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One of the biggest challenges for many small business owners is access to funding due to not meeting traditional lenders’ tight criteria. The good news is that many other non-bank providers offer alternative financial solutions to businesses of all shapes and sizes.
When considering funding, it’s important to be specific about the loan use, loan amount, loan term, loan parameters, loan serviceability (how you can comfortably repay the loan), how quickly you can receive funds and loan interest rates.
Common uses for the funding include expanding operations, managing working capital challenges or separating personal funds for business use.
Interest rates: unsecured vs secured loan
Small business loans can be either secured or unsecured.
Secured small business loans use collateral, such as a residential or commercial property, to ‘back’ (secure) the loan. As a result, they usually have lower interest rates than unsecured loans. Secured loans can come in the form of caveat loans, home equity loans, first mortgages and second mortgages.
In contrast, unsecured small business loans are not backed by real estate. Therefore, the interest rates are typically higher for this type of loan as they’re considered riskier to lenders. Some examples of unsecured small business loans include equipment finance, invoice financing, low doc business loans and no doc business loans.
What are some funding choices for small businesses?
- Short-term loans
As the name implies, a short-term business loan is the provision of finance for a shorter period of time (usually within 12 months). Short-term loans, such as bridging loans, are commonly provided by non-bank lenders, specialist lenders, private lenders and fintechs.
- Invoice financing
Invoice financing works by using unpaid invoices to borrow money from a lender. The business sells its invoices to a lender who will pay a percentage of the invoiced amount. The lender then becomes responsible for collecting payment.
- Business line of credit
In a business line of credit, an agreed amount is made available and can be accessed whenever required. With a line of credit, you only pay the interest on what you use, not the whole facility.
- Equipment finance
Equipment finance supports buying big-ticket items, such as machinery or equipment.
- Merchant cash advance
The lender provides you with an upfront lump-sum payment in exchange for an agreed percentage of future sales.
- Business credit cards
A business credit card is a revolving credit line that can be used, repaid, and then used again. Business credit cards are commonly used to purchase inventory and supplies, pay bills or cover travel expenses.
- Business equity loan
A business equity loan uses the equity of your commercial or residential property as a security against a loan.
Is an interest rate reasonable?
It’s important to also consider any business loan features, including:
- Speed of funding
Private lenders, specialist lenders, non-banks and fintechs are renowned for providing fast, flexible funding with speedy applications. Some applications can be filled out in minutes online and have funding processed within a few days from the application approval.
- Extra repayments
Making extra repayments helps you pay off your debt faster. However, be aware that some lenders charge fees when you make extra repayments.
- Flexible repayments
Lenders typically stipulate a set timeframe in which you can make your repayments (daily, weekly, fortnightly or monthly). However, some lenders provide multiple options, such as making repayments that suit your business cash flow.
- Interest rates
Of course, interest rates are a huge consideration, though it’s wise to consider the rate in the context of the benefit of funding.
Conclusion
Small business owners have many funding choices! It’s always a good idea to discuss your options in conjunction with a finance broker and your accountant.
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