Starting a business, growing a business? How to get a loan
Whether you’re starting a business or getting ready to grow your current business, before too long you’re going to need to borrow money for things like:
Common ways to get a loan when starting or expanding a business
If you don’t have enough cash of your own to finance these things (and most people don’t),you’ll need to explore the other ways new and burgeoning business owners raise funds:
- Bank and other financial institution loans.
- Bank overdrafts.
- Loans or investments from friends and associates.
- Government grants.
You can find out more about government grants on the business.gov.au website. As for loans and overdrafts from a bank, friends or outside investor, you need to think of them all as the same thing – a serious business relationship.
Like a bank or investor, friends are going expect their money back. It’s amazing how many friendships are broken over money, so be careful going down this route and draw up a legal contract right from the start so everyone knows where they stand.
Financing for different time frames and needs
While each person’s situation and needs are unique, new small and medium business owners often mix up their borrowing options, depending on the occasion and time frame, such as:
- Short-term: bank overdraft
- Medium term: bank loan, lease, hire purchase
- Long term: bank loan, mortgage.
Tips for getting a bank loan when starting or growing a small business
Now, you know your business is a winner, but the banks and other financiers don’t. Not yet anyway. As far as they’re concerned you’re just the latest in a long line of passionate entrepreneurs asking for their money.
To stand out from the crowd, you need to sit yourself in their chair. After all, if someone asked you for a loan to start or grow a small business, wouldn’t you want to know who they were, exactly what they were going to do with your money and how they were going to pay it all back on time? Exactly!
Put together documents that sell you and your business as a ‘good risk’
To start with, you’ll want to have a Business Plan that clearly explains your:
- aims and objectives
- target market
- production and sales forecasts
- equipment needed
- distribution plans
- business structure
- expertise and experience.
You’ll also need:
- cash flow projections – so the banks have tangible financial data to assess the risk
- past business tax returns (if you have done any)
- a credit rating report – basically your loan repayment history.
- a list of your personal assets and debts.
- collateral – assets you’re willing to put up as security such as equipment, your house, car.
- to put up money of your own – shows the financier you’re committed to your new business venture.
In a nutshell, if you are starting a new business, or looking to expand an existing one that hasn’t been around for long, take the time to think about which financing option will be best for you and your business. And then put together a professional pitch to get the money you need.
Remember, financing through a friend might seem easier in the short term, but can be fraught with long term disaster if not handled correctly. Plus, you may miss out on all kinds of tax benefits, loan repayment options and other advantages that going through a finance broker/bank can provide.
Need some help getting a new business loan?
You might also like to read our article on ‘How to write an eye catching business loan proposal’