What happens if your business needs additional finance? There are many options to consider in terms of the best lender, but do beware, because just because finance is easy to get doesn’t make it a great deal or the right decision for your business.
Before you sign any new finance contract, it’s always wise to ensure the finance is needed and provides real value to your business.
The type of finance you need will depend on what the finance is for. A few questions to ask yourself is:
- What is the specific purpose of the facility?
- What is the risk to the lender?
- Is it debt or is it equity ?
- Is it short term or long term?
- What is the risk to you?
- When are the funds needed?
The answers to this question can affect where you look to obtain these funds. There are many online finance companies now that are available that are competitive to the traditional banking offer. Look at http://australianfintech.com.au/ to investigate companies such as Moula and Prospa etc. If it is for the growth of the business, then equity funding may be the best option.
If your business is having financial constraints, see if you can look at other ways to work through the tough times ahead of jumping in to getting additional finance - such as negotiating more favourable payment terms with suppliers, or offering a small discount for upfront payment from your customers to boost your cashflow.
If you’re looking to get finance due to cashflow constraints and your business is NOT actively growing, careful analysis of your financial situation is advised before you jump into a new finance contract. It may be that the additional constraints and stress will not pay off and the outcome may be devastating for your business.
So, if the answer is yes your business is growing and you need capital for working finance – what’s the best option and how to you ensure its cost effective?
Firstly determine who you will get your funding from. Working capital finance generally comes from two main funding sources – Banks and Non-Bank Lenders. Bank lenders require more collateral and the application paperwork can be more significant, but can often have more favourable terms. Non-bank lenders are usually a faster and easier way to get finance but the costs can be high. There are a few different types of finance to consider:
- Overdraft and line of credit
- Short term loans
- Debtor finance
- Inventory finance
- Asset finance
- Business loans for assets, property or equipment
Our tips? Make sure you finance what you need – new projects often cost more than you’d think, and if you’re negotiating good terms, make sure you ask for a little more now than you think you’ll need, just to cover both your immediate and future needs. It’s easier to get more now, than go back to renegotiate later.
Allow time for approvals. Don’t leave your finance needs until the last minute. If you keep an eye on your cashflow and monthly accounts, you should know when you might need extra finance so you can plan for the application and approval process. Remember, all good things take time, and dealing with financial institutions can be a slow process. Allow adequate time to get finance approval, your financier will appreciate your understanding that sometimes their hands are tied too and the wheels turn slowly. If you’re looking to pitch for new business – why not talk to your bank manager up front and run through the cost benefit analysis with them – you’ll soon have a clear indication of what you can borrow, what the terms will be, and can make the call on whether expanding is worth the cost.
Lastly, look if you can afford it. Look at the fine print – there may be application costs, repayments, and your cashflow needs to be able to afford the repayments. You don’t want to be in a position where the loan is called in because you’ve missed payments. This puts you in a very bad position, particularly if personal assets have been used as collateral. It’s a good idea to do a 12 month cashflow projection just to ensure you can afford the finance and to get an indication of the total you’ll need. If you show this to your financier it will put you in a good position to negotiate terms.
Managing Risk – you still need a little fat in the business if something happens. For example if you lose a major contract, will you be able to work through the process and still afford the finance. Don’t work your balance sheet so tightly that impacts to the business will see you close your doors. Lenders will only lend funds they are confident in returning, so measure the risk you’re asking them to take on.
Effect on Credit Rating – note that each and every time you apply for finance, it is recorded in your business’s credit file. If you apply for credit, be confident that you will get it. Denials of finance are recorded and could negatively affect your credit rating.
Government/Bank dislike of certain industries – we recommend that you talk to your bank about whether your industry is considered a high risk industry by the bank. If it is, there is a chance the bank may change the terms of your finance to force you to pay back the loan sooner than you planned or can afford. This can have a huge effect on the solvency of your business and has caused businesses to become bankrupt.
Before you go down the path of funding, have a talk to an advisor at PJT who can look at your books and talk you through the risks and return to ensure you make an informed decision that will be good for you and your family.