Business Loans

When our clients approach us for a Business Loan, more often than not, one of their first questions is “How Much Can I Borrow?”
The answer to this question is often complex and is dependent on a range of factors:

Net revenue:
A simplified definition of Net Revenue is turnover (income from all sources) minus all expenses (including  Cost of Goods Sold, interest etc) .
Example:
Monthly turnover is       $50,000
Expenses are               $40,000
Net revenue equals      $10,000
Net revenue in the above example is the amount that is available to service the loan repayment. So if the business is looking for a business loan with payments of $5,000 per month, they could afford the repayment, based on their historical revenue.

However, there is usually more to the equation:

• Lenders often want to see net revenue over a one or two year period
• Often the net revenue varies month to month, so they want to understand the ‘sustainable net revenue’
• Some lenders require financial statements (from your accountant) to work out net revenue, others will rely on your bank statements to work out the actual monthly cash surplus.

Loan Security:
Lenders always want security for a Business Loan. The security can be as ‘simple’ as taking a charge over a business vehicle (for a Business Car Loan) or as ‘complex’ as taking a charge over all of the assets and undertakings of the business. They take security so that they have an alternative source to repay the loan if you are unable to make your repayments. In the example of the Business Car Loan, they will sell the car and use the proceeds to repay the debt.

Often lenders will want you to contribute a deposit towards the purchase to ensure that the loan is repaid if the asset needs to be sold. Sometimes you can use your equity in other assets.
Often lenders want to take a mortgage over your personal property. There are positives and negatives to this; the interest rate may be lower where ‘real property’ is provided, however your personal assets are directly at risk in the event that you default on your loan. It is often our preference that the Business Loan is secured with the Business Assets.

Other Considerations:
Other factors include your previous credit history, your time in business, purpose of the loan and your credit score.

Conclusion:
Businesses can get a wide range of outcomes across different lenders. If you approach one lender in isolation, they will tell you what they can do (or what they cannot do). We have a diverse  lender panel and we will always advise you on your alternatives and the options available. We will provide you with an explanation of your borrowing capacity across a range of lenders and then negotiate the best deal on your behalf.

A frequently asked question that we get asked by clients applying for a Business Loan is whether they can borrow 100%.As a rule, lenders always want some form of security for Business Loans and they generally want some form of equity contribution (deposit) by the client. 

As an example, lenders will generally lend up to 80% against a residential property (meaning that 20% deposit is required). Similarly they will generally lend between 65 – 80% against a commercial property, meaning that a deposit between 20 & 35% is required.

There are some circumstances where a deposit is not required:

Business Asset Finance:
Lenders will often lend 100% of the purchase price of a ‘standard asset’ because the repayment term is short (usually a maximum of 7-years). This means that the business does  not need to consume cash to buy a business asset and the equipment can be paid-off over its useful life.

Other Equity:
Sometimes a business will have another asset that can be given to a lender as ‘supporting security’. As an example, a business may have some unencumbered plant and equipment, or it may have equity in property that can be pledged to the bank. Banks will also often request a mortgage over the personal home of the business owner(s) and the real estate equity can be used to secure the loan. Our general philosophy is that the business assets should support the business loans, but this is not always achievable, so it may be a position that we work towards.

Exceptionally Strong Guarantors:

Even where the business is held in a company, or a trust, lenders will normally ask for guarantees from the ‘ultimate owners’ (the directors/ shareholders or trust beneficiaries). There are some instances where lenders will accept a lower deposit as a result of the strength of the guarantor. They usually want a ‘trade-off’ of accelerated loan repayments to reduce the loan quickly and sometimes they will charge a slightly higher interest rate, but this can be an attractive option when the business wants to conserve cash.

Summary:
Generally a deposit is required however exceptions to this rule do exist. There are many Business Lenders and Business Loans to choose from and it is important to fund the right lender and loan to suit your needs. We have a large panel of business lenders and we work for you to find the best Business Loan solution for your circumstances.

A question that we are frequently asked is “Can I get a Business Loan when I have an ATO debt?”.

The ATO has historically been a relatively cheap and easy source of ‘credit’ and many accountants and advisers have recommended deferring ATO payments when cash is required for other purposes. This strategy has previously worked well because, in recent years, the ATO has taken a ‘hands-off’ approach to businesses who have debt and they have been very lenient in their collection activities.

Recently, the ATO has taken a more aggressive approach towards debt collection and it is no longer a cheap and easy form of finance.

Pressure from the ATO is a stressful experience, so prudent business owners look for refinance options and their natural action is often to approach their bank. Often when they come to us, they have already been to their bank, their loan application has been declined and they are not sure what their options are.
It is true that many banks will not consider lending to refinance ATO debt and they will also not consider providing loans for other purposes, where ATO debt exists (even if a repayment arrangement is in place).Thankfully there are alternative options. Often the solution is twofold, an initial loan to repay the ATO and then an ongoing business loan to finance ongoing working capital (to avoid the need for future ATO debts). Some of these ongoing solutions could be a Business Overdraft, a Trade Finance Limit to purchase stock, or invoice finance to finance trade debtors. There are many options that can be customised to suit the individual circumstances of the business.

Summary & Conclusion:

It is very stressful when the ATO is applying pressure and a Bank has declined a Business Loan. We’ve been able to help many businesses with ATO debt and we’ve been able to put customised solutions in place, to repay the ATO and then provide ongoing access to cash flow support.