If you’re looking to fund the growth or expansion of your 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 business loans.
Business loan
- Expanding your current business with a new site or franchise
- Starting a business from the ground up
- Purchasing an established business
- Revitalising an existing business with new products and services
- Streamlining operations with equipment and tool upgrades
- Invoice finance for improving cash flow
What type of business loan options are 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.
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.
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.
How do lenders assess your business loan application?
Lenders use a variety of criteria to see if you fit their risk profile and ensure your business can repay the loan.
Age and turnover of the business
Start-up finance is usually harder to find and be approved for, so if your business is established, you will find it easier to get a loan. The business turnover is also considered and lenders usually have a minimum requirement for monthly or annual turnover. They may also use your turnover to determine what the business can afford to repay.
Credit profile
The lender will assess the company directors’ personal credit scores as part of the application process, and if the business is established, the lender will also check the company’s credit score. Assessing credit scores allows lenders to determine how risky your business is to lend to.
Credit card volume
If you receive credit card payments in your business, lenders may use the volume of these payments to judge your ability to repay the loan. The assumption among some new lenders is that you will use this volume to repay the loan.
Accounts receivable
Similar to credit card volume, lenders may factor your accounts receivable value into their asset ratios to help them make a decision.
Company structure
Lenders will check what company structure you have and how long you have been in the existing structure. If you have recently undertaken a restructure or are applying for finance in the middle of restructuring, lenders may not want to finance you at this time.
Existing debt
Does your business have an existing debt with another lender? This will be considered as part of your application.
Profitability
For various business loans, including for example a revolving line of credit, your business will usually need to be profitable to be approved.
