There are lots of reasons why you might need finance for your business. You might want to:
Get a boost to your cash flow, especially if your income fluctuates
Buy in stock or take on extra staff to prepare for a business period
Take advantage of bulk stock sales or an opportunity to expand your operations
Scale up your operations to take on larger contracts
If you can’t get the cash any other way, then paying a higher interest rate to secure the funding you need
might be totally reasonable…
As I said earlier, alternative lenders aren’t yet highly regulated in Australia, and there are definitely
some unscrupulous ones out there. If your business is especially high risk – or if you don’t do enough research
and check who you’re dealing with – you could end up paying truly extortionate rates for bad credit finance.
If the rates you get quoted are off the chart, then keep looking – like I said, the market is very competitive,
so there’s no need to accept usurious rates.
If you find that NO lenders will offer you a loan at a reasonable rate, then I strongly recommend you talk to
your financial advisors and consider your options carefully.
If borrowing drives you deeper into financial problems and you’re eventually forced to default on your loan,
you could do irreparable damage to your credit record – or worse, your business itself. Instead of taking that
risk, you may need to postpone your loan application and take other steps to improve your financial position
and your credit record before applying for finance.
There are some other pitfalls to look out for, too.
On top of the interest rates, there may be lots of other charges for your loan – set up fees, ongoing management charges, transaction fees, and early termination fees. Often, these won’t be obvious – you’ll need to dig around and check all the fine print to make sure you know exactly what you’re going to be paying.
Early termination fees, in particular, could end up costing you a lot of money. If your interest is calculated as a percentage rather than a factor rate, then the best way to save on interest is to repay your loan as quickly as possible. If you’re locked in by expensive early repayment penalties then you may end up paying far more than you really need to, should your financial position improve during the term of the loan.
The lender may look for other ways to reduce the risk of the loan – which means they could try to impose restrictive conditions on your business to protect themselves. For example, they may prevent you from offering credit terms to your customers – which could be a major competitive disadvantage in some industries – or insist that you only deal with certain customers who have a strong payment record.
If your business credit rating is poor but your personal score is higher, you may be asked to provide a personal guarantee of the business loan. This can put your personal assets (like your house) at risk, since you’ll be responsible for repaying the loan if your business is forced to default. This could mean you lose everything if your business fails – not just your livelihood, but also your home. That’s a big risk to take.
It really is vital that you understand all the conditions as well as the full cost of the finance you’re being
offered so that you can make an informed decision about whether it’s the right choice for your business.
Right, now we’ve covered ‘why’ and ‘how much’, it’s time for the last big question.