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Bank, online lender or peer-to-peer platform to fund my business?

With the increasing number of debt financing alternatives available to small and medium sized businesses, should businesses be bypassing the major banks and going to straight to these alternative lenders and platforms? For some businesses the answer will be yes though there are a number of considerations that must be weighed up in deciding who is the right lender for any business.

The following outlines a few of the considerations that will help determine the most suitable lender for your business.

1. How will the lenders view the financial profile of my business?

One of the most important considerations in determining whether a bank or online lender is the most appropriate lender is the underlying credit profile of the business. Banks have a strong appetite to lend to businesses with a sound credit profile and will typically be able to offer terms that are more competitive than any of the online lenders currently in the market. Although the banks may take longer to approve a business loan application, it will often be worth the wait given the more favourable terms that they can offer.

On the other hand, no business wants to go through a four to five weeks’ loan application process only to be given a polite “no” at the end of the process and having to start again with another lender. It is therefore important that borrowers understand how they will be viewed by lenders before deciding who will be the most suitable lender and embarking on a loan application process with this lender.

  1. How much debt do I want or need for the business?

There are a number of factors to consider in determining an optimal debt structure for a business, the most important being the continued serviceability of the loan under a downside scenario, what the funds will be used for and how/when the funds will be repaid.

In some instances, debt funding is a necessity to help fund the day to day expenses of the business. In this scenario, the sizing and tenor of the debt should be minimised as best as possible. In other instances, debt can be an effective way of funding the growth of the business such as by funding the purchase of new equipment that will drive increased revenue and earnings. In this scenario, the decision on the debt sizing is more about a return on capital and setting an appropriate and manageable repayment profile.

  1. How much will it cost?

The cost of a loan will be paramount to most businesses in their decision on how much to borrow and from what lender. Interest rates on business loans typically range from around 4% p.a on certain business loan products within the banks up to an effective rate of well over 20% p.a with some of the online unsecured cash flow lenders. The interest rate on a business loan reflects the perceived level of risk in the loan by the lender and as such, the answers to your questions above will have an impact on the most suitable lender and likely interest rate for your loan.

About the author

Adam Welsh, founder and Managing Director of CreditSME

CreditSME can assist you with the above by using its credit rating and lender match platform to quickly assess the credit profile of your business and provide you with a CreditSME Rating Score and Report, use this rating to match you up to the most suitable lender and arrange a loan for your business with the selected lender on the most competitive terms available.  Please visit www.creditsme.com.au or contact me (awelsh@creditsme.com.au)

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Adam Welsh

Adam Welsh

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