Small to medium enterprises in Australia have been hit with a catch 22 scenario. On one hand, interest on small business loans has dropped to 5.3 percent, down from 8.4 percent in 2011. This is the lowest the rate has been since the Reserve Bank of Australia started collecting this data back in 1993. But on the other hand, these loans have become more competitive and harder to get. So how do SMEs present the best case forward to ensure their business loan is approved?

Interest rate drop presents opportunity for business

The record drop in small business loans presents many advantages. Australian Bankers’ Association chief economist Tony Pearson said it is a great opportunity for small business to grow their own enterprises and the nation’s economy.

“Less interest paid by small business on their loans will help drive economic growth, create new jobs and tackle unemployment,” Mr Pearson said.

“With two million small businesses in Australia employing nearly five million people, we need to ensure this sector continues to flourish.”

And these low rates are set to stay until the end of the year, HLB Debt Advisory director James Macfarlane said.

“There’s nothing in the numbers that point to a rate rise in the short term, but they are going to move at some point. US rates will start to move this year, which will over time flow through to our market. But they are unlikely to go up until quite late this year or even early next year,” he said.

This means businesses can take advantage of these low interest rates to invest in their enterprise and slash down their mortgages. A business with a $100,000 loan will save about $3000 annually, compared to the previous rate of 8.4 per cent 2011.

“That’s a lot of extra money that can be invested into growing a business and creating jobs,” Mr Pearson said.

The battle to secure loans

Despite the low interest rates, small business ombudsman Kate Carnell said SMEs were doing it rough with 8 in 10 forced to secure loans against their residential homes to keep their doors open.

“Tens of thousands of small businesses are using loans against the equity in their homes to keep their businesses afloat,” she said.

Presently, small business receives about 80 percent of their external funding from the big banks. Despite this, RBA’s assistant governor for financial markets Chris Kent said that SMEs “continue to find it challenging to obtain external finance.

This was backed up in the Productivity Commission’s draft report into Financial System Competition, which stated that there were “strong incentives” for lenders to require a property as security. That is an issue currently being looked into as part of the Federal Government’s Royal Commission into the banking and finance sector.

How to present the best case for a small business loan

For most SMEs, the prospect of a record low interest rate is enticing but the thought of putting up their residential home as collateral could be daunting.

So what can enterprises do to secure loans without putting their home on the line?

A strong business plan: The preparation work is the most critical aspect of your application. Your business plan should clearly outline the vision and direction of your business, with detailed analytics on strengths, weaknesses, opportunities and threats.

Know the figures: A detailed map of how much you need to borrow, what the capital will be used for, how you can prove you can pay it back and what security (outside of your home) you can offer against the loan is a strong argument in your favour. Don’t wait to crunch the numbers at the bank, prepare the plan yourself or get expert accountancy advice to prepare a detailed rundown of the numbers and your repayment plan. By presenting an irresistible case that shows there is no way you can’t pay the loan back, you strengthen your chances immeasurably.

Consider ‘At call’ loans: While those starting a new venture will likely need an upfront loan to purchase property, equipment and other necessities, those already in business can consider a loan where the funds are available on a semi-regular basis. These are called ‘At call’ loans and could include an overdraft or line of credit that helps bridge the gap while you are waiting on customer payments.

The key part of your application is preparation in every facet. By arming yourself with a strong business vision, a detailed analysis of why you need the loan and a watertight case of how you will be able to pay the money back is what will sway the lenders to approve your loan without the need to risk your house on it.

If you’re in the market to take your business to the next level, find out how the Morris Finance team can help you get started.