For many small business owners in Australia, obtaining finance for your small business can be daunting.
There are different types of financing available and it makes good business sense to look at all your options before deciding on which loan would suit you best.
The purpose of your business loan
You need to determine what you want to get out of a business loan to help you choose the right finance option. The first question a lender will ask is why you need finance.
Common reasons for needing a business loan are managing your business’s cash flow, funding your business’s growth and purchasing equipment or a vehicle for your business.
Types of loans to consider
There are different types of small business loans available in Australia. Unsecured business loans provide fast, short term funding. A business line of credit is easy to obtain and is a very flexible way of financing. A personal loan can also be used for business purposes in the event that your business does not qualify for finance.
Traditional business loans are much more difficult to obtain and usually have very strict qualification requirements. For a small business or a start-up business, it is better to look at alternative business financing.
Preparing your paperwork before you apply
Before applying for finance it is important to have all the required documents available. It will make the process easier and quicker and help your financial provider to understand your business’s financial situation.
Make sure you have your financial statements available, bank statements and identification. Some lenders may also ask for your latest tax returns. If you earn any income unrelated to your business, you may want to provide the details of your alternative sources of income as well.
Unsecured business loans
An unsecured business loan does not require any collateral from you or your business. Your business’s revenue and creditworthiness will determine how much you can borrow. With a traditional business loan, you need to provide collateral. This simply means if you default on your loan the bank could take your asset(s).
Since an unsecured business loan does not require any collateral, they are a bigger risk for lenders. This means the interest rates are higher but they also provide bigger loan amounts and more flexibility.
With an unsecured business loan, you can cover any business-related need. Some business owners use this kind of loan to make investments in inventory or equipment, cover cash flow fluctuations or even to take advantage of new business opportunities. It is a short term facility, which usually has to be paid within no more than 24 months.
- The amount you can loan ranges from $1,000 to $1,000,000. The amount you will be eligible to borrow will largely depend on your monthly turnover.
- Terms are between 3 and 36 months.
- Interest rates are higher than other business loans. Depending on the lender, interest rates range from 9% to 27%.
- The money will be available fast. Usually on the same day.
Advantages of unsecured loans:
- The loan application service is usually simple, fast and can be done online.
- No security is needed.
- It is an easier way of obtaining financing for smaller businesses that do not meet the more stringent bank lending criteria.
Disadvantages of unsecured loans:
- Since unsecured business finance poses a higher risk for the lender, interest rates are usually higher.
- Borrowing costs can increase due to terms, rates, fees, and conditions of the loan.
- You may need to provide a personal guarantee, depending on the amount you borrow. If your business is unable to meet it’s obligations, you will be responsible for the repayment.
A business line of credit
A business line of credit can be compared to a cash advance on a credit card. You will receive an set amount of credit to access when you need it. There is no restriction as to how the money should be utilized and can be used for any purpose. Interest is only paid on the amount used, not the whole line of credit.
- Loan amount varies between $5,000 to $250,000
- Terms are between 3 and 12 months
- Interest rates vary extensively, from 14% to 30%
- Financing is available quickly, between 1 to 2 days
Advantages of lines of credit:
- There is no minimum amount. You will only pay interest on the amount you used.
- The application process is quick and easy.
- Flexible repayment options are a key advantage point of a business line of credit. When cash flow is good you can pay a bigger installment, and when business is slow you can pay the minimum required.
- A business line of credit can help you to establish a positive credit history. You will build a profile as a reliable borrower. This will make it easier for you to apply for larger financing in the future if you want to expand your business.
Disadvantages of lines of credit:
- A business line of credit does not offer any long term certainty.
- Terms vary a lot and you be required to pay up-front fees on top of the interest rate. Make sure you are aware of any fees that may apply.
- A business line of credit does not offer high borrowing limits. If you need a large sum of money you will have to look at other alternatives that give you higher capital.
Personal loans used for business purposes
A personal loan is easy to secure. There are numerous lenders offering personal loans in Australia. Major banks all offer personal loans and there are various other loan companies. If you use a personal loan for business purposes, you can use the money in any way you choose.
Depending on what type of personal loan you choose, it will be a lump sum loan that has to be repaid by the end of a set period.
- Personal loans range from $2,000 to $50,000
- Terms for repaying the loan vary considerably depending on the lender but is usually between 1 to 5 years.
- Interest rates fluctuate between 5.75% and 19.09%
- Most personal loan applications can be processed online and are very fast and easy
Advantages of personal loans:
- A personal loan is a more economic financing option than leasing or hire purchases if you need to buy equipment.
- Most personal loans can be repaid early without incurring a penalty. When your cash flow improves this puts you in the advantageous situation of paying off your debt sooner.
- If you are a start-up business without financial statements and turnover reports, this is an easy way for you to get your business running. Once your business is established there are other financing options available.
- Personal loans are repayable in fixed This makes it easier to budget for your expenses. If you need to purchase a big-ticket item, you can spread the costs of the item over your loan payment term.
Disadvantages of personal loans:
- The availability and amount of the loan will depend on your credit rating.
- You will be personally responsible for the repayments. As it is a personal loan the business will not be held responsible for the loan.
- The interest rate will depend on your credit rating. Personal loans usually have higher interest rates than other business loans.
When taking out business finance it is very important to make sure that you review and are happy with of all the terms and conditions. Look for hidden costs like origination and establishment fees. Make sure there aren’t any penalties payable if you settle your loan earlier than the determined period.