If you need capital to fuel your growth plans or help you through a cash flow gap, small business financing could be the perfect solution. 

But if you’ve never considered applying for funding before, you probably don’t know what’s required or how to get started. 

In this guide, we’ll explore the seven steps you need to take to apply and get approved for small business finance.

Prepare Your Business Plan

Depending on the type of financing you apply for, lenders may want to see your business plan. 

Funding providers want to know that you have a successful and sustainable business. A business plan details what you do, your goals, and how you will repay the money you borrow. 

Whether you want to buy new equipment or take on new staff, your business plan shows the lender how the funding will help your business to grow.

A documented business plan can benefit your company beyond increasing your chances of being accepted for finance.

According to a study by the Harvard Business Review, new companies with formal business plans are 16% more likely to be profitable than similar companies without a plan. 

Know Your Risk Profile

Knowing your risk profile can help you to narrow in on the financial products available to you.

Some types of small business financing are more difficult to qualify for than others. For example, getting approved for a business loan from a bank can be challenging if you are a relatively new business or lack real estate collateral. 

More flexible funding solutions like Invoice Finance are much easier to access.

Lenders will look at your personal and business credit ratings to determine your risk profile. A strong credit rating shows you have a history of paying off your debts.

Even if you have a poor credit rating and no real estate collateral, you can still qualify for some types of small business finance.

Work Out How Much Can You Afford To Borrow

Borrowing more than you can afford can lead to cash flow issues that stunt the growth of your business.

Before you apply for any finance, you should calculate the maximum you can afford to repay. You can use your financial records to see how much revenue your company generates per month. This can help you to work out how much you can afford in financing costs.

A cash flow forecast can be a useful tool for predicting how debt repayments could affect your working capital. You can use our free template to quickly work out your projected cash flow and see how much you can afford in monthly repayments.

Prepare Your Financial Statements

Depending on the type of small business financing, you may need to provide the lender with up to date financial statements. These can include your profit and loss statement, balance sheet, and cash flow statement.

Some lenders will require that a certified accountant has audited your financial statements. This is to ensure that your financial statements are accurate and adhere to general accounting standards.

Know Your Small Business Finance Options

There are lots of different business finance options. It’s important to choose a funding solution that fits your current and future business needs.

Business Loans From a Bank

A business loan from a bank is one of the most common types of financing. Business loans are typically used to pay for large, one-off expenses. The lender will allow you to borrow a lump sum, and you will need to repay the principal and interest over the loan term. 

Small business loans are usually secured by real estate collateral. As a result, interest rates are often more affordable. But it also means that it can be challenging to qualify for a loan if you do not have property equity.

Invoice Finance

Invoice Finance is one of the most accessible forms of small business finance. Rather than taking on long-term debt, Invoice Finance allows you to release the capital tied up in your outstanding sales invoices. 

Instead of waiting 30+ days for your customer to pay, you can receive up to 95% of the invoice value as a cash advance. The remaining balance, less fees, is released when your customer pays the invoice. 

This form of financing can be a good way to support cash flow. But the amount of funding you can access is limited by the value of your invoices. 

You can find out more about this type of funding in our guide, What is Invoice Finance?.

Business Line of Credit

An overdraft facility is more flexible than a business loan. The lender will provide a line of credit that you can access to support your working capital requirements. You can withdraw funds up to the approved limit.

Usually, you are charged interest only on the amount you have used, not the entire credit limit. However, business overdrafts are often subject to additional fees and may require some form of asset security.

Equipment Finance

If you’re looking to purchase new or second-hand equipment, machinery, or vehicles, Equipment Finance could be an excellent alternative to a business loan. The lender will purchase the equipment for your business, using the asset itself as security. 

You can spread the cost of a large business purchase over a more extended period, helping you manage your cash flow and avoid a costly upfront payment. Depending on the financing terms, you may take ownership of the equipment at the end of the funding period.

Business Credit Cards

Business credit cards are a short-term financing solution that can help you to manage your cash flow. You can use the credit card to cover the cost of business purchases and make monthly repayments on the principal and interest. The credit limit and interest rate can vary according to the lender and your credit rating. 

This type of financing can help you cover small expenditures, but the interest rates are generally higher than other types of funding. Interest and charges can be expensive if you miss a payment or don’t clear the card balance each month.

Trade Finance

Trade Finance is a type of funding designed to support the cash flow needs of companies engaged in domestic and international trade. 

If you buy from international or domestic suppliers, Trade Finance can help you pay your suppliers and negotiate early payment or bulk buying discounts. You can avoid cash flow gaps while goods are manufactured and shipped. 

Are you looking to start an import business? Read our guide, The Cost of Importing from China to Australia, to see how much capital you need to get started.

Create a Shortlist of Lenders

Create a shortlist of lenders based on the type of finance that’s the best fit for your needs. Then, you can compare the interest rates, the reputation of the lender, and fees to see which is the best option.

Most people think of their local bank when it comes to applying for small business finance. But banks and traditional lenders are increasingly risk-averse.

A study by American Express revealed that around half of Australian SMEs that apply for business loans are rejected or do not get the level of funding they need. 

There are lots of more flexible options available to business owners, including non-bank lenders like ScotPac. We have a much faster approval process and always strive to find a way to say “yes” and get you the funding you need.

Apply for Small Business Finance

The final step is to apply for small business financing. You should have your business plan and supporting financial documents ready and be prepared to answer questions the lender may ask about your application. 

Being rejected for finance can damage your credit rating, so take time to review your application. Double-check all the details and make sure there are no mistakes.

Depending on the type of funding, you could be approved and get money in your bank in as little as 24 hours.

Small Business Finance with ScotPac

The above key steps will help you gather the information you need, choose the right financial product, and navigate the application process for small business financing. 

Small business lending doesn’t have to be complicated. Here at ScotPac, we believe that every business should be able to access the funding it needs to grow and thrive. 

If you need help determining which funding solution is right for you, give us a call or submit an enquiry using our simple online form. We’ll help you understand your options and get the funding your business needs to succeed.