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As a small business owner you might want to think about ways to grow your business.
As part of this process, you might also consider looking at business loans for the small business to give you the working capital you need without risking your cash flow.
Keep reading to learn about small business loans and why you should consider them.
What Is a Business Loan?
A business loan is borrowed money that a business uses to pay for expenses in order to grow their business.Â
This helps keep operations going without hurting a business’s cash flow and affecting business performance.
What Are the Advantages of Business Loans for Small Businesses?
Small business loans make for great cash-flow solutions. They keep the business running by helping you pay for what is needed.Â
Below are some reasons to consider getting a small business loan for:
1. Keep Full Control of the Money You Borrow
A lender won’t tell you how to use your money.
This wouldn’t necessarily be the case with investors who normally want a say in how to run your business.
The most that a bank or alternative lender will do is ask why you want to borrow money in the first place.
As such, you can use the money for various business purposes — from buying new equipment or commercial property to unexpected expenses.
2. Easy Access to the Funds
Getting money through investors can often take as long as 12 months.
However, you won’t have to wait that long with different lending solutions. In fact, if you go through the business loan application process online, you can get approved in minutes.
3. Improved Business Credit
Assuming you follow the repayment schedule, your credit score might actually improve.
Aside from that, it’s worth noting that business lending can give you lower interest rates than credit cards.
What Are the Different Types of Business Loans?
There are two general types of business loans according to whether or not collateral is needed in exchange for money:
Secured Business Loans
This kind of small business loan requires you to put up an asset as collateral. If you can’t repay the money, the lender will have ownership of that asset.
Because of this assurance, you might be able to borrow more money and have more flexible repayment options, and a lower interest rate.
Aside from residential property, other assets you can use are a major savings fund or even the business itself.
Unsecured Business Loans
An unsecured business loan doesn’t require collateral.
Because the lender is taking on greater risk, you can usually borrow a lower amount of money at a higher interest rate.Â
Like business lines of credit, you typically won’t need asset security up to $150,000 but this differs greatly by lender.Â
Despite that, these loans are usually quicker to set up.
How to Apply for Small Business Loans?
Below is a general step-by-step guide on how to apply for a small business loan:
Step 1. Check Your Eligibility
Lenders have different lending criteria. However, there are key factors that bear weight on how qualified your business is:
- Annual/ monthly business turnover
- Purpose for the loan
- How long you’ve been operating
- Business and personal records
- Credit history
Step 2. Choose an Online Lender
You should research and compare several lenders to find the best one for your business.
Some things to check are:
- Hidden fees
- Approximate interest rate (if it’s a variable or fixed interest rate)
- Loan options
- Annual percentage rate
- Loan term
- Repayment frequency and other terms
If you’re unsure, you can ask for professional advice.
Step 3. Prepare the Required Documents
Lenders might not ask for the same requirements. But below are documents you can expect a lender to ask from you:
- Government-issued ID for identity verification
- The business’s ABN (Australian Business Number)
- Business plan to show how you’ll use the funds
- Financial documents (such as bank account statements, tax returns and projected cash flow for the business)
Step 4. Apply
You can apply and get approved for a loan quickly — sometimes even on the same day.
However, read the contract carefully before signing it.
Discuss loan terms such as the fixed rate period and required repayments. After all, the details are final once you’ve signed.
You may be able to change something (such as from a fixed interest rate to a variable interest rate or making additional repayments) during the term loan.Â
If approved, you can usually get fast access to your funds on the same business day from an online lender. The money will be transferred to your account.
What Are the Requirements for Small Businesses to Get a Loan?
To qualify for a small business loan in the first place, you’ll need to meet the following lending criteria:
- Business entity registered in Australia
- Funding is for any business purpose except investment in residential property
- Updated statutory payments
- Clear credit report
- Good financial situation and history
Frequently Asked Questions
To ensure that you understand small business loans, below are some frequently asked questions:
How Fast Is the Business Loan Approval Process?
This depends on the kind of loan you’re applying for and the lender you choose. For instance, if you want funds fast, then an unsecured loan would usually be faster than a secured loan. The whole process for this can last around just 20 minutes, depending on the lender. Then, you can get the money within the same or the next business day.
Where Can You Use Your Business Loan?
You can use the small business loan for any business need.
This can be to boost business cash flow during a seasonal slump or for buying new equipment.
What Can I Expect During the First Meeting With My Broker?
Existing customers will be used to meeting with brokers by now.
However, for first-timers, remember that a broker is there to walk you through financing options.
They’ll discuss things such as what your business goals are and who your competitors are. From there, they’ll help you get the right finance option.
For instance, you might benefit more from a line of credit than an overdraft, thanks to its lower interest rate.
What If You Don’t Repay Your Business Loan on Time?
If you keep missing fixed repayments, you’ll default on the loan.
An unsecured loan normally has a personal guarantee. That means if you default, the lender can legally collect personal assets to repay the loan amount you owe.
Meanwhile, defaulting on a secured loan means the lender can legally seize the collateral. This will be sold to get back the money you owe.
But if that money is still less than your loan amount and interest, you’ll still have to pay the remaining balance.
On top of all that, it will negatively affect your credit score.
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Conclusion
A small business loan gives your business funding to cover certain expenses while maintaining your business cash flow.
When deciding on the kind of loan to apply for, remember to consider factors such as monthly fees and the repayment terms.
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