Small business lending, and in fact lending in general, has had a lot of recent focus – through the Royal Commission, the government support initiatives during COVID-19, RBA rate changes and the work of the Small Business Ombudsman.
A persistent theme we see from small businesses is that many are struggling to access capital when they need it, which can impact a business’ ability to grow or to maintain a positive cash flow.
New Xero data shows that one in five small businesses in Australia experienced more than six months of negative cash flow in the year, an indication of just how systemic ongoing cash flow stress is.
Helping small businesses access the right working capital is one way we can support them through potential cash flow crunches. To understand the key role accountants and bookkeepers can play in a small businesses finance journey, I recently hosted a panel with three experts, Simon Creighton, co-founder & director of Waddle, from Xero, Andrew Mattner, director of Altitude Advisory, and Jacinta Nielsen, financial advisory partner at Deloitte at Xerocon Sydney.
How to manage providing advice
A common misconception we hear from the accounting and bookkeeping community is that you need a separate financial or credit licence to be able to talk to small businesses about lending.
Andrew explained, “You can provide guidance and advice to your clients about business finance products, provided it is in accordance with applicable rules and laws. Business finance is not classified as a “financial product” under the Corporations Act, so it does not have a licensing regime at the moment.
“Our job is to lift a business owner’s head out of the weeds, give them a bigger picture view of what’s going on, and guide them in the right direction.”
Improve your chances of success
Giving small businesses the best chance of having their loan application approved first time requires time invested to make sure you have an unadulterated data set that’s up to date and complete.
“In terms of collating information, make sure you are putting your best foot forward. Think in the eyes of a lender — consider serviceability, asset security, and what the balance sheet looks like. Ask yourself, if I was a lender, what would I focus on?” said Jacinta.
Simon believes quality bookkeeping that creates reliable financial information not only helps inform strategic business decision making, but can make all the difference when applying for finance.
“Before submitting a loan application, ensure your client’s data is correct in Xero. This gives lenders access to the most accurate snapshot of the business to help speed up the application assessment process.”
We recently welcomed the Waddle lending platform to the Xero family to make it easier for small businesses to access funding by leveraging accounting data through Xero and automating many of the manual processes typically involved in invoice financing.
“If you’re after a multimillion-dollar facility it’s going to take longer. Today it’s not unusual for small businesses to get approved for funding within a day — at Waddle, we can approve funds against small business invoices within 24 hours,” Simon explained.
Andrew added, “The more you can get on the front foot and present a compelling business case the better. Get in the trenches with your clients to really understand their business. So when a funding need arises you can be prepared.”
Understanding finance options
Jacinta shared that options vary for small businesses seeking finance for working capital or investment. “As a first step, we need to understand what the finance is needed for, what’s driving it, how it matches the business objectives, and whether it’s short or long term.”
When considering the options, it’s important to think about whether a loan is the right solution for your client. Have a conversation about how the business plans to use the funds, whether the repayment term is manageable based on the current and future level of business cash flow, and use the various reporting options in Xero to assess the financial position of the business.
“It’s equally important to be able to advise your client ‘that new finance is not the right solution as you can’t afford to pay it back’,” explained Jacinta.
Helping your client with a cash flow forecast and understanding any expected changes in revenue will give you an idea if the repayments will be affordable and the loan is serviceable.
Andrew added, “Our job is to help spot and fix cash flow problems by finding solutions to cover the funding gap. We need to make sure our clients understand what they’re getting themselves into and the rules that come with it. Sometimes the best advice is to not apply for finance.”
Consider your service offering
Once your client has been successful and the funds have been drawn down, now is the ideal time to consider a deeper advisory relationship to help your small business clients grow and thrive beyond getting finance-ready. Will your client benefit from updated forecasts on a regular basis? Or monthly or quarterly business planning to reassess their capital requirements? Or even scenario planning where you look at different ways to approach a problem?
We understand the lending environment is becoming increasingly varied and can be complex for many business owners and their advisors to navigate. This is why we’re working together alongside a range of lenders to help simplify the process of access to capital using the strength of data. Through integrations with the Xero platform, lenders can have accurate and comprehensive information to speed up the application process.
The more we can support small businesses to get finance ready, the greater confidence lenders will have when assessing and providing capital to those who need it.