Small Business Finance 101: A Beginners Guide

Running a small business is about much more than taking care of the day to day stuff. You need to manage people, stay on top of the admin and monitor how well things are going.

You also need to make sure you have enough money. Yes, you’ll earn money in doing business, but often small businesses require a bit more assistance in order to grow.

The thing is, there are so many more small business finance options out there than you might realise. This is your guide to assessing all types of business loans to recognise what’s right for you.

Why use small business finance?

A lot of small business owners are reluctant to take out a loan. It takes time to arrange finance, and running your own business means there’s enough on your plate already. If you don’t know what your finance options are, it can be difficult to figure out what’s best for you. 

But small business finance is an extremely effective tool for establishing and growing your business, in a range of scenarios:

• Covering all the costs of starting a small business 
• Covering expenses until the business generates enough revenue to be cash flow positive
• Paying bills or expenses through a slow period

• Purchasing new equipment or property, or paying wages for new staff to fuel business growth
• Research and development of new products, or expansion into a new area
• Reducing your own risk as the business owner

You can see in these examples that there are two common scenarios where small business finance is used.

1. To cover expenses
2. To fuel business growth

Most, if not all, business owners cover costs using their own money for a period of time. But it’s unlikely that you can bootstrap your business indefinitely, which is where the option of getting small business finance comes into the picture (if it hasn’t before).

In terms of enabling growth, it can take a long time for the business to build up its own bank balance to cover the cost of large growth investments. Being able to get finance means having access to the capital required to help grow and transform your small business.

How to get a small business loan

A small business loan is just one of the finance options you have, but it’s one that many business owners will be familiar with – even if only vaguely. Even then, there are many different forms of business loan, and they all have their individual requirements.

In saying that, there are many common elements in getting a small business loan, whatever type you’re interested in. It can take some time to prepare paperwork and get finance approved, so it pays to start the process well in advance of when you actually need the funds.

Related: The small business lending checklist 

1 – Spend some time understanding exactly what your needs are. Why do you need finance? What do you hope it will achieve? How much do you need? When do you need it? Having a clear idea of your requirements will help you to select the option that suits you best.

2 – Prepare your paperwork. Lenders typically require:

• • Income tax returns from the last three years (personal and business)
  • Your business plan, including revenue forecasts
  • Financial statements, including personal statements and business projections
  • Bank statements
  • Legal documentation, such as business licences and registrations where appropriate
  • There may be additional paperwork required depending on the type of business finance you want, but you can expect at least most of these to be required. You may also be asked questions about certain things, such as your business plan, explanations for periods where you were low on cash, or why you’ve made the projections you have. The better you can explain things, the more chance you’ll have of being approved.

Assess your options. Research the market thoroughly, and look for options that you don’t already know about. You might be surprised at just how many forms of business finance there are, and they all have different pros and cons. (See below for a thorough breakdown).

3 – Things to consider:

• Security. How much collateral is required to secure the loan? If you don’t have it, can you get it? 

• Amount. How much money do you need?

• Entitlement. What will lenders give you? Are you even able to get the amount you need?

• Cost/Repayments. How much will the repayments be, and how often will they be? How much interest will you be charged, and how long will it take to repay the loan?

• Cash flow. Will you be able to cover the cost of those repayments through regular business activity? If not, are there other options?

• Business forecast. How do you project your business will grow throughout the period of the loan? What impact could the loan have on your growth? For example, how will a long term liability affect your business?

There are also different options that exist within each type of small business finance. For example, different banks all have their own range of small business loans with different conditions, limits, interest rates etc.. When you’re analysing small business finance options, make sure you consider more than one lending provider within each finance type.

Tip: When looking for a bank loan, start with your own bank. Banks are more likely to approve a loan for a current customer they know and trust. They may also be prepared to offer a lower interest rate. With this in mind, it can also pay to build a good relationship with your business bank manager before you go looking for finance.

Simply put, you shouldn’t expect to qualify for all types of business finance. Once you know what options are on the table, you can weigh them up against your own needs and priorities to figure out what’s best for you.

Types of small business finance (including advantages/disadvantages)

So what types of small business finance are out there? Knowing what your options are, and what they involve, is the first step in figuring out what suits you best.

Note there are different forms of business finance, and specific options within these categories.

Debt finance

Debt finance is the most common type of loan. It’s when a company borrows money to be paid back at a later date with interest. 

Small business loan (secured or unsecured)

The typical business loan from a bank that most business owners will be familiar with.

Pros:

• Predictable repayment amount and schedule
• Helps to cover large investments
• Paid in a lump sum

Cons:

• Requires large amounts of capital to act as security
• Often has a high minimum lending amount
• Comes with establishment, monthly and other admin fees
• Can take many weeks to get approval

Cash flow lending

A loan specifically designed to help boost cash flow in your business.

Pros:

• Can still be available to borrowers with low credit ratings
• Paid in a lump sum
• Flexible based on your needs
• Can be paired with long term borrowing to keep costs down

Cons: 

• Often comes with higher interest rates
• Added account fees 
• Generally not available in large amounts (Around $50k maximum)

Invoice finance

A form of cash flow finance where specialist lenders borrow the value of invoices to replicate the effect of customers paying them immediately. Also known as invoice factoring or invoice discounting.

Read more: Invoice discounting vs traditional bank loans

Pros:

• Short term liabilities that are quickly repaid
• Available on demand with FundTap, which keeps costs down
• Available in small amounts without large security requirements
• FundTap offers fast application and approval, with payment possible within hours
• FundTap links with accounting software for automated payment when customer pays invoices
• No regular account, application or establishment fees (FundTap only)

Cons:

• Can be inflexible when not offered on demand
• Users can lose control of customer relationships if borrower takes responsibility for getting invoices paid
• Some lenders can be indiscreet, and require borrowers to inform customers of their financing
• Credit Cards/Overdraft

Business credit cards or overdrafts

Can be useful for bridging periods when you’re low on cash.

Pros:

• Easy to get and easy to use
• May come with attractive rewards schemes
• Available on demand

Cons:

• High interest rates that can rack up quickly if not paid
• Limited funds available
• Unarranged overdrafts come with high fees
• Credit cards can be subject to fraud

Equity finance

Equity finance involves trading a share of business ownership for investment into the business.

Crowdfunding

Using a specific platform to seek cash from public investors.

Pros:

• Enables borrowers to build to a community of interested investors
• May not require giving up equity

Cons:

• No guarantee of success
• High fees and up-front costs through crowdfunding platforms
• Can take time to build a campaign and receive funds
• Requires owners to go public with a plea for investment

Private/public investment

Finding a willing backer to invest cash into your business in exchange for a stake in it.

Pros:

• No fees, interest or repayment requirements
• Can get access to business veterans with relevant expertise

Cons:

• Requires giving up an element of control in your business
• Can be hard to find a backer

Grants and funding

Small business grants can be a great way of injecting free cash in your business, if you can qualify.

Incubators/accelerators

There are a wide range of incubators and accelerators across New Zealand and Australia for businesses of different types or in different sectors. 

Pros:

• Get guidance in growing your business from industry experts
• No repayment requirements 

Cons:

• Can require months of dedication to work through the programme
• No control over the amount of investment available
• May involve periods of not being able to work on the day to day business
• High competition for places
• Can have strict requirements that may not suit your business

Māori-owned businesses

In New Zealand, specific Māori business funding can be accessed through the government, local lenders or other organisations with an interest in Māori enterprises.

Pros:

• No repayment obligations
• Paid in a lump sum
• Access to business and cultural expertise

Cons:

• Unavailable without sufficient Māori ownership
• Often not large amounts of lending available
• High competition
• Can come with future obligations
• Sector-specific grants (i.e. tech sector funding)

Many high growth sectors have interested investors willing to finance startups.

Pros:

• No repayment obligations
• Paid in a lump sum
• Can get access to sector experts for advice and mentorship

Cons:

• No control over the amount of cash that’s available
• High competition
• Only available in certain sectors with set criteria

Regional funding (i.e. through EDA’s)

Regional economic development agencies and other local bodies regularly give money to businesses to help boost local economies.

Pros:

• No repayment obligations
• Paid in a lump sum

Cons:

• No control over the amount of money that’s available
• High competition
• Funding often sector-specific 

How to apply for a small business loan

Once you’ve done your research, figured out the best option and got all your paperwork together, it’s time to apply for your small business loan. 

But before you do, just pause for a moment and go over everything. Double check you have everything you need, because first impressions last. There are a few traps to avoid:

• Being unprepared. Make sure you do actually have the right paperwork, and that it’s complete. Look through your numbers and educate yourself on anything you might be questioned about. 

• Taking the first option. If you apply for business finance through more than one provider, wait until you hear back from them all before making a decision. You may be able to play willing providers off against each other and get better terms.

• Borrowing to survive. Small business finance is a great tool for growing a business, but it shouldn’t be a lifeline. If the business isn’t performing, borrowing money is a risky play that could end up making your problems even worse.

• Not reading the fine print. Taking out a loan can be a sizeable liability that takes years to pay off. You should understand exactly what you’re signing up for before you sign the dotted line.

• Spending up once you get the loan. A loan is not a pay day. Avoid the temptation to splash the cash once you’ve got it, because it’ll limit your ability to use it for what you intended.

On Demand Finance for small businesses

One of the key characteristics to keep an eye on among these small business finance options is which are available on demand. Very few actually have this, but it can be useful in a range of ways:

• Keeping costs down when you don’t need extra cash on hand
• Pre-approved finance is available quickly when you need it
• Can be used to supplement other forms of borrowing to keep costs down
• It’s an excellent way to improve cash flow within a business

When it comes to invoice financing, FundTap’s on-demand lending provides affordable cash flow for small business owners. To find out more about how it helps you grow your business, check out how it works.