How To Get A Small Business Loan That Works For You

Obtaining finance can be challenging for small business owners, especially as cash flow challenges are common when starting out. If you need to access finance, these four tips can make sure you are approved, not declined.

1. Dig up your documents

Traditional lenders will demand all paperwork relevant to your business’s prospects of success, and won’t sign off an application without it. These may include a business plan, P&L, cash flow forecast, revenue projections, competitor analysis and much more.

Online lenders like Prospa make life much easier for small businesses. For amounts under $100,000, you only need to provide your driver’s licence, ABN and the BSB and account number of your main trading account. For loans over $100,000, basic financial documentation like P&L and cash flow are required to ensure your business is capable of making repayments.

2. Check your credit score

Your personal credit history is usually the most important factor for a traditional lender. Banks will obtain a copy of your credit report, so it’s crucial you examine yours before applying. Otherwise you may not understand what sort of negotiating platform you’re starting from.

Even if you think your record is clean, double-check it to ensure there are no inaccuracies or nasty surprises. You may not be aware that every time you apply for credit and a credit provider obtains a copy of your report, an inquiry is logged. Credit providers may take a negative view of multiple inquiries made in a short space of time, which may affect your ability to obtain credit.

Under consumer law, you have the right to obtain your credit report and correct any wrong information. Contact any of these credit reporting agencies for a copy:

  • Equifax (previously Veda).
  • Check Your Credit (Dun & Bradstreet).
  • Experian.
  • Tasmanian Collection Service.

3. Master your pitch

Obtaining a small business loan from a bank is essentially a pitch. You’ll need to sell yourself, your business and your plans for the future, while being both professional and passionate.

This can be daunting for those with little experience presenting or selling. Make sure you rehearse, and think of any possible questions or shortcomings that might be brought up. It pays to be ready with evidence that can back up how you will overcome specific issues. The best way to do this is to prove your ROI, or showcase your business growth in easy-to-read graphs and charts.

Fortunately, getting a small business loan from Prospa doesn’t require a pitch. Once you explain the intended use of funds, Prospa will see if you meet its lending criteria by determining if your business has the cash flow to support repayments.

4. Know your security

Traditional lenders usually require the borrower to offer an asset as security against the loan. In most cases this is a property asset, or other valuable assets like vehicles or equipment. Before offering up your home as security for a small business loan, carefully consider the consequences should you default. And always consult with those who will be most affected, like your family or business partner.

If you aren’t comfortable using your house as security, then a small business loan that doesn’t require upfront security from a trusted online lender may be more appropriate.

When opportunity knocks for small businesses, there’s a range of new choices for raising funds. Prospa can help you access the funds to manage cash flow or take advantage of opportunities when they arise. Talk to our team on 0800 005 797.

4 different types of finance to help your business grow

A new wave of lending is revolutionising the way small businesses in New Zealand access finance. Here are some of the game changers you need to know about.

Cash flow lending

Cash flow loans are usually short-term loans to help you maximise a business opportunity or manage a lumpy cash flow.

Lenders like Prospa offer small business loans up to $100,000 with no security required, so you don’t have to put your family home on the line. Other positives include faster applications and less paperwork, cash-flow friendly repayments and transparency around the total amount to be repaid.

Keep in mind that not all lenders are created equal: some don’t offer a fixed upfront price, leaving owners susceptible to interest rate rises, while others may include hidden fees and charges. Look for a lender with specific expertise in small business, a reputable track record and great customer feedback.

Invoice finance

Invoice finance helps small businesses and tradies maintain cash flow when waiting for customers to pay. There are two types of invoice financing:

  • Invoice factoring: Where you sell your invoices to a third party at a reduced cost in exchange for instant payment.
  • Invoice finance: Where you use an invoice you have issued as security to get a loan.

Some invoice finance providers offer 100% of the invoice value in exchange for a small drawdown fee and an ongoing weekly interest rate. Invoice financing is a good tool to have in your kit if you often have to wait for payment after completing projects and purchasing materials. To use invoice finance you need to be the kind of business that issues invoices – like a professional services firm, rather than a cash-based business like a café.

Crowdfunding

Popular in the social and charitable space, crowdfunding has recently matured in the business arena, with platforms like Snowball Effect facilitating substantial amounts of private investment in New Zealand.

The most common crowdfunding model is based on rewards and incentives. A ‘backer’ pledges money to support your business or product idea in exchange for a discount on the new product or another reward. Rewards can be anything from a percentage of revenue to free products or the opportunity to help in the design process.

On the upside, business owners keep full ownership and clients are investors – providing direct access to market feedback. For investors, there is low risk for small amounts.

On the downside, some platforms are all or nothing, with no access to funds if the overall goal isn’t reached. Business owners need to commit time to promoting the campaign and dealing with backers, and still need to deliver on their promises if things don’t go to plan.

Crowdfunding is a form of equity funding – meaning you usually have to give up equity in the business, and is best suited to a start-up rather than an established business. It’s not a viable solution if you need help managing cash flow.

Venture capitalists and angel investors

If you need a large cash injection to start up or take your business to the next level, angel investors or venture capitalists could be good people to meet.

Angel investors

Angel investors are often business owners or high net worth individuals who see the potential in your business and want some involvement. They usually invest in industry sectors they’re familiar with and will want a targeted return on their investment. They may structure their involvement as a loan, or as equity, or a combination of both. Angel investors often come on board in the early stages of a business and contribute their experience and knowledge in addition to funding. It’s important to choose an investor who can add value and has the same vision for your business that you do.

In the technology sector, angel investment is having a big impact, particularly in Wellington.

Figures from this year show record levels of early-stage investment, with combined funding from New Zealand-based angel investors and domestic crowdfunding increasing by 35% to $112 million. Angel and crowdfunding investments into the tech sector have risen at an annual growth rate of 18% over the past four years.

Angel Association New Zealand is a great place to start if you’re looking for this type of investment in your small business.

Venture capitalists

Venture capitalists are investment companies or fund managers who provide cash in return for part-ownership of your business. They tend to look at larger businesses and differ from angel investors in that they typically want to invest larger amounts and have more comprehensive requirements.

VCs may not want to play an active role in the management of your business, instead taking a seat on your board. To find out more about venture capital opportunities in NZ, check out the NZVCA.

When opportunity knocks for small businesses, there’s a range of new choices for raising funds. Prospa can help you access the funds to manage cash flow or take advantage of opportunities when they arise. Talk to our team on 0800 005 797.