Key Takeaway Table
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Term Loans
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Traditional term loans provide business owners with a large lump sum amount, which will be repaid in regular instalments with interest over the life of the loan. Term loans are often used for specific and significant expenses, such as the purchase of commercial real estate and the expansion of a business.
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Business Lines of Credit
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Business lines of credit allow borrowers to draw funds quickly for urgent business needs. An overdraft facility gives borrowers access to a revolving line of credit, while invoice finance allows businesses to access funds from unpaid accounts receivable. Meanwhile, trade and import finance help facilitate the payment of material supplies.
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Specialised Loans
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Some business loans are specific to certain purposes. For instance, equipment finance is solely for the purchase of business equipment. Fitout finance is only for significant interior improvements to a commercial space. Meanwhile, tax debt consolidation loans are for combining tax debt into one single, more manageable debt.
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Secured vs. Unsecured Loans
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Secured loans require property and assets as security against the loan. Security usually comes in the form of real estate, vehicles, machinery, inventory, invoices, and more. Meanwhile, unsecured loans do not require any property security.
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Tips for Choosing the Right Loan Type
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The first step to choosing the right loan is to determine your business needs. Understand the different loan types and choose one that corresponds to what your business needs. While choosing, think about the costs of borrowing, the terms, and whether you're eligible for the loan. Compare lenders to get the best rates and terms.
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Business loans are a valuable financial tool for business owners. Loans can provide funding for critical expenses, like the costs of starting, operating, and expanding a business. However, not all business loans are the same. Different loan types cater to different funding needs. Let’s take a look at some of the common types of business loans obtained by Australian enterprises:
Types of Business Loans
1. Term Loans
Term loans provide businesses with a lump sum of capital that is repaid over a set period with interest. These loans are typically used for specific and significant investments such as expanding operations, purchasing real estate, buying initial inventory, or other substantial expenses. The fixed repayment schedule helps businesses plan their finances by knowing exactly how much they need to pay each month, but the requirement to start repaying immediately can put pressure on cash flow.
2. Business Lines of Credit
- Overdrafts
- An overdraft facility offers flexible access to funds up to a specified limit, allowing businesses to draw and repay funds as needed. This flexibility makes it ideal for managing working capital, addressing cash flow shortages, and taking advantage of sudden opportunities. Interest is only paid on the amount drawn, which can make it a cost-effective way to finance short-term needs, but be wary of overusing the credit line or it can lead to excessive debt.
- Invoice Finance
- Invoice finance allows businesses to borrow against the value of their unpaid invoices, providing immediate working capital without waiting for customers to pay. This can be crucial for businesses with long invoice payment cycles, helping them to maintain operations and grow. Once you apply for invoice finance, lenders will typically release up to 85% of the value of the accounts receivable. Once your customer pays, the lender will charge their fees on the remaining percentage and return the balance to the borrower.
- Trade and Import Finance
- Trade and import finance offers specialised financing solutions to support the import of domestic and overseas material supplies. Import finance can also be used in conjunction with equipment finance to import plant and equipment that might not be available in Australia.
3. Specialised Business Loans
Some business loans are made for specific purposes, such as the following:
- Equipment Finance
- Equipment finance provides funds specifically for the purchase of machinery, vehicles, or other equipment necessary for business operations. This type of financing allows businesses to use the equipment immediately without using up existing capital. The asset itself typically secures the loan, which can help borrowers get lower interest rates. However, if the borrower fails to repay, the lender can legally seize the assets, which can significantly impact business operations.
- Fitout Finance
- Fitout finance is a specialised form of financing used by businesses to fund the interior design and furnishing of commercial premises, such as factories, offices, retail spaces, or restaurants. This can include everything from fixtures and fittings to furniture and equipment. Fitout finance allows businesses to preserve their working capital by spreading the cost of the fitout over time. This means businesses can create a functional and appealing workspace without a significant upfront investment, which is crucial for startups or businesses looking to improve their premises.
- Tax Debt Consolidation Loans
- Tax debt consolidation loans are used by businesses to consolidate various tax debts into a single loan. This type of financing can help businesses manage cash flow more effectively by replacing multiple tax payments with a single, more manageable monthly payment. It can also prevent penalties and interest from accumulating on outstanding tax debts, which can be significantly higher than the interest on a consolidation loan. However, securing a tax debt consolidation loan often depends on the business’s creditworthiness and financial stability.
Secured vs. Unsecured Loans
Secured and unsecured loans are two primary types of loans that differ mainly in the requirement of security. Choosing between a secured and an unsecured loan largely depends on the borrower’s needs, their ability to provide security, and their willingness to accept the risk of losing that security in case of default. Here’s a breakdown of both:
Secured Loans
- Security Required: Secured loans require the borrower to provide a property or an asset to secure the loan. This asset could be real estate, vehicles, equipment, or other valuable property.
- Lower Interest Rates: Because the lender has the security to fall back on if the borrower defaults, secured loans typically come with lower interest rates compared to unsecured loans.
- Better Loan Terms: Lenders are often more willing to offer longer loan terms for secured loans, as the risk is mitigated by the security.
- Better Chance of Approval: Since the loan is secured, borrowers can get a better chance of approval, especially if they’re borrowing a large amount. Although approval may take longer, the chances of getting approved are higher.
- Risk to Borrower: If the borrower fails to repay the loan, the lender has the right to seize the security to recover the outstanding debt. This means the borrower could lose the asset they put up as security.
Unsecured Loans
- No Security Required: Unsecured loans do not require any property security from the borrower. Approval for these loans is typically based on the borrower’s creditworthiness and income.
- Higher Interest Rates: Due to the increased risk to the lender, unsecured loans often come with higher interest rates than secured loans.
- Less Favourable Loan Terms: Lenders usually offer shorter loan terms for unsecured loans compared to secured loans.
- Quick Approval: Since there’s no security, lenders don’t have to go through the process of verifying the value and ownership of the asset. Thus, borrowers can get approved faster.
- Defaulting Consequences: While the borrower’s assets are not directly at risk if they fail to repay an unsecured loan, defaulting can significantly impact their credit score. Lenders can also take legal action to recover the debt.
Top Tips for Choosing the Right Loan
How do you know which loans you should apply for? Here are some tips you can follow:
- Outline Your Business Needs: Clearly define why you need the loan and how much you need to borrow. This helps in choosing a loan that matches the amount and purpose, whether it's for purchasing equipment, expanding your business, consolidating debt, or covering cash flow gaps.
- Understand the Different Loan Types: Familiarise yourself with the various loan types available. Each type has its own terms, conditions, and uses. Understanding these can help you match the loan to your specific needs.
- Consider the Cost of Borrowing: Look beyond the interest rate and consider all costs associated with the loan, including additional fees and any penalties for early repayment or late payments. Calculate the Annual Percentage Rate (APR) to get a clearer picture of the total cost of the loan.
- Evaluate Repayment Terms: Choose a loan with repayment terms that fit your financial situation. Short-term loans usually have higher monthly payments but lower total interest costs, while long-term loans spread the payments over a longer period, making them more manageable but potentially more expensive in the long run.
- Check Eligibility Criteria: Before applying, make sure you meet the lender’s eligibility criteria, which can include minimum credit scores, annual revenue requirements, and business operation duration. This can save you time and effort with unnecessary inquiries.
- Compare Lenders: Compare loans from multiple lenders, including banks and non-bank lenders, to find the best rates and terms. Each lender may offer different advantages, such as lower rates, more flexible terms, or quicker funding time
Find Tailored Loan Solutions for Your Business
Each loan type offers unique terms, interest rates, and repayment structures. By selecting the right loan type, you can get the necessary funds with terms that align with your objectives and goals as a business owner. Need help with business loans? We can help direct you to the right loan types, terms, and lenders for your needs. Send us a message today.
