August 21, 2016
When small businesses find themselves equity rich and cash flow poor, a small business loan can be a helpful solution.Reasons for taking out small business loans
A business owner might take out a loan to cover one-off expenses such as buying new equipment, paying for training, or renovating their facilities. Alternatively, loans might be used to improve business cash flow and provide flexible access to a pool of funds to be called upon as needed.
Varieties of small business loans
There are a great variety of loans available to businesses. A business loan can be structured either on an upfront basis, where the entire value of the loan is withdrawn at once and paid back in regular instalments, or it may be on call, with payments determined by the amount of the loan that the business has drawn down.
The different business loan types naturally come with varying interest rates and repayment conditions.
Line of credit or equity loans can provide access to funds by allowing the business to draw on an account balance up to an approved limit. These loans are highly flexible and are commonly used to fund smaller capital requirements. They are usually secured against property. This means that the interest rate for a line of credit is likely to be lower than that for an overdraft, although failure to make payments will place the secured asset at risk of repossession.
Building your business
A second loan type is a Term Loan, which is a fully drawn advance aimed at funding long term business investments that improve the earning potential of the business, such as new equipment. A fully drawn advance will generally be structured over a fixed term with scheduled repayments, and will be secured by a mortgage over a residential or commercial property, or other acceptable asset.
The use of security generally means that the interest rate will be lower than for other business loans, and it may be structured to a fixed interest rate that delivers certainty in terms of repayments.
If the goal of the business loan is to provide access to capital equipment, another option could be lease finance. This is where, for example, the business enters into a contract with a finance provider who buys the required asset, and then the business leases the use of that asset for a fixed amount over the life of the contract. When the contract ends, the business has the option to renew the lease on the existing equipment, take out a new lease on new equipment, or arrange to buy the leased item outright.
Business credit fitness
To qualify for a small business loan, your business must be in sound financial shape. It may also help if you can provide some form of security against the business loan, such as commercial or residential property. If the loan is unsecured it is likely to come with a higher interest rate.
If you're seeking a small business loan, talk to your Mortgage Choice expert. They can discuss the different business loans and providers to find the small business loan that will be best suited to your business.