Benefits of business loans
Business loans are designed to assist you with major investments in the future of your business.
To qualify for a business loan you will of course need to be running a registered business. You'll also need to demonstrate that you can easily repay the loan, by providing documentation of your business’s financial history and assets and liabilities, including any other loans. You'll be required to provide security for the loan, in the form of either residential or commercial assets.
Business loans are very different to other short-term forms of finance, such as an overdraft or commercial line of credit. They are generally used to directly fund business expansion, such as opening new premises, renovating existing facilities, or acquiring major plant and equipment. All of the loaned funds are withdrawn at the start of the contract, with regular repayments made over the life of the loan, which can be more than ten years.
Business loan options
There are many different types of business loans available in the market today which require the borrower to put up some form of security such as their business premises.
Another option is to provide a residential property as security (this is also known as a business mortgage loan). This option is only available if the property doesn’t have a substantial existing loan (such as a mortgage), and is subject to the property being accepted as suitable security by the business loan provider. However, using a residential property as security can significantly reduce the interest rates charged.
Fixed business loans
Payments are set against a fixed interest rate, and remain the same for the life of the loan, which can provide certainty around repayment amounts. However, interest rates on a fixed business loan are often higher than market rates. Some lenders will allow fixed business loan holders to make additional repayments (usually up to a set limit per year). This can be a good option for a business where cash flow has improved and there is an opportunity to pay off the loan sooner and reduce the interest incurred.
Variable options for business
A variable business loan allows greater flexibility, but as interest is calculated on an ongoing basis against market rates, it provides less certainty around future repayment costs. Different lenders also offer different repayment options, with some enabling reductions to interest only payments for a period of the loan. Additional payments may be made without penalty, and some lenders will also allow a redraw facility on their variable loans, enabling the business to access funds without having to create a new credit facility.
It's also possible to create loans with both a fixed and variable component, giving you the best of both worlds.