Whether you are an established small business that has been trading for years, or have recently started a business from home with very little money, there comes a point where you might need to secure a small business loan.
Regardless of whether you need it to expand your operations, fund new marketing activities, buy new equipment or increase working capital, there are a few things you should be mindful of when it comes to business lending.
In this guide we will highlight what is involved in it and, if you are serious about applying for one, give some pointers about how to go about choosing the right small business loan for you.
So, let’s get into it!
What exactly is a small business loan?
A small business loan is a sum of money which a financial institution lends to your business in some form.
As the name alludes, small business loans tend to be substantially less in terms of value than commercial loans. Often sitting between $2000 and $100,000, whereas commercial loans can sometimes be over $1 million.
To fully understand what a business loan is, it is a good idea to read ‘A Simple Guide to Business Loans and Finance’ by Westpac Bank, as this explains the process very well.
Types of business loans
Typically, a small business loan can take many forms. This includes the following:
A business loan is a specific amount of money that is lent to you.
The loan terms can vary from a few months to several years. You can also choose between a fixed or variable rate of interest, as well as a payment frequency that suits you i.e weekly, fortnightly or monthly.
The loan must be paid back in full to an agreed timeframe, and sometimes security like business assets is required to secure your loan.
If you would rather not put-up security against a loan, you may prefer to opt for an unsecured business loan, although you usually will not be able to borrow as much as you could for a secured one.
Business overdraft facility/line of credit
Essentially, a business overdraft is a line of credit that most often gets applied to your business’s transaction account.
This is a good option for when you need an injection of cash to pay unexpected bills, or for purposes like funding marketing initiatives, or the purchase of new equipment that will benefit the business.
With this option you only pay interest on the money used and not the entirety of the overdraft figure. When you receive new funds, you can also regularly reduce the overdraft limit to keep it at more manageable levels.
The interest rate for an overdraft is often higher than a business loan, it also does not have a defined end date – only finishing when your balance is back in the black.
Another type of small business loan is a finance lease. This enables you to use an asset like machinery, a car or other types of equipment) for an agreed length of time.
The lender will then buy the asset on your behalf and rent it back to you over a specific length of time. Once this length of time has elapsed, the car or machinery is returned.
Although you do not own the asset at any time of the transaction, the good thing about the rent payments you pay to the lender, is that they might be tax deductible.
Commercial hire purchase
A commercial hire purchase is slightly different to a finance lease in that a financial institution will buy the asset for you.
It will then take regular repayments from you, over an agreed period in exchange for being able to use it. Once all the payments have been made, your business then owns the asset.
The good thing about this type of small business loan is that both the interest on the finance, as well as the depreciation of the asset may be tax deductible.
Also known as a ‘goods loan’, a chattel mortgage is a very popular type of finance for business assets.
Most often used to buy equipment or vehicles, this option allows your business to own the asset right from the start.
It does require you to make regular repayments over an agreed length of time, until the full amount of the loan has been paid. But like with a commercial hire purchase, the interest and depreciation might be tax deductible.
If your business is looking for a quick way to access cash, then invoice finance could well be the right option for you.
Occasionally referred to as accounts receivable finance, this is a quick and relatively stress-free way to source the money you require to pay for invoices that are outstanding.
Typically, you can access up to 85% of the total value of the unpaid invoices you have issued. (Although obviously it does mean you will not receive the full value of it).
However, no security is required as the invoice acts it, while funds can often be received within 24 business hours.
As you can see, when choosing the right small business loan there are many different options available.
At the end of the day, deciding on the best one for you is often just a matter of understanding your objectives and finding the option that best meets it.
All lenders offer a wide range of choices when it comes to small business loans. So, by taking the time to understand what is available, you will set your business up for success, when you finally decide to make a formal application for one.
Disclaimer: MoneyMagpie is not a licensed financial advisor and therefore information found here including opinions, commentary, suggestions or strategies are for informational, entertainment or educational purposes only. This should not be considered as financial advice. Anyone thinking of investing should conduct their own due diligence.