Everyone who either owns or is thinking of starting a business has likely scratched their head over one thing in particular: business loans. For business owners, there will often come the time when more money is required than what is being brought in, and that’s where business loans come in.
However, it is crucial to assess what exactly is your financial situation, and who to approach for what type of loan. To address some of these points, I have highlighted a few key pointers on acquiring business loans.
When you need to get a clear visualisation of your financial needs, might as well get educated about financial plans. First of all, you need to avoid these 6 biggest small business loan mistakes.
Who Provides Business Loans?
Business loans are available in many different varieties, whether for small businesses or major corporations, and it can often be confusing to know exactly where to begin. The options are many, and it’s important to know the type of loan that best serves your business.
Business loans can be secured by approaching a bank or a business lender. So, what’s the difference? Let’s start with banks. Banks generally have tighter criteria for approving loans, especially for small or higher risk businesses.
It’s important to note that the application process for a business loan through a bank is lengthy. It could take you between three and four weeks to gather and send all your required documents, and a month or more after that to get the approval for your loan.”
It is also typical for a bank to secure your loan with an asset- usually a commercial or residential property or a high-value item- known as collateral, which will be sold as a means of repaying the debt should you be unable to pay it back.
Banks will look at everything about your business to ensure that you have a good credit history, no excessive outstanding debt, etc. before approving your loan. As such, the process can be lengthy; though the process would certainly be rendered worthwhile once you have access to the money in question.
- Business lenders
Then there are business lenders. These are an alternate source of financing whose approval process requires less time and whose criteria for accepting a loan request are not so stringent.
Although, it must be mentioned that due to the fact that business lenders may have to fund businesses from their own resources, they are therefore likely to charge higher interest rates. The flipside is that business owners have a higher chance of being approved as opposed to when they approach a bank, which suits new businesses.
In fact, according to the statistics of Lending Express, provided by Small Business Loans Australia, 33% of loans obtained from online lenders in Australia between July and October of 2017 were by businesses 3 years old or younger.
This is an experience the team at Close Consulting have experienced, noting that “within the first few years of running our store, we realised we needed more money to actually grow. So we applied to a few business lenders to get some capital”.
What Are the Different Types of Business Loans?
So here are some of the business loans typically provided by banks and lenders:
- Secured Business Loan
A secured business loan is one in which the money lent is secured by an asset, usually either a commercial or residential property. The benefit of this type of loan is generally that it is more likely to be approved, and with lower interest rates too.
- Unsecured Business Loan
According to the Home Loans experts at Crew Financial, this is a riskier strategy as “An Unsecured Business Loan is considered “unsecured” because there is no collateral involved. Lenders in this category expose themselves to greater risk, as they have little recourse if the borrower defaults. For this reason, the borrower’s credit plays a more important role in determining how much they can borrow at one time.”
- Business Line of Credit
A Business line of credit acts a bit differently from a traditional business loan. The receiver of the loan has access to a revolving line of limited credit, as opposed to an upfront lump-sum payment, which they can then tap into as required.
You are then only obliged to pay back the credit that has actually been used, with an interest rate that is generally lower than that of a traditional credit card. The advantage of this particular loan is that you are allowed the flexibility to borrow only what you need, and pay it back at your own pace.
- Business Credit Card
Business credit cards are used to cover work expenses, much in the same way that personal credit cards are used for personal expenses, and are used by companies ranging from small business to major corporations.
Unlike personal credit cards, however, business credit cards come with features designed specifically for workplace businesses, such as customisable spending limits, additional cards for employees and expense tracking. In any case, funds can be paid back over time with interest charges.
This has been especially useful for one Australian business, Organic Innovation, who noted that “when your business begins to really cross over into your personal life, having a business card becomes absolutely essential. It’s me saved countless hours on bookkeeping and other admin tasks”.
- Business Vehicle Finance
This applies to sole traders or business owners simply looking to purchase or lease a car. In such a case, there are multiple financing agreements available to the person in question, such as a novated lease, business loan or regular car loan, to mention a few.
- Equipment Finance
This is a great option for those with businesses that need either an equipment upgrade or simply a lot of machinery in order to run smoothly and effectively, ranging from agricultural to medical, IT to industrial. This loan lends you the money necessary to purchase specialised equipment upfront without the stress of having to produce the money from your own pocket. As usual, funds can be paid back over an agreed repayment period.
- Business Overdraft
A business overdraft is a particular line of credit that is attached to your existing transaction account. This credit becomes available to you once you have exhausted all the funds in your transaction account.
After all this is sorted, you need to start looking for a broker. But what qualities should I look for in a broker?