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Up until about 10 years ago, it was never easy for small businesses in Australia to obtain loans to expand their businesses, however well the enterprises may have been doing.
Banks traditionally shunned small businesses because it was easier to lend to larger businesses that had assets that could be used as collateral or long-established credit history.
Business loans were difficult for many small companies to obtain because of the long and sometimes arduous approval processes that had to be endured, and the requirement by many banks that small business owners pledge personal assets to secure the loans.
Thankfully there have been a few things which have changed and now it a much easier and faster process for small business owners looking to obtain finance. These factors include:
Technology brings change
That all changed with the advent of the FinTech industry and the appearance of alternative lenders on the Australian business scene. Online finance brokers created a new and highly competitive lending environment.
The new boys on the block enabled small businesses to apply for unsecured business loans online and receive funding in 1-2 days, compared to the 1-2 months that it often took banks to process loan applications – a substantial proportion of which were never approved.
The new fast-application, fast-approval, regime meant that small businesses that needed urgent access to additional working capital to take advantage of expansion or acquisition opportunities could do so knowing that the money would be in the bank in a matter of days.
This fast access to cash meant that small businesses could accelerate expansion by taking advantage of the ability to purchase additional inventory or hire extra staff at times of the year when there were seasonal or other opportunities to increase sales.
Change brings competition
There are now around 40 online lenders approved as credit providers offering small business loans in Australia. That’s made most of the big banks sit up and take note, and in recent years they’ve jumped on the bandwagon offering similar loan offerings.
The banks are rarely able to match the newcomers regarding loan approval times, but the added competition has been good for small businesses that now have financiers chasing them for business.
Small retailers have particularly benefited from this competition with some of the new financiers offering a type of business loan known as a merchant cash advance.
This type of loan is technically unsecured but is in effect an advance on future sales because the repayments are made from future sales.
Advanced POS technology
Again, it is new technology that has enabled this type of business loan to be offered, as the repayments are made directly to the financier through the deduction of a small percentage from the value of each credit and debit card sale via the retailers’ point of sale terminals.
This type of financing is available to retailers that have been in business for 6-12 months and are achieving at least $10,000 in monthly credit or debit card sales. It’s, therefore, an effective way of providing additional working capital to expand a relatively new business.
However, as interest rates are higher than a secured bank loan, it’s important that cash flow is carefully monitored to ensure that the additional profit from the increased revenue generated by the investment of the additional working is greater than the interest costs associated with the merchant cash advance.
If this is managed properly, then merchant cash advances can be used on an ongoing basis to keep increasing turnover and facilitate a much more rapid expansion of the business than could be achieved by using traditional bank loans to increase working capital.
