When it comes to growing a small business, financial backing and business loans are an essential part of the business plan. It can be difficult knowing where to start when it comes to choosing and managing these sorts of loans and what is the best one for the business. Knowing a few facts and tips will provide some guidance, and speaking with an experienced business lender about the individual requirements of the firm will ensure the effective management of these loans.
- Ensure the business budget is accurate
There is no point in looking at the different loans and repayment schemes on the market unless an owner has an accurate base income and knows the current and planned business outgoings. This means checking that all assets are covered, including any current repayments (to family and friends if it is a new start up), and planned growth activities are factored in (new product line requiring additional equipment, material, staffing, insurance, distribution or premises). This will determine the amount of finance needed. If the landlord has given a preferential rate for the first six months and it then increases, this has to be noted in the business budget. The same goes for staffing costs and other known outgoings.
As managing a small business loan will involve keeping a close eye on repayments, it is essential that the outgoings currently linked to the business are accurate and recorded on the business budget. This will form part of the discussion regarding the most suitable loan for the business, as the lender will need to factor in the ability to repay monthly instalments.
- Review all small business loan options
There are plenty of loan choices in the marketplace. While being loyal to one bank or financial institution has been a factor in the past, the options available now are more flexible and appropriate to the needs of the smaller business owner. Alternate lenders can offer a more specialist service too. If the need is for an office refit or to purchase a specialised piece of equipment (new or used), it is worth speaking to an independent lender to review all loan services.
- Don’t be taken in by the headline rates
Remember this is about choosing the right loan for the small business owner. Lenders are very aware that there is strong demand for credit facilities and the headline rates are there to attract interest (no pun intended!) from the borrower. In order to effectively manage a small business loan, it has to be just that – manageable in terms of interest rates and repayment terms.
Make sure that there is full understanding of the terms and conditions behind the headlines. What may sound very attractive in terms of interest rates and repayment dates could have an underlying condition attached that will impact on the planned repayments (for eg. a larger sum in the last few months or a higher amount for an early repayment). Fortunately, if discussed with a lending specialist they can outline all terms and conditions in plain English so that there are no unpleasant surprises.
- Ensure the business’ bookkeeping is in order
When it comes to applying for a small business loan, the owner must ensure that their bookkeeping practices are up to date. Otherwise, how is it possible to effectively manage a small business loan? For those who are underwriting the loan, the reliance is on accurate and strong figures and ratios.
Use an accounting software package that will provide an organised picture of the company’s financial history. When it comes to pitching a requirement for a loan that is suitable for the business, the figures to discuss will be how much is required, and how these funds will be repaid. All these will require accurate bookkeeping. Once a loan is secured, it is much easier to put forecast figures into an automated accounts package, where it can calculate how much the repayments will change by increases in interest rates, for example. Then the business can ensure they monitor the repayment costs on a daily, weekly or monthly basis which is an effective management tool.
- Calculate the debt service coverage ratio (DSCR)
The DSCR is a measurement of the company’s available cash flow to pay off the existing obligations. The majority of lenders require a DSCR ratio of 1.25 or higher. This is because it demonstrates a business can pay off existing obligations but still have something in the bank for any unexpected expenses. If the DSCR can be maintained at 1.25 or higher, this is another management indicator for effectively managing a small business loan.
- Get the right advice at the right time
The business loans market is an ever-changing environment. For the small business entrepreneur, there are enough demands on their limited time. It is difficult to know all the latest loan products and services on the market. At the same time, the owner of the business is the expert when it comes to their own company. In order to effectively manage a small business loan, an effective small business loan lender is the key person to consult. They will be able to steer and advise businesses to the right loans at the right time for the company so make sure a consultation appointment is booked with them at the very start of considering a loan.
About the author
Barry Oxley is the Director of Lending Specialists, a mortgage broking business based in Melbourne, Australia. Having been involved in the finance industry since 1970, Barry is one of the country’s leading experts on managing small business loans. He understands what it takes to not only build a successful business, but to maintain and grow it from strength to strength.