One of the key challenges for small to medium enterprises is financing their business needs. Often they will need to turn to the banks for a loan, which can be difficult if you don’t understand what they are talking about.
We are going to break down some of the terms that you may come across in dealing with the bank when applying for finance.
Risk
As a small business borrowing money, risk is the chance you take in taking out a loan and being able to repay it. You may be risking your business, or even your home, to provide surety that you can repay the debt.
Security
The right of a lender against the real property, or other assets of a borrower or guarantor, to secure the repayment of a loan. The security is aimed at ensuring that the lender is able to recover the full amount of the loan (selling the asset) if the borrower can’t repay the loan.
Cash reserves
Cash previously put aside for a special use.
Cash flow forecast
A cash flow forecast sets out all the expected revenues and expenses over a certain period and highlights any cash excess or shortages. All your assumptions should be included when preparing a forecast for the bank. An online software program, and up to date financials, are key in the preparation of a cashflow forecast.
Capacity to repay
The lender or bank will determine your ability to repay the loan based on your financial statements, cash flows and financial ratios.
Credit history
A record of an individual’s or business’ past borrowing and repayment behaviour. Your credit history will show credit applications, records of current credit, overdue accounts and bankruptcy information.
Interest cover
Interest cover is the cash you have available to service the interest payable on the loan, taking into account current conditions and possible fluctuations in interest rates over the term of the loan.
Loan to Value Ratio (LVR)
The LVR measures the amount of the loan compared to the value of the property being used as security for the loan, expressed as a percentage figure. From a lender’s perspective, the higher the LVR, the higher the risk to the lender. For example: the bank may consider a LVR of 65% on a factory, valued at $500K, which means they may lend up to $325K.
One of the benefits of using a Finance Broker is that they can bridge the gap between the lender and the borrower, and make the process as simple as possible.
If you are thinking about applying for a loan, whether it be for a home, farm equipment or your business, MBC Finance can help you. Contact Al Hattersley on 0431 733 783 or email al.hattersley@mbco.com.au
