Alternative finance options for small businesses during the COVID-19 outbreak
If your business has been affected by COVID-19 there are a number of options available to help you financially.
The banks are offering various relief measures to help small businesses during this time of uncertainty. This includes measures such as payment deferrals, fee and interest waivers and discounted rates on business loans.
The government has employing various financial measures including subsidies, refunds, deferrals, and waivers to help businesses retain staff and purchase new equipment during this time.
Businesses can either be lent a lump-sum payment or a revolving line of credit, which is repaid, with interest, over an agreed term (generally anywhere from three months to five years).
Business loans come as either secured or unsecured loans and allow businesses to borrow from $5,000 to $1,000,000, though some lenders do not have limits on their borrowing amounts. Most business loans come with a fixed interest rate and you will need to make repayments on a daily, weekly or monthly basis.
Two types of business loans
Secured business loanYou will need to use an asset, generally a residential or commercial property, as security against the loan. In return, you will generally receive a lower interest rate, have the ability to borrow a larger amount and are more likely to be approved by the lender. Some lenders do not have a limit on the funds that you can borrow with a secured business loan. The amount that you qualify for will instead be determined by your asset value.
Unsecured business loanYou do not need to use an asset as security on an unsecured loan. As an unsecured loan represents more of a risk to the lender, you will generally be offered a higher interest rate and may be less likely to be approved for a loan, depending on the strength of your application. Unsecured loans can be beneficial for business owners who do not own an asset of value, or would prefer not to risk their personal or company property.
Quick guide to business loans
Are you eligible for a business loan? How do business loan applications receive approval? Why are applications rejected? We take you through your business loan application to help you get it across the line.
Is your business eligible for a loan?
Age of the business. You usually need to have been operating for at least one year for most unsecured business loans on offer from alternative lenders and banks, but some may offer unsecured startup finance. Invoice factoring and equipment loans have less stringent criteria for business age, but you also need to have been operating for at least one year for business overdrafts or a line of credit.
Turnover. Your business may need to be making a specific amount of turnover to be eligible for a loan. This revenue may be monthly or yearly and can range from $50,000 p.a. to $200,000+. Other lenders require you to connect your business’ accounting software or financials as part of the application process, so it can calculate a loan your business can afford.
Credit profile. The lender may check the personal credit histories of the directors, along with the company’s credit (unless you’re a startup). If the business has unpaid defaults or tax debt you may need to find a bad credit business loan.
NZBN. You’ll need to have a New Zealand Business Number (NZBN).
What are the business finance options available?
Lenders split business finance into two main categories: debt finance and equity finance. An owner or external investor provide equity finance, whereas banks, credit unions or a business lender provide debt finance. Below, you can find out more information about the different types of short-term and long-term debt finance available.
Business overdraft
Business overdrafts are attached to your business banking account and allow you to overdraw up to a specified limit on that account. You only pay interest on the outstanding balance.
A pre-determined limit that you can overdraw up to on your business bank account
Suitable to manage day-to-day cash flow fluctuations in a business
Usually comes with an application fee, line or facility fees, and you pay the interest monthly when you use the overdraft funds
A business line of credit
You have a set limit and can use up to and including that limit as and when you need to. Repayments are flexible as long as you keep the account in good standing.
Draw on an account balance up to an approved limit
A line of credit can be secured or unsecured, and more non-traditional lenders are starting to offer them
Lenders usually charge interest monthly, and repayments include the interest plus fees
Short-term business loan
You receive approval for a specific amount of funds which you repay over a set term, which is usually between three and 12 months.
Repay what you owe quickly
Repayments are usually daily or weekly to mitigate the impact on a business’ cash flow
Lenders may charge interest on the principal or the outstanding amount, depending on the lender, and fees may apply
Credit card
A business credit card works just like a personal credit card, except for the business expenses. Plus, you can add multiple additional cardholders.
How do lenders judge your business loan application?
Lenders use a variety of criteria to see if you fit their risk profile and to ensure your business can repay the loan.
Age and turnover of the business Startup finance is harder to find and receive approval for, so if it is an established business, you will find it easier to be eligible for a loan. The provider also considers the business turnover, and it usually has a minimum requirement for the monthly or annual turnover or uses your turnover to determine what the business can afford to repay.
Credit profile The lender assesses the director’s credit scores as part of the application process. If the business is established, so is the company’s credit score.
Credit card volume If you receive credit card payments in your business, lenders may use the amount of these payments to judge your ability to repay the loan. The assumption among some new lenders is that you will primarily use this volume to repay the loan.
Accounts receivable Similar to credit card volume, lenders may factor your accounts receivable value into their asset ratios to help them make a decision.
Company structure Lenders check your company’s structure and how long you have had this existing structure. If you have recently undertaken a restructure or are applying for finance in the middle of restructuring, lenders may not want to finance you at this time.
Existing debt Does your business have an existing debt with another lender? The loan provider considers this as part of your application.
Profitability For a revolving line of credit, your business usually needs to be profitable to receive approval.
Common mistakes that mean rejection for your application
Frequent changes to your company structure. One way lenders judge your business is to see how long you’ve had your current format. If you’re applying for finance when you’re undergoing a restructure, or if you’ve been through multiple restructures, this could be a red flag.
Not having a clear loan purpose. If you don’t have a clearly defined plan for the funds you’re applying for, lenders are hesitant to lend to you, even if your financials show you can repay the loan. Have cash flow projections that incorporate the credit you’re applying for and demonstrate how you will use and repay it.
Asking for too much. Lenders use the information you provide in your application, including business details and account information, to work out how much you can comfortably afford to borrow. If you ask for too much at the onset, the lender may reject the loan rather than offer you a lower amount. However, asking for too little may mean you need to borrow again soon. Work out how much you can comfortably afford, so you have the best chance of gaining approval.
Being impatient. Each lender has a different approval process for business loans and the first lender you approach may not necessarily close the deal for you. You are entitled to ask your lender how long the process will take, but consider that it may take longer than you first thought. Take the time to complete the paperwork correctly because the provider will use it to determine whether to approve you for a loan or not.
Relying on your cash flow. Lenders look at things other than cash flow, such as how long the business has been in operation, the financial situation of the directors and the reason for the loan. Remember to give as much detail as possible to help your application.
How can you compare business loans?
Do you meet the eligibility criteria? Checking you meet the minimum eligibility criteria before you apply is the first step in your comparison process, as this helps narrow down the most suitable choices.
How much will the business loan cost? If you know what loan you need, the next step is deciding what your company can afford. Look at your incomings and outgoings to see what you can comfortably repay without putting too much strain on the business. If the loan is for a startup, you need to rely on cash flow projections.
Do the repayment terms meet your business’ needs? Lenders offer repayment terms of varying flexibility. Some allow you to repay daily, others weekly and some require you to repay the loan monthly. Work out which best meets your business’ needs regarding cash flow.
Information about business loans you might find useful
Costs vary significantly depending on the lender, but you can usually find out the cost structure before you apply. Some lenders charge interest and others charge factor rates, where the interest doesn’t compound. Most non-bank lenders charge their interest rates daily, as this is when your repayments are direct-debited from your account, whereas banks charge an annual fee. You may need to pay an establishment fee but can typically repay early without penalty.
Repayment terms differ depending on how much you borrow and the lender. Generally, you have between six months and three years to repay a loan from a non-bank lender, but banks offer more extended periods.
The lender specifies which credit history they need to check, but usually, it’s the directors’ credit histories that they need to verify. They may also review your business’ financials, using accounting information you supply as part of the application process.
Read the guide on business loans and your credit file.
A fixed-term loan provides you with a lump sum when you receive approval, and the lender arranges the repayments, so you repay the money by the end of your loan term. With a line of credit, the lender gives you a certain limit that you can draw up to and including, as per your business needs. Some lenders can approve you for a limit but will not charge you if you decide not to use it. As you repay the line of credit, the funds become available for you to use again.
Don’t apply for business loans until you can present a favourable case to the lender to prove your suitability as a borrower. You need to show your business’ financials and cash flow. Make sure you review the minimum criteria for the loan and ensure your business meets it. If you aren’t sure, check directly with the lender.
There are a range of reasons why a lender may deny a business loan application, and it is essential to ask for feedback if you do receive a rejection. The feedback gives you an insight into what you did wrong, and you can improve on this the next time you apply. If the lender is unable to provide this feedback, you may want to review your application and see if you can spot any red flags. Common rejection reasons for large and small business loans can include bad credit listings; cash flow issues; insufficient security or not meeting the lender’s criteria. Before applying again, make sure you compare your business loan options thoroughly, so you choose a lender that fits your needs and suits your financial situation.
No matter where in New Zealand you’re looking for business finance, there are loan options available. Take a look online to see what some of your options could be.
Elizabeth Barry is Finder's global fintech editor. She has written about finance for over six years and has been featured in a range of publications and media including Seven News, the ABC, Mamamia, Dynamic Business and Financy. Elizabeth has a Bachelor of Communications and a Master of Creative Writing from the University of Technology Sydney. In 2017, she received the Highly Commended award for Best New Journalist at the IT Journalism Awards. Elizabeth's passion is writing about innovations in financial services (which has surprised her more than anyone else).
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