Financing for Small Businesses
Sourcing adequate finance can be the difference between failure and successful growth for small businesses. The good news is that access to finance is not a major issue for most SMEs.
Accessing financing not a challenge for most
A report by DBM Financial Services Monitors and commissioned by the Australian Bankers’ Association and the Council of Small Business of Australia has found that only 6.6% of SMEs in Australia were worried about accessing finance. However, small businesses in certain industries found it harder to access finance than others.
Around 16% of mining SMEs and 11% of SMEs in telecommunications found accessing financing a major issue. In manufacturing the figure was 9%. Small businesses worried about finance were concerned about not being able to take advantage of new opportunities.
Most small businesses make use of bank financing, with 49% using lending products other than credit cards and 71% using lending products including credit cards.
Steps involved in SME financing
Small business owners who have not yet made use of bank financing might find the process intimidating. Here are the basic application and approval steps:
- Consult an advisor: Some SMEs find consulting a financial advisor before approaching lenders helps with identifying the right loan. The advisor can guide the borrower through different categories of loans and assist with the type of loan(s) that match the SME’s requirements. The advisor might be able to put the borrower in touch with specific lenders with suitable products.
- Apply: The next step is to put the application together. Small businesses that use an advisor can have their advisor prepare their application on their behalf. The types of documents required for this process include the business’ accounts and finance statements and its business history. A business plan, personal financial statements for the owners, and other financial documents may also be required.
- Assessment: The lender will take some time to review, verify, and make a decision on the application. They will check the owner’s credit file and review the financial history of the business.
- Decision: The lender will make a decision on the application. If the application is approved, the lender and the SME will enter into a contract for the loan and the loan amount disbursed to the SME. Approval periods will vary depending on the lender, the borrower, and the type of loan. For some loans it may only take a few days to be approved, other loans might require months for a decision.
Issues to keep in mind
Most business loans are secured, which means the SME secures their loan with collateral such as real property. As a general rule, the more valuable the collateral, the more the business can access in financing. Small businesses can access different types of loans, including start-up financing, debtor/inventory financing, equipment financing, and trade financing. The loan period will vary depending on the financing option, and the loan could be as short as a few months to 15 years or more.