Are you interested in taking out a business loan but you have no idea where to start? Don’t worry. We’ve covered the most important factors to ensure you are better prepared when exploring the options for business loans.
How do business loans work?
Business loans aren’t unlike other loans that you may have encountered before, in that they can vary in size, interest rates, and be either secured or unsecured. Business loans can be provided as a lump-sum payment or involve accessing a line of credit which is repaid with interest over a period of time.
The right loan for you will depend on your unique business needs and the purposes for which you are seeking a loan. Here, we will break down the different types of financing and loans available to you and how you can secure your business loan.
Is my business eligible for a loan?
Before diving into the different loan options available, you might be considering whether your business is eligible for a loan. Eligibility is dependent on the type of loan you want, but there are generally three key things to bear in mind.
The length of time your business has been operating
A business usually needs to be operating for a minimum of 6 months to a year to secure a business loan. Having said that, there are certain types of loans, e.g. equipment finance loans which are less focused on business age as a criterion. There are also lenders who offer financing for start-ups.
Lenders may look at your business turnover when considering your eligibility for a loan and the minimum turnover required will vary from loan to loan.
While not all loans require perfect credit histories, it’s likely that lenders will be checking both your personal credit history as well as that of your business when determining eligibility.
What is the difference between a secured loan and an unsecured loan?
There are two types of business loans: secured and unsecured.
Secured business loans require you to put forward an asset as ‘security’ in order to be granted a loan, which can then be collected as collateral in the event that you do not repay the loan as agreed. Secured loans often allow you to borrow a larger amount at a lower interest rate.
Unsecured business loans do not require you to put forward any assets as ‘security’ to access the loan. However, unsecured loans pose more risk to the lender who will then, in turn, charge a higher interest rate.
What is the difference between debt and equity financing?
There are two main types of business finance: debt and equity.
What is debt finance?
Debt finance is money borrowed from external lenders, predominantly banks
What is equity finance?
Equity finance is money invested by individuals or companies in exchange for a share in the ownership of the business
Is debt or equity financing better for my business needs?
Many businesses use both types of financing to acquire the capital they need, although it’s helpful to know the pros and cons of each type.
Allows owners to retain full control of their business
Interest paid on loan is a tax-deductible expense
Banks offer different types of loans for different term lengths allowing business owners to shop around
Must be paid back in a fixed period and loan repayments often start immediately
Are usually secured against assets of a business
For large loans, interest and repayments can be a hindrance to the growth of a business
Less risky than debt financing - does not need to be paid back immediately, no fixed-term
Allows businesses to have more cash on hand
Investors may bring valuable skills to the table, offering additional expertise or enhancing credibility
Less business autonomy, as new stakeholders will have some say in how the business is managed and the decisions the business makes
Significant time, effort and difficulty involved in finding the right person and negotiating the terms of the investment
What business financing options do I have?
There are many financing options available to small business owners. The following list is a non-exhaustive list of the most common financing options.
A business overdraft is a feature of a business account which allows you to continue to draw funds below a zero balance to a predetermined limit.
Business line of credit
A business line of credit is similar to a business overdraft, but usually has a higher limit and is provided at a lower interest rate, as they are usually a secured form of a bank loan (though not always). It’s fairly flexible and generally involves a quick application. You will only need to repay interest for the amount you use, but there’s little long-term certainty with overdrafts and they will likely charge fees even when unused.
Business credit card
A business credit card is similar to a personal credit card and can benefit your business’ short-term cash flow needs, especially if you take advantage of cards which offer interest-free periods. Interest rates can be very high if repayments are missed.
Invoice financing is the process of selling your unpaid invoices to a lender who will then pay you what you’re owed minus a fee. You can use your invoices as a source of immediate funding, but you will receive less than what was originally owed to you.
Equipment financing is a fixed term loan used specifically for purchasing equipment or machinery. It usually requires little to no-upfront payments and is easy to secure, but the ownership of the asset will be retained by the lender throughout the loan. The lease can’t usually be terminated before the agreed date unless you pay a fee.
Microfinance business loan
A microfinance business loan is a small loan (usually between $500 and $20,000) offered to low-income earners who would like to start a business. Features of a microfinance loan include a 90-day free interest period and fixed interest rates.
Which type of loan is best for my business?
In order to determine the best type of loan for your business, you need to consider:
How much funding your business needs
What this funding will be used for
The length of time you will require the funding
The nature of your business and its cash flow requirements and your business turnover
If you feel like you need some further support and guidance to determine the best type of loan for your business, you’re certainly not alone.
Businesses often rely on business loan brokers to determine which type of financing and loan provider is best suited to them. In somes cases, capital is raised from multiple sources using both types of financing, especially in the early stages of business startups or in periods of rapid growth.
How do I get a small business loan?
Use the following checklist to ensure you find the right business loan for your needs.
Carefully consider your business needs including how much money you want to borrow and for what purposes you are borrowing, i.e. is this a long-term loan or a short-term one? What will I be spending this money on?
Compare the rates and fees of all loans e.g. interest rates, application fees, ongoing fees etc.
Consider your eligibility against the requirements of the loan including your business age and turnover as well as credit profile and existing debt.
Ensure that the repayment terms of the loan align with your business needs and be realistic when considering your ability to repay a loan.
Lastly, in the event that your application is rejected, always ask your lender for feedback. This feedback may contain vital information which you can then use for future applications.
Answer a few questions to tell us about your business requirements and we’ll introduce you to a business loan broker that is right for you.
Find out more about business finance and loan experts here.
Can you get a small business loan with bad credit?
It can be difficult to secure a business loan from a traditional bank if you have a bad credit rating. Bad credit business loans are sometimes offered to business owners who have a negative credit history or have defaulted on a previous loan.
Can you get a small business loan without collateral?
Since the financial crisis in 2008, banks have become much more active in small business lending. Only the most creditworthy businesses are considered for unsecured small business loans without collateral (property or other assets). However, there are some online non-banking lenders who give small businesses access to loans without the need for collateral.
How much deposit do I need for a business loan?
Business loans in Australia don’t require a cash deposit. A secured loan requires some form of collateral, i.e. property or other assets but it does not require money from you. An unsecured loan does not require collateral.
What do I need to get a business loan?
The most important requirement to secure an SBA (small business administration) loan from a bank is an excellent credit rating as well as good personal credit. Every lender has their own requirements such as the duration you’ve been in business, revenue and cash flow.
Can I use my super as security for a loan?
It is possible to borrow against your super within a self-managed superannuation fund (SMSF), but the asset purchased will need to be owned within the SMSF. For example, a property is bought and used as security collateral for the loan. No additional assets within the SMSF can be used as security by the lender.