Whether you’re just setting up shop or undertaking a company-changing expansion, there has never been a better time to find a small business loan given the lender choice available.
The choices aren’t limited to bank and non-bank lenders (often referred to as traditional and non-traditional lenders), and secured or unsecured loans. There is a range of other factors to consider, such as interest rates, security, fees, and the length of the loan, all of which will be determined by the stage you’re at in the business lifecycle – startup, high growth, or established.
There are also plenty of sites where you can compare the relative merits of each loan providers’ offerings. These sites contain lots of independent analysis using star ratings designed to help simplify your choice.
Secured or unsecured
Business loans can be an important first step when it comes to starting or expanding your business, but you should first ask yourself whether you need a loan, or if you can acquire the funds in an alternative way. For example, if you are a small-to-medium sized company with a consistent revenue stream, you could consider funding options such as angel investors or venture capital to grow your business.
If you decide to go down the path of a small business loan, your first consideration should be whether you want a secured or unsecured loan, depending on your financial situation.
A secured loan is a good choice if you have assets such as property, cash, or equipment to use as collateral against your loan. The big four banks – NAB, ANZ, CommBank, Westpac – offer an array of secured business loans, as do established financial institutions such as Sydney Credit Union and ING Direct.
However, if you’re a relatively new business or are just entering a growth phase, chances are you don’t have much in the way of these assets. This could make it difficult to meet a bank’s stringent lending criteria, forcing you to go down the unsecured loan route.
An unsecured loan is not secured against assets and generally requires less paperwork, as the application and approval process takes less time than a secured loan. Additionally, you don’t need to offer any security and the lender can’t force you to sell assets if you miss loan repayments.
There are dozens of institutions vying for your unsecured loan business, many of which – such as Prospa, Capify, and Spotcap – are recent online-only additions to the Australian market.
Interest rates and terms
As a small business owner, the most obvious considerations when contemplating a loan should be: how much you can borrow, the interest rates and fees associated with the loan, and how long it will take you to repay it.
Generally speaking, the riskier the lender perceives you to be, the higher the interest rate. Loan providers offer an advertised rate, but they may tack on an additional risk margin, depending on your circumstances. It’s vital, therefore, for you to shop around for a loan where any margins, if they exist, are fully explained.
You should also check the terms of the loan and whether there are harsh penalties for missing payments or added fees for paying the loan out early.
Develop a business plan
As with any loan, you’ll need to consider the level of debt you’re comfortable with, whether the interest rate is fixed or not, the general economic conditions prevailing at the time, and how you’re prepared for any unforeseen downturns that could affect your cash flow.
It may be difficult to determine how much you can repay if your business isn’t above the ground yet, so having a well-considered business plan is important. Along with keeping clear and concise records, it will also give a prospective lender a much better idea of where your business is at, and may go a long way to reducing the red tape and fees that may otherwise be involved with your loan.
Things to remember
Finding an ideal financial product is never easy, but you can take a number of steps to simplify the process:
- First and foremost, you should know exactly what you want the money for, and be able to should how you can repay the loan over the course of its life. This should take into account current and future business conditions.
- Keeping good financial records and having a business plan will not only help you demonstrate your capacity to a would-be lender, but will also simplify the lending process.
- Finally, research online, or talk to a financial expert about the pros and cons of a particular loan.
To read more about small business finance, check out these helpful resources.