Find out how to compare your loan options to get the right one for what your business needs.
If you've come to a point in your business where you need a loan, whether it's to buy equipment, cover seasonal cash flow issues, or even to get your business started, finding the right one is important. There is a range of business financing options available. Comparing your options will help you narrow them down to what will work for your business' needs. This guide will show you how to do that.
What are business loans?
Business loans are credit facilities that are intended to financially help your company to operate smoothly and make progress to achieve your business goals. They can also be applied for to help finance a startup. Business loans are provided by banks and other alternative lenders.
What types of business loans are available?
Choosing the right type of loan is the first step to getting the right loan for your business. There are many types of business loans catering to the different needs of your company. It is important that you know exactly the type of loan that you plan to obtain so that you’ll get the full benefit of the loan.
- Business overdraft. This type of finance is usually taken out by smaller businesses or those with fluctating cash flow. It's designed to finance the day-to-day cash needs of a business and are lent by banks and credit unions, as they're tied to a business bank account.
- Business line of credit. Similar to a business overdraft, this finance gives businesses additional funds as and when they need it. The difference is this finance is usually secured by a mortgage or a personal guarantee.
- Credit cards. Both personal and business credit cards are utilised by business owners when financing short-term capital requirements. Some benefits of credit cards are interest-free days and frequent flyer points, but can be expensive if not paid back in full each month.
- Cash flow lending. This type of financing is opted for by businesses that generate cash flow aren't able to provide security. The loan is secured by the working capital assets of the business.
- Invoice factoring. Many businesses have capital tied up in outstanding invoices, so this type of finance allows them to sell invoices to bring the payment forward. Usually 85% of the invoice value is available for finance.
- Trade finance. Businesses looking to purchase goods from a domestic or international supplier can consider trade finance. Through a letter of credit, bank guarantee or documentary collection you simply pay interest on the amount provided for each trade transaction.
- Vehicle finance. Businesses that need to purchase vehicles have access to a range of vehicle financing options. As the loan is secured your business can look forward to more competitive rates, and depending on the use of the vehicle, tax benefits.
- Equipment finance. If you need equipment for your business, whether it be for a construction site, a medical lab or an office, you may need finance to lease or purchase it. There are a few options available, such as hire purchase agreements, with each having different benefits for different businesses.
How can I compare business loans?
The business loan features are as follows.
- Interest rates. Interest rates on business loans can be charges in a variety of ways. Some lenders use a fixed interest rate charged on what you owe, although others use a factor rate that is charged on your principal loan amount. Factor rates are generally charged for short loan terms. Compare costs of loans and see what will work for your business' cash flow.
- Repayments. Each business' cash flow is different and will require different repayments. Some lenders offer flexible repayment terms depending on what you require, while others only offer weekly or monthly repayments. Some lenders take repayments out daily.
- Flexible terms. The purpose of your loan should match your loan terms. For instance, if you're buying stock that will only last one year you don't want to be paying it off for five years. There is a range of lenders offering a range of terms, from three months to ten years.
- Fees. Loans differ on what fees they come with. Keep an eye out for an application or establishment fee, an account-keeping fee, a service fee and a document fee.
- Loan consultant. Your bank or lender may be able to provider a business advisor to help you every step of the way.
Frequently asked questions
What do I need to apply for a business loan? This differs between lenders. Generally, you will need a summary of your business' financials, a business plan, financial forecasts (including cash flow forecasts) and your personal information. However, many new lenders simply request to log into your business' accounting software to get this information for themselves. Will my credit history be assessed? The personal credit history of the directors and the business' credit score will usually be assessed before you're approved for a business loan. What do lenders look for in an application? This differs depending on what business stage you're at and the type of lender you apply with. For instance, banks will be much stricter and be looking for a more detailed business plan than newer online lenders will. It ultimately comes down to risk – the lenders will judge the risk they are taking on with your loan and the likelihood that your business has the capacity to repay it. Picture: Shutterstock