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BUSINESS LOANS

Take a few handy tips and avoid the traps in banking.
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Business Loans

1. Be clear about leasing

Leasing is really just another form of borrowing to finance a purchase. But unlike loan finance - where you take ownership of the item and offer it or something else as security to the lender – lease finance sees a leasing company take ownership and give you the use of the goods under contract for a specified period.

2. Be realistic in your forecasts

Be realistic about your predictions for revenue and expenses. Ensure that you can make a good case to substantiate your forecasts. If you are unsure about making budget forecasts, consult your accountant.

3. Build your case

The more information you can supply the better. Lenders want to understand not only you but also your business. Most lenders will want to see evidence of consistent financial performance in your business activities. They will want to see:

balance sheets,
tax returns
cash-flow budgets

Think hard about other documentary evidence you can gather that will convince lenders you are a good risk.

4. Can't get a standard loan? There are alternatives

If the banks, building societies and credit unions won't lend to you because you're self employed, newly arrived in the country or have a poor credit history, consider the booming non-conforming and "low doc" loan market. A number of non-bank lenders offer loans which especially cater for this type of borrower. The interest rates on non-conforming loans are generally higher but come down after a few years of on-time repayments. Compare non-conforming loans.

5. Check your statements carefully

There are claims that more than half of loan statements contain calculation errors. Simple mistakes, like the entry of the incorrect balance or the application of the wrong interest rate at the wrong time can be costly and mostly favour the lender. Errors like these can also attract thousands of dollars in penalty interest and greatly damage business cash flow.

6. Consider fees

Commercial loans attract a wide range of fees. This is because of the more complex structure of the loan compared to personal or home loans. Line fees, limit fees, over-limit fees, overdraft fees and temporary overdraft fees may sometimes be quoted as a percentage of the total loan amount rather than an exact dollar amount. These should always be spelled out in your loan contract.

7. Don't go up with the balloon

If leasing, know what 'residual' or 'balloon' payment will be required from you at the end of the lease term. This may well have a significant effect on your cash-flow.

8. Get independent advice
Consult your accountant or financial adviser as to what tax implications there may be before committing to lease finance. Don't rely on the lease provider to give you objective information about the tax benefits of your lease arrangement and whether leasing is better that than other forms of finance for your circumstances.

9. Have the right information when applying
What you will be required to supply in any application for lease finance will depend on whether the lease is for personal or business use.

Personal lease applications will require:

proof of current employment
income details or tax returns

Business lease financing requires more detailed information and may include your:

balance sheet
tax returns
cash flow projections
business plan

Confirm with the lender what you will need before the interview.

10. Keep accurate records
Keep accurate records of your deposits and ATM transactions. It is also wise to keep copies of your loan application and approval documents in a safe place. This is the best way to avoid hefty fees which may be charged by a bank when its customers want to see copies of their cheques or loan files.

11. Know what interest rate is being charged

Make sure that you determine the actual interest rate being charged in any leasing deal you consider. Those offering you lease finance will invariably avoid talking about the interest rate and only talk in terms of the monthly repayments you will be up for. But the only way to accurately compare leasing quotes is to ask for the rate being charged; like you would do with any other form of borrowing. Leasing is often chosen as a financing option on the basis that it's easily incorporated in budgets and cash-flow planning. This is a valid approach but make sure you look at the interest rate too.

12. Prepare for the interview
Do you have all the information the lender wants to properly assess the application? Find out exactly what information is required and what forms need to be filled out so that you don’t waste valuable time for either yourself or your prospective lender. Have your financial information organised in a way that makes it easy to review.

13. Proof of assets
How your business is structured? The lender may want to satisfy itself that the proper authority has been given to office bearers to apply for finance:

Certificates of Incorporation and Registration
Trust deeds etc.

A company seal is required to complete mortgage registration documents on behalf of a company.

14. Proof of Identity

If you are not an existing customer you may need to supply proof of identity as per requirements laid out within the Financial Transactions Reports Act (1988).

15. Sell yourself

Make sure you present yourself and your information in a professional manner. Consider wearing a suit to your meeting. Be punctual.

16. Small business customers on the move
Twelve per cent of micro business customers said they would definitely change banks during the next six months, while 20 per cent said it was highly probable they would do, research by East & Partners found. "[Micro businesses] are not aggressive buyers of banking products; display suspicious and often openly jaundiced views of their banking relationships and the banking industry at large," said Easts’ in a report. However, they have a huge appetite for debt – with almost three-quarters identifying term loans as a product of increasing importance to them. Easts estimate that micro businesses account for between 25 per cent and 27 per cent of all business lending.