Money talk: shopping for a business loan

| August 30, 2011

Coming to grips with your cash flow peaks and troughs is essential to determine your ability to repay a business loan.

Below are my top business-lending tips.

Choose the right loan
A business loan is more complex than a home loan: there are more variables, so source banking advice about how to best manage your risk. Some people think they want the loan with the lowest interest rate, yet those loans often lack flexibility and may require monthly repayments.

Understand seasonal fluctuations in your cash flow to determine whether you want a loan that allows monthly, quarterly or annual repayments. Ask your banker, ‘How can I manage that fluctuation and what loan gives me flexibility to save cash for the slower parts of the year?’.

Also clarify: ‘Can I fix the loan interest rate? If interest rates start to move, is it possible to fix the loan without incurring multiple contract changes and penalty costs?’.

And ask about the lending term. For example, if it’s an asset finance arrangement, don’t take a 10 year loan to purchase a piece of business equipment that you will use for only three years.

Common lending issues
Many businesses have cash peaks and troughs and bankers can work to structure a loan around those circumstances. For instance, if you’re a retailer, December and June are peak times for ‘cash in’, whereas other times of the year are devoted to peak stock purchasing. You may need a higher overdraft when in core spending mode as cash may not flow back in for another three or four months.

Minimise your exposure to potential interest rate rises
Determine the maximum level of interest rate that your business can withstand. Do some computer modelling. If interest rates rise to X percent, how will that impact on your business and will you still be earning enough? Understand how much risk you’re willing to take with interest rates.

A number of variable rate loan products allow a rate cap – a ceiling – to be set. For example, you might set the cap at eight percent, ensuring your loan adjusts to rate movements up to, and including, eight percent. So, you get the benefit of a variable, but with the protection of a fixed upper rate limit.

Work with business bankers to structure lending products that minimise risk, but also make sure you understand rate cycles. Predictions of rate rises are already factored into the fixed rate offered. Consider taking a mix of fixed and variable rates, and pay the variable back more quickly.

Trends in lending products
We’re seeing more businesses heading down the capping path to allow more freedom. But taking a cap is like an insurance policy – it does come at a cost. There are higher charges involved to allow that flexibility.

Align a business plan with a lending strategy
Review your lending strategy annually. Sit down with your business banker and bring along your business plan and cash flow details to kick start the discussion. It’s a great opportunity to see where your business is going, where you want it to go and the challenges and opportunites you face in getting there.

Find out more about managing your exposure to interest rate risk.

This story was first published at NAB Business View Connect and is republished here with kind permission of the author, Jacqui Colwell NAB lending strategist.