In continuation to Guide to Business Lending: A Look at Key Lenders in Australia
Australian Federal Government runs numerous fiscal measures to improve small business operating conditions in the country. Some of these measures include Australian Business Securitisation Fund, Business Growth Fund, Employee Share Scheme, Financial Reporting Thresholds, Australian Small Business Advisory Services, Australian Small Business & Family Enterprise Ombudsman etc.
The Federal Government has continued to take preventive actions for the small business community. For bushfires-impacted small businesses, the government is providing a grant of $10k to business owners based in selected fire-affected areas. Applications are invited from 16 March 2020, more information on eligibility is being provided by state hotlines.
Also, the Federal Government and State Governments had announced recovery grants of up to $50k for Non-Profit Organisations (NPOs) and eligible small businesses.
Further, the governments had launched concessional loans of up to $500k for eligible small businesses, primary producers and NPOs. Additional information is available on respective state government websites.
Specifically, for small businesses, the big four banks have taken measures to curb the disruptions by the COVID-19 global outbreak.
Earlier in March, Westpac Banking (ASX:WBC) had lowered the variable interest rates on small business loans (cash-based) and overdrafts by 0.25% p.a. Also, the bank has introduced the following measures:
- Fee-free redraws
- Deferred business loan repayments by about three months
- Consolidating and restructuring loans
- Deferred payments for business credit cards
- Option to extend the business loan term by three months
National Bank of Australia (ASX:NAB) reduced its interest rates for small business option loans and overdraft facilities. Also, the businesses impacted by coronavirus are being handled on a case-by-case basis, and assistance include extension, restructuring and deferral.
Australian & New Zealand Bank (ASX:ANZ) had also stated that business customers facing deteriorating business conditions in the wake of COVID-19 would be given assistance, including additional credit, suspending interest repayments, and access to term deposits at no additional costs.
Commonwealth Bank (ASX:CBA) has presented its set of assistance measures in light of COVID-19 today (i.e. 11 March 2020). Other than the 25 basis points reduction in home loan rates, the bank has provided an option for deferral of loan repayments for adversely impacted retail customers.
CBA has also introduced measures for small and medium business customers, including:
- A 25 bps decrease in business loans rates
- The capacity increment for teams supporting business lending
- Deferring repayment on business loan and overdraft for three months
- Waiving merchant terminal fees for customers with CBA terminals for three months
- Deferring repayment on equipment finance, and a few more
Related: COVID-19 drowns Risk- Assets; Governments’ Fiscal Response Awaited
Types of business lending
Generally, debt/loan has one major distinction – secured and unsecured. A secured loan is backed by a collateral that could be acquired by the lender in the event of default by the borrower. An unsecured debt, on the other hand, is riskier for lenders as it does not have a collateral backing. Thus, the interest rates are higher in unsecured credit.
Other key business lending products include:
Fixed rate and variable rates
A lending product usually comes with two interest options. Fixed interest rates are the products which carry the same level of interest rate throughout the tenure of the loan. Variable rate products have a floating interest rate which changes concurrently with the changes in its underlying benchmark.
Unsecured business loans
These loans are the most common form of business loans. Business loans are usually utilised to fund daily business activities, including wage payments, inventory procurement, starting a business, invoicing expenses. Moreover, such loans are used to fund business as usual activities.
Overdraft loans enable the business owners to fund daily business activities upon a period when incoming cash flows are delayed, thereby creating liquidity issues for the business owners. Moreover, these loans provide businesses with headroom in the event of contingent development.
Trade Finance refers to a loan that delivers payment to an exporter on behalf of the importer prior to goods arrival. Trade finance instruments include a form of letters of credit, export factoring, export credits, insurance or lending facilities. The process is usually short term, as it enables the purchase of goods and then pays off once they are resold on the marketplace.
It is a kind of financing used by companies as part of the recovery programme of their business. Ideally, it entails a lender providing business finance which is secured by a portion of equipment. Equipment finance is useful for businesses of all sizes to finance the purchase of any type of machinery, equipment or vehicles that are required to fully operate their business.
How to apply for a business loan?
Access to the business loan is easy, but the main distinction in the process comes when you are asking for funds for a new business.
New business funding prerequisites
When you need funding while starting your new business, you will need to prepare a business plan for your proposed business. In this, you would be writing down your business model, strategies, actions, timing, and finances.
All these factors would take research and time. In a business plan, you have to convince the lender that your business model is sustainable and potentially profitable. And, your business plan should be backed by your financial position.
Review your financial position
After you have prepared the business plan, you should check your financial position. This includes some questions you have to ask yourself, including:
- How much seed capital do I have?
- What is the need of the business loan?
- Which of my assets are available for collateral?
- Who could be the guarantor to the loan?
Select your preferred loan type
Business loans have various features including fixed rate, variable rate, secured business loan, unsecured business loan. All of these features come under the cost of the loan, and there could be one-time charges as well.
Next task is arranging your paperwork, which includes an identification proof, business plan, financial statements of at last three years, financial ratios of your business, and personal financial information.
Existing business owners
Prior to applying for business funding products, you would be generally asked to produce some paperwork, which usually includes:
- If you’re applying for a secured product, you could use residential or commercial property as collateral
- A credit history that reflects your creditworthiness
- Existing financial and loan obligations
- Tax returns or financial statements
Compare & get the best deal
Now you can start looking for funding products as per your requirements and compare the options available to you. When you compare numerous loan products, there are chances that you would find a better and optimal deal.