If you’re looking for a small business loan, knowing what types of loans you can apply for is a critical first step.
Secured term loans
Secured terms loans are typically paid off at a fixed interest rate over a pre-agreed term, and they require borrowers to provide some sort of collateral (e.g., a property asset) to the lender. If the borrower defaults on a secured loan, the lender recoups their losses by selling the collateral and keeping some percentage of the sales price.
Secured term loans are best suited to more established businesses, who generally have assets to offer as collateral. Because these loans are relatively low risk for lenders, they tend to be for larger amounts, making them suitable for asset finance purchases, such as vehicles, major equipment and property.
Unsecured business loans
Unsecured business loans do not require the borrower to secure the loan with collateral. Instead, the lender assesses applications on the basis of the borrower’s financial position and credit history.
The application process for unsecured loans tends to be faster than for secured loans. However, because the risk is higher for lenders, they are usually for smaller amounts. This means an unsecured loan may be right for you if you need working capital in a hurry – for example, to pay wages, buy inventory, or just to give yourself some financial breathing space.
A business overdraft is nearly identical to a personal overdraft. Getting an overdraft on your business’ bank account allows you to run a negative balance and spend more money than you currently have.
The amount you can borrow through an overdraft depends on the current and past state of your finances. Typically, overdrafts are useful as a back-up for times when you need working capital to cover day-to-day operational costs.
Business credit cards
Business credit cards work like personal credit cards. They allow you to make purchases in the present with money you will pay off in the future. Credit accounts are commonly used to get hold of working capital.
An advantage of putting your loan on a credit card is that you may be eligible for rewards programs. A disadvantage is that credit cards tend to have high interest rates, so take caution if you can’t pay your debt off quickly.
Lines of credit
A line of credit works similarly to a credit card. In fact, all credit cards are technically lines of credit – that is, channels for spending money you will pay off in the future. A “pure” line of credit, however, is not linked to a card.
This means lines of credit don’t provide access to rewards programs, but also that they tend to come with lower, fixed interest rates and longer repayment terms. These features make lines of credit better suited as asset finance for larger purchases (e.g., vehicles or equipment) than credit cards are.
Merchant cash advances
A merchant cash advance is where you borrow a sum of money that you pay off as a percentage of future EFTPOS sales. For example, you could borrow $20,000 and pay off a small amount of this total sum each time you process a transaction on your EFTPOS machine.
For obvious reasons, merchant cash advances suit retail businesses with an EFTPOS machine and consistent cash-flow, providing a useful source of working capital.
Debtor financing involves “selling” debt – in the form of unpaid invoices – to a lender. Suppose you are owed $10,000 by a customer. With debtor financing, a lender would “buy” this unpaid invoice from you, giving you slightly less than $10,000 now and claiming the full $10,000 from your customer over time.
As this example suggests, debtor financing suits businesses who receive delayed payments from customers.
How to know what type of loan is best for you?
Now that you have a general steer on the type of loan that will suit you best, you may want to talk to an expert.
At Make It Cheaper, we know the Australian business loan market. With access to over 80 bank and non-bank lenders, we work with businesses to find the loan that best suits their individual needs and financial position.
Compare business loans with Make it Cheaper or call us on 1300 098 338 and speak with a Business Lending Expert today.