If you’re seeking financing for the first time, the process can be tricky if you don’t understand business loan terms and conditions. If you’re thinking of taking out a loan for your business, it’s important to know what you’re signing up for. Let’s break down the specifics of business loans to help you make an informed choice when it comes to your business finance solutions.
What are Loan Terms and Conditions?
Loan Amount
The principal amount refers to the initial total funds borrowed in a loan. It’s the original loan amount before interest and other charges are applied. Borrowers must repay the principal plus other charges regularly over a set period, which can be anything from a few months up to 30 years. The principal usually comes in the form of a lump sum payment for most loan types. For lines of credit, including overdrafts, the loan amount will be the set credit limit the borrower can draw up to.
Interest Rate
The interest rate is the cost of borrowing money. Lenders charge it as a percentage of the loan amount, and borrowers must pay interest on top of the principal to repay their loan in full. The interest rate significantly influences the total cost of the loan, so it’s crucial for borrowers to find the best rates when applying for loans.
Interest rates can either be variable or fixed. Variable interest rates can change anytime depending on different factors, the most prominent one being the cash rate determined by the Reserve Bank of Australia. Economic conditions and global events can also affect interest rates.
Meanwhile, fixed rates mean the interest rate is set at a certain percentage for a period of time. After the end of the fixed rate period the loan rolls over to the regular rate but some loans, like equipment finance and private loans, usually have fixed rates only.
Loan Term
The loan term is the entire duration of the loan. This period can range from a few months to many years.The loan term influences the monthly repayment amount—generally the longer the term, the smaller the monthly payments.
Repayment Amount and Schedule
The repayment amount is the total sum a borrower is required to pay regularly to fulfil their loan obligations. It could include the principal and the interest or be an interest only repayment.
The repayment schedule outlines when the borrower is expected to make their regular payments. Loan repayment frequency on secured loans is typically monthly but can also be capitalised whereas unsecured loans and loans for bad credit borrowers usually have more frequent repayments.
Deposit
A deposit is a lump sum payment usually required when purchasing an asset like property or equipment and machinery that lowers the lenders loan to value ratio. The value of having a deposit contribution is it lowers the risk by building equity in a security asset which can mean the difference between being approved for finance or not.
Security
Security refers to assets provided by the borrower to secure the loan. It serves as a form of protection for the lender in case the borrower defaults on the loan. Common types of security include real estate, vehicles, business equipment, inventory, accounts receivable, or other valuable assets.
Guarantees
A guarantee is a commitment by a third party, known as the guarantor, to assume responsibility for the loan if the borrower fails to repay. For business loans, guarantees are commonly required from directors.
Can You Negotiate Loan Terms?
Yes, business loan terms are negotiable. Negotiating can involve several aspects of the loan, such as interest rates and repayment terms. Negotiations can succeed depending on your relationship with the lender, how desirable your type of loan is to the lender and the strength of your application.
Negotiating a business loan agreement is about balancing what’s important for your business’s operations and growth against the market standards. Not everything can be negotiable or is worth negotiating, so focus on the terms that directly impact your business’s finances.
Key Areas for Negotiation:
- Interest Rates: Negotiating a lower interest rate is possible, which can help borrowers save significant amounts over the loan’s life. Contact us to get some great rates for your business loans.
- Loan Terms: Some lenders may allow borrowers to negotiate for longer loan terms, but be wary of any additional fees.
- Loan Structure: Some lenders may allow you to change your loan structure. For instance, you may be able to change from a fixed-rate loan to a variable-rate loan.
- Pausing Repayments: Lenders may allow struggling borrowers to temporarily pause loan repayments.
Tips for Effective Negotiation
Do Your Homework
Take your time to understand loan terms and conditions so you’re prepared when you negotiate. Additionally, research banks and other lenders thoroughly and find those with specialties aligned with your needs. Having multiple options can strengthen your negotiating position.
Know Your Limits
Understand which terms are crucial for your business. For instance, a longer loan term may lessen your monthly payments, but may not be the best solution for your business in the long term.
Seek Professional Help
Consulting loan experts who understand your business can help you successfully negotiate terms so your loan can suit your business’s situation better.
