Many businesses unprepared when seeking finance, research finds

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Many of Australia’s small and medium enterprises (SMEs) are at risk of missing out on the vital funding necessary to grow their business because they’re not properly prepared when approaching a lender, new research finds. Here, we share some important tips to help you avoid the common mistakes many businesses make when seeking finance.

State of SME funding

The State of SME Funding report^{^[1]} provides a snapshot of funding for Australian businesses, based on data collected from 200 SMEs and start-ups. The report reveals that while funding provides a significant boost to business performance confidence, many SMEs are ill-prepared when it comes to applying for finance.

Key findings from the State of SME Funding report include:

- Funding provides a dramatic uplift in forecast business performance confidence, with 45% of business owners expecting 50% plus growth after funding. This compares to just 10% of business owners expecting the same level of growth without funding.
- A surprising 50% of SMEs are seeking funding without a business plan. Further, two-thirds do not have a proper cash flow forecast when seeking funding.

With the performance boost funding can provide, how do you give your business the best possible chance of success when applying for finance?

Questions you first need to consider

Firstly, before approaching any lender for finance, there are a number of questions you need to consider:

- How much does my business need to borrow?
- What type of loan will I need?
- For how long will my business require funding?
- Can my business afford to repay the loan?
- What security can my business offer as collateral?

It pays to be prepared

Your answers to the above questions will give you a clear picture of your financing requirements. Next, do your homework and prepare. By spending some time preparing your application, you’ll increase your chance of success.

- Prepare a business plan – Develop an up-to-date business plan and summary and ensure your financial projections in the plan match your funding requests.
- Prepare a cashflow forecast – This will help identify how much funding you need, when you need it, how your business can repay loans and how long it will take to repay the loans.
- Have your paperwork ready – Make sure you have all your paperwork ready. This should include a list of personal assets, tax returns, bank statements and super fund statements. The lender will require this information from you, so by having it ready when you apply for finance, the sooner a decision on loan approval can be made.

Learn more in Your Insider’s Guide to getting that loan approved.

Assessing business risk

Lenders will look at your business risk profile when considering your application for finance. Understanding what lenders look for in terms of business risk will help you effectively present your business case.

Generally, lenders will take into account:

- What security you have to offer, such as residential, commercial, business or rural property
- Your cash flow to assess your ability to make regular loan repayments
- Any other existing debts that may affect your ability to repay the debt, and
- Your business credit profile.

What assets can you pledge to support the primary source of repayment of the loan? In addition to property, collateral that may be considered by the lender includes accounts receivable, inventory or a mortgage on fixed assets such as plant and equipment.

You need to assess the level of cash flow or business risk in your specific situation. A projection of the cash requirements of the business is most important to a lender. It is the surplus cash after business expenses have been paid that will be available to repay the loan, not your income.

Your business may have a credit profile that can affect your success when applying for finance. If you’re not nurturing your credit profile, you could be losing opportunities for not only finance, but also for attracting new customers and obtaining credit with suppliers. Find out how to stay on top of your business credit profile.

A lender’s perception of risk

Some of the factors that can influence a lender’s perception of risk include:

- Lack of security
- Lack of business history
- Factors specific to your industry sector, such as competition, barriers to entry, profitability profile and current economic conditions
- Seasonal business such as tourism, agriculture. You’ll need to demonstrate how you’ll deal with cash flow pressures in the off season
- Lack of planning, market knowledge and finance skills
- Poor credit history.