It’s great hearing stories of people taking a leap of faith into the business arena! To me owning your own business and being your own boss is all about freedom, certainly not much freedom in the early days as you’ll be working hard and overtime to create your desired life, but overtime if the business is successful you should have a lot more opportunity around freedom and your time… so if you are one of those people taking a leap, good on you for having a crack!
And on this, one of the most common questions I get asked is around accessing funding or finance for new ventures. Eg – “Hey Jimmy, can I buy this truck It’s for a new business?….” The good and bad news is that there is no right or wrong answers when it comes to finance for new businesses.. there are however some principles and criteria which will be considered when applying.
In my opinion you should be looking to obtain finance with a bank or first tier equipment funder as a first point of call, why you ask? Well when starting a new business cash is king right? Generally speaking you will always get access to cheaper money through these channels which means that your monthly repayments will be lower and the business will seem more viable… The bad news is that some banks straight out do not like new business venture funding! The good news is that some will and they will be looking at the following criteria…. So take note.
1. Get Written Confirmation of Your Work Program
Pretty important for a bank to know what work is available if they are going to lend you money right? Well, I always say to clients that it’s not only important to banks but it’s also important to you as the borrower to complete your own due diligence and confirm that the work is available…. How do you do this? It might come in the form of a contract, work source letter or purchase order…. Helps if the work being undertaken is with a reputable business as well. Any sort of written confirmation also helps in keeping your contract relationship accountable for what you have discussed.
2. Set Aside Working Capital
Please don’t take offence or feel awkward when I ask you how much cash do you have?? But really how much cash do you have to survive your first months in business? Depending on when you start trading to submitting your first invoice and actually getting paid might not be for 30-90days! Do you have enough funds to survive this initially period… I would highly recommend saving up & banking some money before applying for finance. Particularly in the early day’s of businesses there will always be expenditure that you haven’t accounted for or considered.
3. Know How to Manage Your Cash Flow Before You Start
How much will your business get paid? confirmation of this is very helpful. When will it be paid? Ie – weekly, monthly? What are you monthly business expenditure forecasted to be? Providing a cash flow forecast or budget will be required. Again, not only important for the bank to understand where the cash is going, but also important for you as the business owner to understand. You might also have support income in another business, casual work or maybe a partner that has a full time job… important to know about this as it can work in your favour!
4. Have a Fall Back Position
Absolutely worst case if things turn sour in business… and lets get real here, they can and do! What position will you be in to repay the debt? there are exceptions but the general rule is that banks generally like homeowners with some equity position in their home… reason is that they are considered to be more stable in their life & at an absolute worst case may be able to draw upon some home equity if in hardship to clear debts. Now the exceptions might be for non-homeowners who are contributing an upfront deposit towards the purchase of equipment – normally 20% + which assists with banks mitigating early risk.
5. Gain Industry Experience
Your background & experience certainly forms a critical part of an application. What is your experience within the industry that you are about to start a business? How long have you been in the industry? Have you ever had a loan before? Did you make your repayments on-time? Do you have any credit defaults? Are you stable in life? What are you plans for the business?….. I like meeting new people so this is normally the easy part.
Hope these tips give you an indication of what may be required to obtain equipment finance for a new business. Please don’t be discouraged however, if you feel as though you don’t meet all these tips, because these are only guidelines of what some banks look for & there is also alternative funding for new businesses outside of the banks.
If you wish to find out more about your equipment finance options for a new business venture please give me a call on 0431 177 605 or drop me a note via the contact us form.