Types of finance
The type of finance suitable for your business will vary depending on what you are using the finance for. The three main types of finance are:
- Debt - financing that is provided from an external source, such as a bank.
- Equity – financing that is provided by an owner or an investor.
- Internal funds – funds generated by the business through cash flow and profits which are used to fund the ongoing operations and expansion of the business.
Right level of debt
There is no right level of debt for a business as it will vary with every business. In assessing the right level of debt for your business you can look at industry related benchmark data. Seek assistance from an advisor or prepare a business case to ensure you will be able to service the loan.
Short-term versus long-term debt
The rule of financing states that the debt term should match the life cycle of what you are funding. For example if you are financing technology that will have a useful life of three years, then the loan term should be three years.
There are many different types of short and long term loan products on offer. You should ensure that you understand these before choosing your loan.
How the banks assess the loan application
Although each bank will have their own guidelines in assessing loan applications, all will use what is referred to as the 5C’s to assist in their assessment. The 5C’s refer to the lender assessing:
- Character – the borrower’s reputation, integrity and ’willingness’ to repay the loan.
- Capacity – the borrower’s ability to repay.
- Capital – the borrower’s current financial position.
- Conditions – the lender’s ‘terms’ and the ability of the borrower to meet these terms.
- Collateral (security) – the borrower’s “security” for the proposed loan.
You can download the 5C’s from the Resources page.
Also include a current business plan as part of your loan application. You can download a business plan template from the Resources page.
Using an adviser
Consider using an adviser to assist in your loan application. They can save you time and possibly improve the quality of your loan application.