As appeared in Dynamic Business.
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:
|Lenders/platforms for SME loans||Typical interest rate|
|Major and regional banks||3.5% to 12%|
|Equipment financiers||3.5% to 15%|
|Peer to peer platforms||6.0% to 18%|
|Invoice financiers||8% to 15%|
|Factoring||1% to 4% per invoice|
|Non-bank unsecured loan or line of credit||12% to 25%+|
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 (and therefore offer lower interest rates) for the more defensive sectors where customer demand is not exposed to cyclical downturns and less
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 invoices within a business 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 give you visibility on how your business will be viewed by lenders and the best loan pricing that is available to your business. Apply Now to get indicative loan terms for your business of or contact us today (1300 001 567) to discuss the best financing solutions available to your business.