Best Business Loans

What is a business loan?

A business loan is a loan provided to a business owner by a bank or a private lender. This loan is specifically used for business purposes, whether it’s to help a business grow, make large purchases, or meet day-to-day costs.

You can use a business loan for all kinds of business purposes, including:

• Purchasing premises for your business
• Buying new equipment, such as a company car
• Hiring employees or paying staff wages
• Purchasing stock
• Managing cash flow
• Paying invoices

Types of business loans

Business loan

A traditional bank term loan is what most people think when they think of a business loan. It’s a lump sum of money that’s lent to your business. This amount can vary, as can the loan term, interest rate, type of interest rate, fees, and security.

This kind of loan is often suitable for businesses who know exactly how much they need to borrow or have to pay for a large one-off business expense.

Secured v unsecured business loans

Business loans are either secured or unsecured.

A secured business loan is one where the borrower offers collateral (financial assets you own, such as a home or a car) that they use to pay the lender if they default on the loan. These assets will be used to clear any outstanding balance, interest, or fees owed.

An unsecured loan doesn’t require collateral as security. This means that lenders will typically look at the viability and cash flow of your business as security. Some unsecured loans will still require a personal guarantee, which means the borrower is personally responsible for paying the debt if the business defaults.

Overdraft facility

A business overdraft or business line of credit is when a lender provides a business with access to funds up to a credit limit, which the borrower can withdraw any sized portion from whenever they need. It lets borrowers access as little or as much as they need up to the limit, and they don’t have to pay interest on the remainder they don’t use.

Invoice finance

Also called accounts receivable finance, this is a quick loan that lets you access cash to pay your business’ outstanding invoices. A lender gives you a portion of the total invoice value (usually somewhere between 80 to 90%) upfront as a loan or line of credit. Once your client pays the invoice, you pay the lender back the loaned amount with fees and interest.

Factoring

This is similar to invoice finance, except that a business sells the outstanding invoices to a factoring company at a discount. The factoring company then assumes responsibility for chasing up the debts from the client.

Chattel mortgage

A chattel mortgage - sometimes referred to as a goods loan - is when your business buys and owns an asset from the beginning of the loan term, and makes repayments until the loan is paid off.

Rent to buy

This is where you pay an initial deposit and then lease a good until you have paid it off.

What to consider when comparing business loans

Eligibility

Lenders will have criteria to consider when determining whether an applicant is eligible for a loan. Check a lender’s eligibility criteria before you go through the application process to ensure that you’re not wasting your time.

Some factors that may affect your eligibility for a business loan are:

• Your business’ credit score. Businesses with a good credit score have a higher chance of receiving a loan, will likely be able to borrow a larger amount of money, and have more competitive interest rates.
• The purpose of your loan. Lenders need to know the details of why you want to borrow money, how much you need to borrow, and your plans for repayments.
• Your personal and business history. This can include past legal issues or business ventures, as well as personal debts you have.
• How old your business is. Many lenders require your business to have been operating for a minimum amount of time before they’ll consider offering you a loan, with some requiring at least 2 years of trading before being eligible for a loan.
• The annual turnover of your business. A lender will likely require a business to have a minimum turnover to help ensure your business is making enough money to meet loan repayments.

Be prepared to share these details with a provider when applying for a loan.

Loan amount

Try to figure out how much you need to borrow. Those looking to borrow to purchase an asset will probably find this to be more straightforward than those needing to cover a cash shortfall.

How much you can borrow will depend on factors like the purpose of your loan, the type of business you run (for example, a start-up or small business probably won’t be able to borrow as much as a large company can), and whether or not you have security on your loan.

Different lenders will also have different maximum loan amounts. Smaller lenders, such as some online lenders, will usually only offer loans up to $150,000, while larger banks will offer some businesses loans upward of $1,000,000.

Loan term

The loan term is the length of time it takes to completely pay off your loan, and can range anywhere from 1 month to 20 years or more.

Your loan term will usually depend on the amount of money you’re borrowing and your repayments. If you’re borrowing money for a piece of equipment that costs a few thousand dollars, your loan term may be as short as just a few months if you’re able to pay it back quickly.

Loan repayments

The loan term will impact your repayment amounts.

Before you contact a lender, it’s a good idea to figure out what you can afford to repay each month by looking at your business’ financials and calculating a cash flow forecast.

Interest rates

You want a loan that will help you grow or manage your business without interest rates and fees that will cripple it.

Different lenders express interest rates differently, so check whether the advertised interest rate is per fortnight, per month, or per annum when you’re comparing loans. Some lenders also won’t let you know their interest rates upfront, instead calculating an interest rate determined by a business’ specific situation.

Lenders may also have specific deals that can affect the interest rate of your loan. For example, some lenders offer lower interest rates on a commercial car loan if you use it to purchase a low-emission vehicle.

Fixed vs variable interest rates

As is the case with other loans, you’ll generally have to choose between a fixed or variable interest rate for your business loan.

A fixed rate means that the interest rate of your business loan stays the same for a set period of time. It has the benefit of providing certainty with your repayment amounts, but it also means that if interest rates lower, you won’t be able to take advantage of them.

A variable rate on your business loan fluctuates depending on market conditions. It may be suitable for you if you think you can make repayments even if interest rates increase.

Fees

There are also fees that may be attached to a loan, including the following:

• Application fee: Also called an establishment fee, this is paid at the start of the loan.
• Ongoing fee: This is a service fee that may be charged on a weekly, fornightly, monthly, or annual basis.
• Early repayment fee: A lender may charge you for making early repayments on your loan, particularly if you’ve taken out a fixed rate loan.
• Late repayment fee: This fee is charged every time you miss a repayment, and generally is somewhere between $25 to $50.
• Dishonour fee: Also called a direct debit dishonour fee, this is a fee charged if a payment isn’t able to be processed because you have insufficient funds in your account.
• Valuation fee: This is charged if you choose to secure your loan.
• Exit fee: A fee charged once you have paid off your loan or if you refinance your loan. This is also called a discharge fee.

Loan features

Some business loans have useful features that can make it more suitable for your business’ specific needs and situation.

• Extra repayments: This lets you pay off your debt faster, while also helping you reduce the amount of interest you pay. However, some lenders charge a fee when you do this.
• Redraw facility: If you make extra repayments, a loan with a redraw facility lets you redraw this money if you need it to pay any unexpected costs. Some lenders charge a redraw fee or restrict the amount you can redraw.
• Portability: This will let you keep the same business loan, even if you change the location of your office or store.
• Quick funding: There are plenty of lenders, particularly online loan providers, who have a speedy application process and advertise funds being available to you in as little as 24 hours after the approval of your loan.

The bottom line

Before you meet with a lender, prepare your documentation, including your business plan, past financial reports, cash flow forecasts, and personal financial information.

Don’t be afraid to seek expert financial advice if you’re not confident answering questions relating to finance. This can help your business get approval for a loan that will ultimately help it grow.

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