Financing is important for small businesses in a variety of ways. Needing quick money often has connotations of having poor cash flow and not being able to meet your short-term liabilities. This is far from the only reason for needing business financing though.
Financing is often a solution for growth projects when businesses owners do not want to dilute equity any further. The conventional way to grow is to sell a portion of the company to an investor, in which you can raise perhaps hundreds of thousands without adding to your debt.
Likewise, financing may just be to fulfill an order. This doesn’t necessarily mean you’re struggling, but rather, there’s a big opportunity at the early stage of the business. Scaling up is extremely difficult because you want to re-invest most of your profits in order to grow in size, so you can fulfill orders. Yet, of course you need enough cash left over to meet your overheads, debts and so on. These are growing too, so finding the right balance of cash reserves, accounts receivables, investment and so on is difficult. Often, it’s worth taking on even high-interest debt if it means fulfilling an order, if not merely for taking on board a new client or even signalling to other suppliers that you can manage big orders.
Whether the reason for needing financing is growth, meeting orders, purchasing capital or having difficulties with cash flow, banks are seldom the answer. Traditional banks are extremely inept regarding quick financing. It’s not completely certain whether this is an intentional tactic, but banks will not offer quick loans.
The process of getting a bank loan is this: meeting in a physical branch and receiving the application form, filling in the form and creating a business plan over the next few days, or perhaps even weeks as it’s extremely extensive and then hand the application in. From here, you will wait for 3 to 5 weeks for the verdict. If you’re approved, you may have to wait another month for the cash to be received.
As we can see, this isn’t viable for meeting the needs of most small business financing solutions. This may be suitable for some long-term growth projects that you have on the back burner, but it won’t help with cash flow issues or immediate access to funds.
Not to mention that they do not treat sole traders any different than from personal loans. This results in having not the best rates, and not having your business needs taken into account for the features of the loan.
Alternative Aussie Lenders
Australia’s startup scene is booming. With small businesses being at the core of the Australian economy, there are lots of incentives to be starting a business right now, or even moving there for your venture.
Another industry that’s booming is the gap in the market that banks have left behind: small business finance. These lenders are specialising in everything that banks have been lacking: quick access to funds, short and snappy applications, instant verdicts and so on.
They’ve done this mostly by automating their risk assessment process by chucking credit checks in the bin, and having their own risk assessment process. This means that your finances when submitted are churned through classification models, reorganised into mini financial statements and computed into financial ratios.
Essentially, when you take the human input aspect out of the equation, you’re left with a ruthlessly fast process. There’s no need to have businesses sitting around and waiting for a decision — many companies will let them know if they’re approved within 5 minutes.
Of course, these loans aren’t going to be millions of dollars and for 10-year projects. That would be very difficult to assess, and perhaps would require human expertise. But short term loans for a few thousand (even into 6 digits)… The digitised process works a treat.
Example of a small business loans company: OnDeck
Instead of speaking in general terms, let’s get specific. OnDeck financing is one of these options that small businesses have in Australia. In fact, they operate in America too but the following information will be specific to their Australian operations.
So, exactly how much are these financing companies offering? OnDeck has loan amounts between $5,000 and $250,000. This is a substantial amount for any small business. The loan term will have to be between 6 months and 2 years. It should be noted though, that there are no early repayment penalties. These companies do not offer the cheapest interest rates compared to banks, so they don’t tend to resort to cheap tricks.
OnDeck offers both unsecured loans and secured loans, though some companies may only offer one of the two. There are some prerequisites that the company must fulfil:
- Over $100,000 in annual turnover
- At least 12 months trading history
- No bankruptcy history
- At least 500 business credit score
If you pass these, you’re in with a good chance of being approved. There are a couple of extra documents you may have to send off, but generally administration is kept to an absolute minimum in order to save time.
The above story looks similar for many of the companies in this space. OnDeck has its advantages, though, as it’s an extremely reputable company. The company has long been established in the USA, and has built up a credible reputation of being ethical.
This is highlighted when you flick through customer reviews, in which many admire the customer service (24 hours) and the way that OnDeck are upfront, transparent and friendly in their dealings. This is important, because when dealing with a lot of money (particularly debt), you’re vulnerable and companies can take advantage of your lack of T&C knowledge.
It’s not that OnDeck are necessarily the best out there. Here, we’re simply taking an example of a company within the industry and shining a light on the flaws of high street banks and fortunately, there are growing options for small companies.