Whether you’re just starting out as an entrepreneur or running your own show for over a decade, having the right business loan up your sleeve can be a big factor in your success. When used responsibly, business loans not only help keep the business going through tough times, but are also useful when additional funding is needed to seize opportunities for growth and innovation.
About the Author
Catherine Ochi is the senior business banking editor for Australian financial comparison site Mozo. She explores banking details and shares the latest financial tips with businesses to help them make smarter financial decisions. I go.
Some businesses may not be aware of the number of options available in the market, from standard business loans and lines of credit to more specialized options for invoices and equipment. Depending on the needs and financial situation of your business, some of these business loans will work better for you than others.
Whether you’re planning to buy inventory or need a safety net for your cash flow, understanding the purpose of a loan is often the first step in finding a match. To guide your research, we worked with a colleague at Mozo.com.au to announce six of Australia’s most popular types of business loans. Read an overview of the main features.
Unsecured business loan
- No collateral required
- Suitable for many business purposes
- Fast loan approval time
This is a bread and butter business loan that can be used for a variety of purposes including buying stocks, overhead costs, and increasing daily cash flow. As the name suggests, unsecured business loans do not require collateral and are a good option to consider for small businesses that don’t want to put their assets at risk.
Please note that some lenders may require the employer or the board to provide personal guarantees instead (i.e. if the business goes bankrupt, they are responsible for repaying the loan. Masu) .
Since unsecured business loans are riskier for lenders than secured loans, the amount you can borrow (typically up to AU $ 200,000 to AU $ 500,000) and the term (months to years) can be more limited in terms of scope). .. However, the small size of the loan also means that this type of financing can be approved sooner, and non-bank lenders like Moula and Bizcap promise access to decisions and financing within 24 hours.
Secured business loan
- Need guarantee
- No more loan amount available
- Can be rented for years
Funding large investments like real estate and other businesses won’t be easy with a business portfolio. Secured business loans often have much larger loans and much longer loan terms than unsecured loans, helping to meet these tighter financing needs.
For example, Heritage Bank’s fully drawn loan has no maximum amount, and borrowers can repay for up to 15 or 25 years, depending on the type of collateral.
Of course, this type of financing has a bigger stake because it requires guarantees for family homes, company cars, etc. It is therefore increasingly important to have a repayment plan to avoid defaults and loss of assets. However, the advantage is that by providing security the borrower also has a lower risk and may be able to get a lower interest rate.
- Professional loan
- Protected against the device itself
- Can be used with tax incentives
Equipment loans are just that. A type of business financing designed to help with the purchase, repair, and rental of equipment such as farm machinery, automobiles, and coffee makers.
However, keep in mind that equipment loans are a special type of financing and do not give you the flexibility to finance non-equipment purchases. As such, they are primarily aimed at companies that are struggling to get equipment upgrades or replacements out of their pockets. The collateral for this type of loan is usually the device itself. This is good news if you want to avoid using assets you already own as securities.
Equipment loans have recently proved particularly popular, thanks to the boom in agricultural spending. Indeed, between 2019 and 2020, the large bank NAB experienced a 130% increase in the financing of agricultural equipment. This is due to a variety of factors. Introduce government tax incentives such as favorable seasonal conditions, skyrocketing commodity prices and temporary total expenses that allow qualifying businesses to claim immediate tax credits on depreciable assets, including equipment.
- Continuous access to finance
- Pay interest only on what you use
- Suitable for non-uniform cash flow
Times are uncertain, so it makes sense that you need a business loan to help you deal with sudden swings in your cash flow. This is where the line of credit comes in.
Like a credit card, the line of credit includes the ability to withdraw the required amount up to the approved limit. The big advantage here is that you don’t have to pay interest on the money left over in the direct debit facility. This can lower the overall cost of your mortgage.
Lines of credit such as Zip’s business loans act as a buffer to fill the working capital gap and are especially attractive to businesses with unpredictable cash flows because they don’t have to use all the funds. available. As business operations increase or decrease, lenders may also offer the option of increasing or decreasing facility limits as circumstances change.
However, this flexibility comes at a cost. You may need to consider additional charges such as a pickup fee (billed each time you opt out of the facility) and line charges (billed to keep the facility open).
- Turn unpaid invoices into funds
- Suitable for doing business with corporate clients
- Protected against the invoice itself
Late paying customers are a big problem for SMEs, according to a survey, and the MYOB accounting platform last year revealed that 38% of SMEs face financial difficulties due to late payments. One way to get around this problem is to fund invoices.
Invoice Finance is a line of credit that gives access to the capital contained in unpaid commercial invoices. Lenders typically provide up to 85% of their bills to the business up front, and once the customer pays, send the rest (excluding fees and commissions) later.
Fortunately, invoice financing is usually protected against the invoice itself and does not provide other assets as collateral. However, all bills are charged and can be more expensive than traditional bank loans.
Buy now, pay later
- Zero interest rate (fees apply)
- Fast approval time
- Repay in installments
Buy Now PayLater (BNPL) services have exploded steadily over the past year, but consumers aren’t the only ones crazy about it. Business owners, especially young entrepreneurs, are the next big target market for more and more BNPL providers.
Like a line of credit, BNPL allows you to borrow as much as you need, up to a certain amount. However, the difference (and its main selling point) is that no interest is charged on the funds withdrawn, only a fee applies. The borrowed amount will be repaid in a series of fixed installments.
For example, Zip recently announced two interest-free BNPL accounts. Zip Business Trade, which has access up to AU $ 3,000 for daily expenses such as office supplies and social media advertising, and a much higher cap of AU $ 150,000 for large purchases, including inventory and equipment. The only cost for the first account is AU $ 12 per month and there is no recurring charge for the second account, but 3% if you choose to spread the repayment over 4 months instead of 2 months. has costs.
These BNPL accounts have less cash injection than the other business loans described above, so the approval process should be quick. 10 minutes for ZipBusiness Trade and 24 business hours for Zip Business Trade Plus.
Tips before applying for a business loan
Always remember, whatever type of business loan you ultimately choose.
- Check the eligibility criteria. Many lenders require that your business be traded for a minimum of time or earn more than a certain amount of income, which can be negotiable.
- Borrow responsibly: Just because you can borrow more doesn’t mean you should. Therefore, unless you get a line of credit, it’s helpful to look at your budget and calculate the exact amount and repayment amount (and if you can afford it) for the extra funds you need. .
- Understand the fees: It’s time to dig into the details. In addition to interest rates, check any other fees you might be charged. Some common things to note include establishment, ongoing, late payments, prepayments, and exit fees. Also check if these rates are fixed or percentage based. Note that in the latter case, the more you rent, the higher the cost.
- Weigh the bell and the whistle. Do you need the ability to make prepayments without penalty or the freedom to change your repayment schedule based on cash flow? Some lenders offer these perks to make them more competitive, so it is worth paying attention to the additional features when purchasing.
- Shopping: Instead of going with the lender you saw for the first time, use a business loan comparison website like Mozo to assess your options. According to the Mozo database, bank interest rates can range from 2.29% per year to almost 10% per year.
Are you ready to apply? Check out Mozo’s list of the best business loans in Australia.