments, instead of providing you with the cash you need to operate successfully.
In business, the right finance is so much more than just finding the lowest interest rate, and reducing fees. Not only do you need the right type of finance, you need to be able to choose from the widest range of options, terms and structure. Needless to say, there are a lot of complexities. It can be a difficult area to navigate, and to have the confidence to know you’ve made the right choice.
That’s why using a broker like us is a smart decision. We will match the right business loan to your business needs. We have access to a range of business loan options from a variety of lenders. This means we can help find the right loan for your business, and give you the peace of mind that like all good business decisions you’ve explored the options before making the final call.

Business funding – how does it all work?

How does the lender assess a loan application and interest rates?

Commercial lending is assessed on a number of different components. Whilst serviceability is key, the risk assessment includes value and type of security (such as residential, commercial, industrial, specialised and alike); industry type; management experience; age of business; purpose of funds; financial ratios, margins, profitability and trend analysis; bank account performance and credit history; and business cash flow.
Lenders assess serviceability or repayment capacity slightly differently. Some will require up to the past three years of tax based financial statements whilst at the other end of the spectrum some will rely on management accounts or even your last BAS statement. In some cases a cash flow forecast complete with assumptions will be required. They will assess strength of your business to withstand interest rate movements, trading fluctuations and ability to meet principal and interest payments even if your loan is interest only.
One thing for certain, lenders treat ability to repay as paramount in their assessment process. And whilst they hold the ultimate decision whether to approve or not, the most important party in this finance application is you, the borrower – it is important you are comfortable with the ability of your business to meet the financial commitment you are entering.
It should also be noted commercial lenders differ greatly in their risk appetite – some specialise in industry or security types while others exclude certain sectors entirely. Understanding these differences (which are dynamic) is crucial in deciding where to place your finance application. A poor alignment between your needs, your business ‘risk profile’ and the risk appetite of a lender is not ideal for your future business growth and success.

How are interest rates assessed and what type of fees are applicable?

Interest rates are extremely competitive amongst lenders and generally the lower the assessed risk, the lower the interest rate, and similarly with value of security offered and comprehensiveness of supporting financial data.
Lenders will charge up-front fees such as a Loan Approval fee, ongoing loan administration fees, and/or limit line fees, and set-up costs such as valuation fees and government duties, and quite often legal costs, documentation preparation cost and settlement fees. Given our strong lender relationships we also know how lenders work, what they look for and what they need from you.

Why is cash flow an important consideration in finance product selection?

A general rule is to match the life of the asset being purchased with the life of a loan.
Loan terms to purchase commercial property will vary between ten and 30 years. And whilst property based security is often required for business loans and will attract longer loan terms, lenders will take into consideration the length of lease remaining on the business premises or license, usable life of fit-out and/or franchise term.
Typically Chattel Mortgage Finance for purchase of plant and equipment, motor vehicle etc will have a loan term of between four and seven years which equates approximately to the usable life of the item being purchased. This means when the equipment requires replacement it has no residual debt outstanding and the business will be able to again purchase new equipment and access asset finance options.
Working capital facilities offer a range of choices largely dependent upon the security offered.
Working capital overdrafts are generally annually renewed and facilitate the funding gap by providing an overdraft limit that fluctuates with the cash flow cycle of a business – that is the variability caused between the timing differences between purchase of stock, sale of stock and collection of debtors versus payment of creditors. Similarly Invoice Finance is a revolving facility that is repaid in full each time the debtor makes payment and is then renewed upon new invoicing.
Unsecured business loans are typically much shorter in duration and designed for short term working capital needs and whist they provide very quick access to funds they also have relatively quick repayment terms of between one month to a year but usually a three month term, and with fortnightly, weekly or even daily repayments.

What security will be required?

For commercial loans, lenders will usually seek landed security for business borrowings, quite often the owners residence. If the borrower is a company or trust entity, they will also take a General Security Agreement over all assets of the company entity, and a Guarantee from the Directors, Beneficiaries or Unit Holders.
For most purchases of businesses including goodwill and stock, lenders will require property security. For many business owners this will mean a mortgage over their residence. However in the case of approved franchise systems some lenders will provide finance up to 75 per cent of the value of the business.
In the case of Asset Finance (plant, equipment, motor vehicle, green assets) lenders usually secure the Chattel or Lease Finance by the asset itself, although directors guarantees may also be required.
There are also specialised lenders who provide finance for specific purposes such as Insurance Premium Funding secured by the insurance policies themselves, Trade Finance secured by the stock being purchased, Debtor Finance secured by the debtors and of course Unsecured Business Finance which can be completely unsecured or secured by owners guarantee.

What financial information is required?

Depending on lender criteria, supporting information can include owners personal asset and liability statement and tax returns, financial statements of the business (either tax based or management accounts, full year or interim, and up to past three years in some cases) and cash flow forecasts.

Why is the type of security important?

Matching security to the type of finance is important to ensure your risk is correctly weighted and future borrowing capacity not artificially constrained or restricted because of the incorrect use of your assets as security. As an example, utilising property security for a general loan to purchase plant and equipment instead of say a Chattel Mortgage, may mean when the business needs working capital, or to purchase additional property that there is insufficient security available because whilst a property can be used to secure and access equipment finance, it doesn’t work in reverse – that is you cannot use the value of your plant and equipment as security for a general purpose or property loan. So while Asset Finance interest rates may not always be as low as property security, access to finance can be the more important criteria.

Choose the type of finance you need

Unlike residential finance, where the challenge is often to save you money, the right business loan may be more about helping increase your potential to make money.
In fact, residential finance and business finance couldn’t be more different. For a home loan, you simply need funds to purchase a home. It’s essentially one type of loan.
In business there are many different types of loans depending on the reason for the finance, the objectives of the business owner, and the sector the business is in.
It’s all about maximising your cash flow, minimising cost and providing opportunities for growth. And there are a variety of products that may help you achieve this:
• Commercial real estate loans – property and development.
• Equipment and vehicle finance.
• Inventory finance.
• Debtor or invoice finance.
• Accounts receivable finance.
• Working capital finance.
• Franchisee loans.
• Self-managed super fund.
• Unsecured short-term business loans.
• Insurance premium funding.
• Term loans.

Equipment and vehicle Finance

It’s a common question for small business owners; how do you get your hands on the equipment you need to grow, while still keeping the all-important cash flow and working capital? Choosing the right equipment finance gives you a lot more benefits other than just preserving your day-to-day funds: • Equipment can generate immediate income. • Equipment Finance preserves working capital. • Repayments let you budget more accurately. • Loans are often secured by the asset so usually you don’t have to put your house on the line. • There could be potential tax advantages to consider. What can be financed? Any plant or equipment that can help generate income for your business can usually be financed.
Some examples are as follows: • Motor vehicles. • Commercial vehicles. • Plant and machinery. • Agricultural equipment. • Computers, photocopiers and phone systems. • Medical and dental equipment. • Office equipment. • General business equipment.

Commercial Real Estate Finance – Property and Development

Like residential real estate finance, the commercial category is competitive among banks and lenders.
Your business can make the most of this to create excellent opportunities for growth and long-term investment. However, in contrast to the more familiar residential market, there are many more variables.
A commercial real estate loan can be used for anything from retail to industrial, office complexes to aged care facilities, or hotels and apartments, and the finance can be used for buying land, property development or construction. This means you’ll need an understanding of the commercial finance market. Enlisting the help of an experienced business finance broker is a good place to start.

What types of equipment finance are there?

There are many different financial products available with some more popular than others. It is important to discuss with your professional advisers such as your accountant which product may be appropriate for your business needs. These options include Commercial Hire Purchase, Chattel Mortgage, Finance Lease, Novated Lease, full maintained Novated Lease and Operating Lease. The more commonly used options are Chattel Mortgage, Finance Lease and Novated Lease. We can help you evaluate the key benefits and differences for each product. Chattel Mortgage The equipment belongs to you from the beginning and the lender has a ‘charge’ over the equipment that secures the loan until the final payment has been made. Because the borrower holds title to the goods there may be taxation benefits. So it’s important to get the right advice from an appropriate professional adviser such as an accountant on how this could best work for you and your business. Finance Lease The lender (lessor) purchases the equipment outright. The borrower (lessee) gets to use the equipment for the term of the lease in return for lease/rental payments. Under a finance lease the borrower (lessee) traditionally doesn’t need to outlay any working capital and may also be eligible to claim a tax deduction. You should consult your tax adviser about potential tax deductions when considering a finance lease. Novated Lease for Vehicles A Novated Lease is a three-way agreement between an employee, their employer and a finance company. The word “Novation” refers to the substitution of a new contract in place of an old one. In other words, the employer agrees to take on the employee’s lease obligations. The employer makes the monthly lease payments out of the employee’s pre-tax income.

Inventory finance

For most manufacturers, wholesalers or retailers, keeping stock on the floor is what keeps the business running.
Inventory finance is a short-term loan that allows you to purchase stock in advance without tying up all your cash reserves. The products you buy are the collateral of the loan, so you don’t have to use your assets to secure the loan. Then you pay back the lender once you’ve sold the stock.
Inventory finance is another strategy to preserve cash flow and working capital by allowing you to pay suppliers before you sell the goods. But the real opportunity lies in being able to purchase more stock for your busier times, like Christmas. For anyone with something to sell, it can really help boost sales volumes.
These types of loans traditionally have short timespans between 30 to 120 days and the rates and fees can be higher, which can impact your margins. Finding the right product and terms to help you achieve your goals is essential. An important thing to remember is that lenders will want to see a strong track record of sales and a good credit history.

Working capital finance

Working capital finance is a loan that helps you take care of your business by taking care of more immediate and day-to-day costs.
Like the name suggests, having this type of financing means you have the capital to cover vital costs like ensuring cash flow, paying suppliers on time, or covering employees’ wages during slower periods.
Just as importantly, it also means you can have funds at hand when you need them to create growth and make the most of any opportunities when they happen. The money is there, if and when you need it, and usually, you only start repayments when you’ve drawn down on it.
Unlike other more specific business finance products, working capital loans can be used for many different purposes. Secured or Unsecured Some loans require collateral like your business assets, inventory or even your own home or commercial property as security. However, unsecured loans are still available. The great thing about this is you don’t have to bet your house on your businesses success. The main thing to remember is that because of the short-term nature of working capital finance, the interest rates and fees can be higher. At the end of the day, good business finance should help your growth, not hinder it and we’re here to help you find the right solution.

Loans to purchase a business or franchise

Whether you’re expanding a current business or starting up a new one, it goes without saying that finding the right finance product for your business or franchise is critical to your success.
The loan options out there are as wide and varied as the type of businesses the lenders are financing. Choosing the finance product that suits your needs is just the beginning. Before a lender will approve your loan, they often require a lot of detailed information. They’ll want to see real numbers about things like cash flow, profitability, tax returns, sales forecasts and growth potential of the business. From you, they’ll also want to know about your qualifications, your personal assets and liabilities, and how much you’ll be able to invest. It can often be a complicated and time-consuming undertaking.
We can guide you through the entire process, from selecting the right loan, to putting the application together and getting final approval. We work hard to stay up-to-date on available products and understand what lenders need for your application to help maximise your chance of approval.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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