Small business loans

If you’re looking to fund the growth or expansion of your small business, there are several loan options available to help you reach your financial goals. Finding the best small business loan can be difficult, so let’s take a look at how to compare your finance options and find the loan that’s right for you in this guide to small business loans.

What’s a small business loan?

A small business loan is, quite simply, finance for your business. These types of loans can be used for a number of business purposes and are available from both bank and non-bank lenders. In order to qualify for a small business loan, you must be either the owner or a director of a listed company.

What types of small business loans are available?

Whatever your financing requirements, there’s a wide range of small business loan options available:

• Line of credit. You can get access to a revolving line of credit and draw on your account balance up to an approved limit. You only need to pay back the money you borrow (plus fees and interest) rather than the entire approved amount. A business line of credit is worth considering if you need to better manage your cash flow or cover an unexpected expense.
• Business overdraft. A business overdraft is attached to your business banking account and lets you overdraw on your account up to a specified limit. This can help you better manage cash flow for your small business, but it does come with fees attached and there are monthly interest charges on the overdrawn amount.
• Term loan. A term loan allows you to borrow a single lump sum that you must then repay over an agreed period of time. Available with fixed or variable rates, these types of loans are suitable when you have a fixed purchase price or expense when you know the price in advance.
• Invoice financing. Instead of waiting weeks or months for your invoices to be paid, invoice financing allows you to use outstanding invoices to provide cash flow for your business. When you generate an invoice, you can sell it to an invoice financing company, which pays a large percentage of the invoice amount straight away and keeps a small percentage as payment for itself.
• Business credit card.Business credit cards work in much the same way as personal credit cards, with the key differences that you can add multiple cardholders and your plastic is used for business purchases. They’re very handy for meeting your immediate cash flow needs and can also offer benefits through rewards programs, but they can also be expensive if you don’t pay off your purchases during the interest-free period.
• Business vehicle finance. This is a secured loan that can be used to buy a vehicle for your small business. Vehicle leasing is also available and you may be able to take advantage of tax benefits depending on how the financing arrangement is structured.
• Equipment lease/finance. There are multiple equipment finance options available to help you purchase or lease business equipment. This includes commercial loans, equipment hire purchases, finance leases and novated leases, so you’ll need to compare their pros and cons to determine which option is right for your business.
• Peer-to-peer business loan. Peer-to-peer lending allows you to access business financing from a single investor or a pool of investors. These loans are easy to apply for and offer an alternative source of funding to traditional banks, but you’ll still need to satisfy a range of eligibility criteria and pay fees to the peer-to-peer broker that sets up the loan.
• Impact-linked financing. Depending on the nature of your business, you may even qualify for impact-linked financing. If your business is active in the community or has sustainable initiatives, you could qualify for a loan with financial incentives.

Which small business loan is best?

The loan that is best for you will depend entirely on your business’s structure and what you need the loan for. For example, if you need help with ongoing cash flow and are a B2B business that invoices their clients for goods or services, invoice finance might suit your needs. If you are the owner of a cafe and you need a new coffee machine, a business credit card might work best. If you’re looking to expand your company and buy new premises, perhaps a peer-to-peer loan would suit.

It’s best to consider what it is you’ll need the loan for, how much you’ll need and which repayment method suits your business the best prior to submitting an application.

What can a business loan be used for?

A business loan can generally be used for any worthwhile business purpose, including the following:

• Purchasing equipment or stock
• Improving cash flow
• Debt consolidation
• Business expansion
• Marketing and advertising
• Payroll

How much can I borrow with a small business loan?

As a small business owner, you can generally borrow from $5,000 to $250,000, though some lenders will allow you to borrow up to $1,000,000. The amount you can borrow will generally be tied to the size, age and revenue of your business.

Some secured business lenders have no limit on the amount of money that they are able to lend. However, your asset security will have to be equal to or greater than the value of the loan funds.

Is my small business eligible for a loan?

Lenders consider a number of factors to see if you’re eligible for a small business loan. While the exact criteria will vary from one lender to the next, the decision is based on things such as the following:

• Turnover. Your small business may need to have a minimum amount of turnover to be eligible for a loan. Depending on the lender, this could be calculated on a yearly or monthly basis. While one lender might require your business to have an annual turnover of at least $100,000, another might need to see evidence of monthly sales exceeding $10,000.
• Age of business. Your business may need to have been operating for a minimum period of time in order to be considered for a loan. Commonly, this minimum period is 6–12 months. Established businesses are considered a much lower lending risk than new startups. However, some lenders do cater to startups in need of finance.
• Business financials. In addition to turnover, lenders will request a range of other financial information about your small business. This could include details of your existing bank accounts and loans, previous tax returns, profit/loss statements and future financial projections. If your business has outstanding debts, these will need to be divulged to the lender.
• Credit profile The lender will investigate your business’s credit history and will also check all directors’ credit profiles. If your credit history is less than perfect, a bad credit business loan may be the solution. Some invoice finance providers also cater to business borrowers with bad credit since any funds you borrow will be tied directly to your outstanding invoices – which are used as security on the loans.

How much does a small business loan cost?

There are three factors you need to consider when calculating the total cost of a small business loan:

• The loan amount. The more you borrow, the larger your repayments will be.
• The interest rate. The higher the interest rate that applies to the funds you borrow, the more the loan will cost you to repay. Different business loans may offer either fixed rates, which remain the same for the term of the loan, or variable rates, which change in line with market rates.
• Fees and charges. You’ll need to read the fine print to find out what upfront and ongoing fees apply. These include application and establishment fees as well as ongoing monthly or annual charges.

How to get a small business loan

Once you’ve found the best small business loan to meet your financial needs, you can apply using the following steps:

1. 1. • Apply online. Most lenders will let you apply online. You’ll generally need to provide your name and contact details, plus your ABN/ACN and some other basic business information. You’ll also have to supply detailed financial information about your business, such as turnover, profit/loss statements and future cash flow projections.
      • Get approved. If you’re successful, you will receive a quote from the lender with the terms of your loan, which you can then accept.
      • Receive and use the funds. Processing times vary between lenders, but it’s often possible to access the funds you need on the next business day. These can then be used according to the needs of your business.
      • Manage your repayments. You will need to factor your loan repayments into the operating costs of your business and ensure they are paid on time to avoid costly fees.

Mistakes to avoid

Choosing the wrong finance option

There are benefits and drawbacks to all business loan types. Picking the wrong loan for your situation could be costly to the success of your business. Really consider which type of loan would work best for your business before applying. If you’re unsure, contact an expert, such as a finance broker.

Not having your application prepared

You will need to provide specific details of your business as part of your application. If you fail to provide them, you risk your loan being delayed or even rejected altogether.

Choosing the wrong loan terms

It’s important to understand your financial needs when choosing how much to borrow. If you end up borrowing too little, you may struggle to finance your business. If you borrow too much, you may be stuck making larger repayments than necessary.

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