By Zilla Effrat 

If you are thinking of taking your business from a side hustle to a full-time operation, it’s important that you are across the fundamentals of making the leap. 

Having a good idea isn’t enough. In addition to having a solid business plan, it’s crucial to understand the many challenges of financing your businesses. 

What types of finance are most common?

In general, Australian small businesses are known to prefer debt finance – that is, obtaining a loan from an external lender such as a bank. In fact, they are three times more likely to apply for debt than equity finance (where investors buy a stake in the business). 

Debt funding allows you to continue to have complete control over your business and may be tax deductible. But failing to make repayments on time will affect your credit rating and interest rates will vary depending on the financing option you use. 

Both lenders and investors will want to know if your finances are in order, how much money you have, how much money you need, your expected cash flow and how much you expect to earn soon. 

Lenders will typically ask for a detailed business plan, personal identification, financial statements, tax returns and your credit history. You may also need to provide proof of industry experience.

Why is new business finance challenging?

It’s important to note that new businesses often struggle to access financing from traditional sources such as banks. They are often seen as riskier because of their smaller size, limited track record and lack of diversity or because they have less collateral available to secure a loan.  

Many banks also believe it takes more time and costs more to approve a small business loan. Plus, lending to small businesses is not as profitable for the banks as lending for residential property or personal lending. 

Banks often reject business owners’ loan applications because of their poor credit history, high outstanding debt, weak cash flow and profit projections and poor documentation. Or they consider the business sector they have chosen to operate in to be too volatile or risky. 

Indeed, research has found that at least a quarter of SMEs looking for finance to grow their businesses were turned away by the incumbent banks. 

Also, the Productivity Commission notes that fewer lenders are willing to offer unsecured finance between $250,000 and $5 million.  

Small business owners who can provide their homes as collateral are typically able to pay lower interest rates and can secure larger loans than otherwise, but these loans may still not be big enough to meet the needs of an expanding business. 

Many small business owners are unwilling to provide their homes as collateral given the stress involved in such a decision.  

There are, however, there are other alternatives to using a home as collateral. Options can include vehicles, machinery and intangible assets such as invoices and other expected receipts.

Flexible funding solutions

There are also alternatives to bank loans. Research by ScotPac has found that the number of Australian SMEs turning to non-bank lenders for support has trebled since 2018 to a record high of 47% in March 2023. One of the key drivers of this trend was found to be the ability to secure finance without using property or non-property assets as security. 

Remember that most lenders won’t finance businesses that have been operating for less than 12 months because they need time to get a good sense of how well the business is doing and financial statements and tax returns may not be available to help them make a lending decision.  

The longer you’ve been in business, the less risky you appear to a lender because research generally shows that small businesses have a lower survival rate relative to larger businesses. 

There are some exceptions to this 12-month rule, depending on the amount of financing required, type of finance and industry, such as labour hire. Because of this, it’s best to speak to an advisor about your individual circumstances. 

If your business loan is rejected, it’s important to find out why and to assess if there are any steps you can take to improve your chances the next time you apply.  

You can also look at alternative ways to find the financing you need. Some alternatives include merchant cash advance, invoice financing, invoice factoring, asset financing, unsecured business credit cards, personal loans, peer-to-peer lending or a loan from friends or family. 

Contact us for tailored funding solutions for your business.