With the emergence of a range of new funding sources for small and medium sized businesses, it’s crucial to understand what your company’s debt funding options are and the most competitive interest rate you will be able to obtain.
The following sets out the broad categories of the different funding options for businesses and the typical interest rates offered by these different groups of lenders:
|Financiers/platforms for SMEs
||Typical interest rate range
|Major banks/regional banks
||3.5% to 9%
||3.5% to 12%
|Peer to peer platforms
||6% to 15%
|Working capital financiers / factoring
||8% to 15%
|Online – unsecured cash flow lending
||12% to 22%+
The above shows a large range between the upper and lower end of the different bands so what are some of the key factors that will determine what lender group is most suitable for your business and where your business fits within this pricing range?
- Industry – One of the key factors that will drive the lenders decision on their relative lending appetite is the industry in which your business operates. Lenders have a strong appetite for the defensive sectors where customer demand is not exposed to cyclical downturns. Healthcare is one example of an industry that is seen as defensive and lenders will therefore target aggressively and offer very competitive interest rates.
- Asset coverage – The quality and quantity of assets within the business (or outside assets offered as security) will be another key driver of interest rate pricing on business loans. The greater the asset cover, the ability of the lender to value the assets and the liquidity of the market for the assets will all be integral to a loan pricing decision. This explains the banks love of bricks and mortar security though there’s also a number of asset classes such equipment and receivables that will be viewed favourably by lenders.
- Debt serviceability – Lenders will look at the profitability and cash flow from the business and whether this is sufficient to cover the principal repayments and interest on the loan. They will also assess the “quality of earnings” that is essentially the predictability of earnings that will be assessed by looking at the historical trends in revenue and earnings and the level of change from one period to another.
CreditSME can help you get better visibility on how your business will be viewed by lenders and the best loan pricing that is available to your business? For the month of September, CreditSME is offering a 50% discount on our Lender Match Report that will provide:
- A summary credit profile of the business and the associated borrower score for your business (ie. how the business will be viewed by lenders);
- The best financing options available to the business and the indicative loan terms that are achievable;
- A list of the information that is required for loan approval (following a decision to proceed on the basis of the indicative terms); and
- The expected timing of loan approval and funding.
Go to www.creditsme.com.au and select the Lender Match package and apply coupon code SEPT to order your report and let us find the best possible loan for your business.