Starting up a small business from scratch can be a difficult and confusing process, especially if you are new to a country or unfamiliar with the processes and requirements involved. The most important thing when starting a business is to get your finances in order. Ben Nice looks at what kind of small business loans are on the market and what you need to know about financing your new business.
No matter what kind of business start-up you are considering, with no finance available, the task is near impossible. While some people are fortunate and are able to raise their own capital, or borrow money from a friend or family member, most will rely on some form of banking facility or loan to kick-start, invest in or expand their business.
Whether it’s a restaurant, a franchise business, an accounting firm, import/export or even a one man taxi business, almost every business has some kind of start-up costs. Luckily, there are several options available to prospective business people in Australia, offering anything from a few hundred dollars to several hundred thousand, to help businesses get on their feet and start making money.
Assessing your options???
The business financing landscape in Australia is crowded and confusing, with many variables and considerations as to what is on offer. The type of loan that you will need will depend on your business plan and your financial requirements; and the options can be broken down into three main areas:
– Fully drawn advance – This is a usually quite a large amount of money which is offered in the form of a loan. The amount will normally be paid back over a 12 month period or longer, with interest charged on the amount borrowed, and repayments due from the first month after the loan. These are very similar to home loans, where you will be paying the principle amount and interest back over a period of time. This type of finance option can be anything from a few thousand to several hundred thousand and is considered a ‘long-term’ finance option. This type of loan is normally used for things such as a commercial property or an expensive piece of machinery – generally things which will not yield a return in the short term.
– Overdraft – An overdraft will tend to be a smaller amount which is required in the short term. This could be anything up to around $50,000 and will allow the business to take money in and out – providing them with working capital before any income is received. This kind of loan is considered a short-term finance option and should not be used for capital finance. Fees on business overdrafts will vary and depend on how much the overdraft is.
– Line of credit – This is quite similar to an overdraft facility – although banks will often offer a larger amount and more flexibility with how it is used, as it will normally be secured against a mortgage. It gives a business the ability to go out and invest and spend money on their business, and is more of a long-term arrangement than an overdraft. Businesses will start by making interest only repayments, and once the maximum amount has been borrowed or ‘drawn out’ then it can be paid back like a loan.
The amount or type of finance on offer will entirely depend on the person’s ability to repay the loan, says Steven Guscic – Executive Manager, Local Business Banking, Commonwealth Bank.
“The person has got to be able to demonstrate an ability to repay the loan,” he says.
“Generally they would’ve been in business before, and be able to provide the last few years financial statements for the business as well as personal tax returns – and then that gives us an indication of the turnover, the profits and the future prospects of the business.”
“If it’s brand new we look at the cash flow budget, the forecast and the business plan, to assess how the business will perform in the first 12-24 months. The plan should highlight what they’re trying to do, how they’re trying to do it and how they got to their cash flow predictions. It all comes down to their capacity to pay back the loan,” he says.
As well as compiling a solid business plan and demonstrating good knowledge and business skills to the bank, other important factors include; what you are willing to provide in security against the loan; and what kind of credit history you have.
Security: As with a home loan, the bank will be looking at what you can provide in case you default on the loan and can’t meet the repayments. With a business loan, you could use your residential property as loan security. Without loan security, Guscic says that your options of getting a good finance deal are extremely narrowed – although not impossible.
“If they can’t provide some kind of security then their options are limited. We do offer some unsecured overdrafts under $50,000 but the business has to be really strong – if they’ve been running for 5 or 10 years and everything looks good then there should be no reason why we wouldn’t give them an unsecured overdraft facility,” he says.
Credit history : ? Another important aspect of what kind of finance your business can get is your personal financial track record. They will do this by accessing your credit file which outlines your financial history – including loans, credit cards, mortgages, income, savings, and any other financial information. If you have managed your money well, and can show a steady income as well as the ability to pay back debt efficiently, then your credit score should be quite good. However if you have been bankrupt or have defaulted on payments, your score will reflect this and you may be unable to access a loan.
“If you have defaulted or been bankrupt it is very hard to get a loan approved, because that shows us that they haven’t had the capacity or desire to repay debt. It’s hard to come back from that position unless there are mitigating circumstances such as severe illness.”
If you are new to the country and haven’t taken out any loans or financial products, then you’re credit score will also reflect that, and may deter lenders from giving you a loan. The best way to improve your credit rating is to apply for a small personal loan or a credit card and make sure that you make payments in full and on time. This will slowly help you to build up your rating, and improve your chances.
However, Guscic says that just because someone is new to the country and hasn’t built up a credit rating, this does not necessarily mean that they will be refused a loan.
“If someone is brand new to the country, you can’t hold that against them. If they haven’t had a history of borrowed money, but they can demonstrate a capacity to repay the debt there shouldn’t be too much of an issue in that regard,” he says.
Business loan checklist :
• Have I got a strong business plan?
• Can I demonstrate good knowledge or experience in my chosen business field?
• How much money do I need?
• Do you need full amount of money upfront or on call?
• On average, how much of that amount am I likely to need at any one time?
• How long will I need to pay it back?
• Do I want a fixed or variable interest rate?
• What type of security can I provide?
• What is my credit history like?
small business loan comparison
Indian Executive looked at a snapshot on what kind of rates and fees you can expect for two different business start-up scenarios: (insert excel tables)
– $100,000 needed upfront, with either variable or fixed rate interest. Residential security provided.
– $30,000 needed on call, with either variable or fixed rate interest. No security provided.
(*All loans currently advertised as of 14th August. Subject to individual application)
which type of business?
Not sure which type of business to start up? Here’s the lowdown.
Franchises: although franchises can often be an expensive method of owning your business, this type of system allows you to work within an existing and reliable framework with ongoing mentoring and support from the franchisor. You will usually have to pay a start-up franchise fee plus the usual business start-up costs, and then an ongoing percentage of your profits to the franchisor. In exchange you will receive ongoing support, training and marketing. Usually the more popular or well known the company is, the more in fees you will have to pay. For example, an initial investment for a Domino’s Pizza franchise is $400,000
Taxi licenses : Many immigrants in Australia opt for a taxi business due to its cheap upfront costs, and the simplicity of the business models. Get yourself a drivers licence, a taxi licence and a registered car, and away you go. However, the taxi market is competitive and you still some capital to get yourself on the road. There are special broker services which could help you find specialised finance in exchange for a fee.
Restaurants : with more and more Indians settling in Australia, Indian takeaways and restaurants are on the rise. While this area can produce good returns, it is also highly competitive and will generally require a high level of finance capital for a property on which to base your business.
Small professional practice businesses: This can include small businesses which are linked to professional sectors such as medical or accounting firms. These can yield high returns, but will also usually require a large amount of capital finance for a commercial property. Business knowledge or experience in your chosen area is essential if you want to apply for a loan.
Retail : This is a highly volatile area to start your business. With high start-up costs and a huge amount of competition you really need to do your research before investing money in the retail sector. Again, sector knowledge is important if you want to secure finance.
Guscic says that the type of business which you want to invest in, can have an effect on which kind of loan options are available to you.
“If someone comes into buy a fish and chip shop they don’t generally need much experience, but with a retail shop you might need to know a bit more about the ins and outs of the business. This could mean that they were part of a business, or have previously been involved with a family business,” he says.
“However, if it’s a specialised business you need specialised experience. It really varies as to what type of business they’re trying to buy into as to what experience we’re looking for,” he says.