While real estate agents are starting to cheer the increase in property prices, business owners looking to banks to assist with business loans have little to nothing to cheer about.
You may wonder why that is, as we are largely given to understand that an increase in property prices is just the sign of optimism everyone is looking for. Isn’t that the one sign everyone is looking for?
Well, allow me to explain. There are two levers at play here.
One is the property prices, or in actual terms, the equity created in property by a rise in prices, which allows business owners and individuals to use this equity as collateral to support their loans to grow their business. This is the default security option banks look at. So, for example, if my property value went up by $100,000, I could go to the bank and use this increase in my property value as collateral for a loan that I want to use to grow my business.
However, it’s good to note that a strong track record and consistent growth in profits and cashflow can also be used as collateral, but not as often.
The second lever is the credit policies that govern the banks and other capital providers in the market, which decide the industries they lend to and how much. For example, a doctor may be able to access a loan for setting up a new dental practice quite easily compared to an interior design company that wants to take out a loan to set up its new venture. This is because a doctor who is qualified is considered a lower risk as there is some degree of certainty in their track record.
With this in mind, current business lending policies mean the banks are now able to cherry-pick the loans they consider low risk compared to others. So it is possible, for example, that a group of five applications may all have a great business story, only two may tick the bank’s policies and the other three may not.
Securing banking credit for businesses is still not an easy road. Bank lending processes are archaic and slow, and business bankers can pick the best of the lot to approve, leaving a lot of businesses in the lurch. The days of the same business banker working with one business for many years are well and truly over.
What are the alternatives?
So what about those other three businesses, you may wonder. Well, thankfully, there are now many fintech lenders in the market to fill this vacuum. Many of these are quick to respond and have credit policies that enable businesses to access capital faster.
The catch is this is more expensive money and not as cheap as bank loans. But what they give you is the ability to grasp the opportunity at hand without letting it go by.
Fintech lenders such Prospa, Moula and Spotcap, among others, are more nimble, and even though they represent more expensive sources of funds, businesses are moving to them due to more customer-friendly service and quick turnarounds.
New SME bank Judo Bank has also been impressive; the company is making the most of its big advantage with quick turnaround times and client-friendly decision-making process.
The small and medium business owners we work with are sometimes frustrated or overwhelmed by the choices and need help to better understand their options so they can make an informed decision.
Business owners need to evaluate securing the funding against the opportunity cost of not taking any action to grow their business, and they need to understand how to structure their business and the loan itself. This includes things like understanding how the interest charged for businesses is also tax-deductible.
The common thread with bank and fintech lenders is the treatment of credit behaviour. This is often overlooked, but it’s very important for every individual and business owner to keep in mind.
My top five tips to ace your business loan application
- Know and understand your credit report and your business’ credit report.
- Keep regular tabs on cashflow and ensure there are funds for bills to be paid. Move bills to be paid by direct debits on a certain date of the month. Pay bills on time or talk to the supplier to request payment terms.
- Ensure there are no dishonours on loans or accounts as this severely impairs your chance of getting a loan.
- Talk to your accountant, chief financial officer or business advisor to plan for tax commitments and BAS payments to be made in a timely manner, and have a business plan and forecasts for the next 12 months.
- Ensure you have all the business financials and tax returns filed by the due date.