Finance is the lifeline of many small businesses in Australia with over 50% of businesses leaning on a small business loan to kick off their company. There are no cookie cutter loans that suit all small business requirements so it is important to take your time and find a loan that works for you – while you work for yourself.
Here are some of the common loan challenges which threaten small businesses and how you can overcome them.
Why It Is Important To Manage A Business Loan?
As our parents would always say, “money doesn’t grow on trees” – and boy, haven’t we learned that lesson!
It’s often said that more than half of new businesses fail within the first 3 years. While we’re not sure that this is necessarily the case for all industries, it’s hardly a surprise with so many challenges lurking around the corner, threatening your future success.
Even the most profitable business can be undone by poor cash flow or money handling issues. Balancing your loan repayments, payments to suppliers and staff wages can be a painstaking challenge.
Making sure that you make repayments on time will maintain your credit score so that next time it comes to borrowing money, your chances of being approved could be higher. Making late payments on your credit cards or having defaults on record can also affect your credit score. Staying organised can be difficult, so schedule time to perform that dreaded admin so that your payments are made on time and you can address any issues before they arise.
Also checkout our post on 5 challenges faced by small businesses.
How To Choose Your Lender
Finding the right lender for you is going to have a large impact on the success and profitability of your business. When heading into uncharted loan territory, it is hard to predict exactly what your cash flow will look like and how drastically it will be affected seasonally. It is therefore important that your lender shows flexibility when it comes to repayment schedules, interest rates, fees and payment methods.
Having the option to pay off your loan, daily, weekly, fortnightly or monthly depending on your cash flow will mean that you can make repayments when it suits you best.
Another important question to ask your lender is if you can pay off your loan early without penalty. Some lenders even offer discounts to pay early. That way, if business is booming you’re not left paying unnecessary interest, fees or penalties for a loan you can afford to pay off now.
Go With The Flow…
Cashflow that is!
When the cash starts flowing and it feels like you’re finally reaching the light at the end of the tunnel, don’t forget to channel some of that profit towards your loan. It can be tempting to coast by on your agreed, minimum repayments and enjoy your new found financial freedom, but unfortunately, cashflow can be unstable and just as fast as the money flows in, it can also dry up.
Leaving a buffer for yourself in those down times by paying off more than you need to while the money is coming in, can save you from added fees and interest overall.
Saving money away for a rainy day will also help you to avoid having to possible refinance your loan if you come across unforeseen costs such as repairs, marketing through quiet periods and insurance.
Most small businesses face seasonal peaks and troughs, so making sure that you are covered when business is in the down phase is a necessary part of the overall strategy.
In fact, Australian small businesses are crumbling under the pressure of unpaid invoices, with a recent report showing they are owed $26 billion by their customers. The Late Payments Study, commissioned by PayPal and Intuit Australia, shows that the average amount owed to each small business at any one time is $13,200, with more than a quarter forced to take out a loan to cover their own expenses.
Asking for upfront payment where possible or invoicing with short deadlines means you have a higher chance of getting paid promptly. Also, not making sure you put time aside to send out invoices and follow them up is one way to get yourself into hot water very quickly.
Scheduling payments for invoices that may be larger than expected or reducing staff members in quiet times can make all the difference when heading into a tight month. Paying attention to your sales trends will allow you to be able to financially plan ahead of time to ensure you stay in a positive cashflow. Check out our article about how to cashflow for peak trading seasons.
If you’re ready to review your existing loan or repayments, or you’re ready to take on a new loan, talk to a lending expert at Capify on 1300 760 930 or apply online for a small business loan.