If you are considering a secured or unsecrued business loan, you now access to both bank and non-bank financing options.
In the past, banks were primarily the only way to secure a loan, and it was a difficult process.
Banks have streamlined their processes and made lending easier, however, they generally have tighter lending requirements which many small business owners may not be unable to meet.
It can be a lot easier, and quicker to secure financing through non-bank lenders, but it will likely cost a bit more than going through a bank.
Always contact several lenders, including both bank and non-bank to discuss your particular needs. Find out what they can offer you, and what it will cost.
Other forms of lending
Rather than a business loan, consider a business credit card with a manageable limit if you don’t already have one. It is never a good idea to use your personal credit card for business expenses. It can get confusing, and will generally add more time and effort to the process of bookkeeping. I don’t know too many business owners who enjoy bookkeeping so, keep it simple with a separate credit card!
There are various credit cards available, some have no fees, others with interest free days and those that offer rewards. Compare and choose one that is suitable for your business spending needs.
An overdraft may be an option to consider whereby, you can draw above the actual amount in your business bank account.
The overdraft funds become accessible once your bank account falls below zero. It can be very useful as a temporarily solution when cash flow is tight, and immediate funds are required.
A line of credit is another type of finance that allows the business to draw funds up to an agreed credit limit. Once funds are repaid, the credit limit can be drawn on again.
Naturally, credit cards, overdraft, and line of credit will incur fees and interest, so be sure you fully understand how much it will cost to use these credit facilities.
Minimum documentation and licensing requirements may include: ABN registration, proof of Australian residency, and length of time in business. Prior tax returns, current financial statements along with bank and credit card statements, will generally be required.
Never sign any lending documents without having time to fully understand all the terms. It is not uncommon for some lenders to have high exit fees if you wish to pay off the loan early, or other terms you may not think important, until it’s too late.
Ask questions and have your accountant, advisor, or a knowledgeable friend/partner etc read through the lending terms to ensure you fully understand your obligations before signing any contracts.
Loan repayments will generally comprise two elements. The actual principle borrowed, and the interest charges or fees. The principle portion of loan repayments is not tax deductible, however, all lending fees, charges, and loan interest are allowable tax deductions.
Understand that some loans or credit facilities may incur early repayment penalties so be sure to check this, before making any early final payments.
Some credit cards have an interest free period. This period is between the time a purchase is made, and the current statement amount needs to be paid, providing there was nothing owing from prior months.
The interest free period may be up to 55 days. This can be very useful in managing your cash flow. Make sure the statement balance is paid by the due date, otherwise hefty interest charges can apply.
Ensure you have a stable cash flow to fully support loan repayments, to avoid putting the business under financial stress.
Secured and unsecured loans
A secured loan is one that requires an asset as guarantee. This could be the family home, or the asset you purchased using the loan (e.g. equipment). Understand, the assets can be repossessed by the lender if you default on making loan repayments.
An unsecured loan requires no asset guarantee; however, lending costs are usually higher.
Bank or non-bank lenders
Always contact your bank first to find out what they can offer, then make a comparison against non-bank lenders.
Use non-bank lenders when traditional bank lending is not available to you, if funds are needed in a hurry, or the non-bank offers a better deal.
Listed below are a few non-bank lenders that have gained a good reputation in the small business lending world.
Contact them to find out if they can provide the best financing for your business lending requirements.
Loans from: $5,000 to $300,000
Loan type: Secured and unsecured, and line of credit ($2,000 to $25,000)
Loan terms: 3 months to 2 years
To quality: Business must be operating for a minimum of 6 months with a turnover of at least $6,000 per month.
Beyond Merchant Capital
Loans from: $5,000 to $500,000
Loan type: Unsecured
Loan terms: 3 months to 18 months
To quality: Business must be operating for a minimum of 6 months with an annual turnover of at least $60,000.
Loans from: $5,000 to $200,000
Loan type: Secured and unsecured
Loan terms: 3 months to 18 months
To quality: Business must be operating for a minimum of 6 months with an annual turnover of at least $50,000.
Loans from: $5,000 to $250,000 or up to 100% of the business average sales over 6 month period.
Loan type: Secured, unsecured, equipment finance and working capital
Loan terms: 3 months to 1 year
To quality: Business must be operating for a minimum of 6 months for a secured loan, or 12 months for unsecured. A turnover of at least $10,000 per month for a secured loan, and ½ the monthly business turnover for unsecured.
Call lenders whenever possible to get a quote for your business lending before completing loan application forms.
It can hurt your credit rating if applying for a loan more than once every 3 months.
Carefully compare costs and lending terms before making your loan application.
Seek professional advice if unsure about any of the lending terms or conditions.
Contact both bank and non-bank lenders for a true comparison.
Understand that banks are likely to offer cheaper funding, but their terms are generally much tighter.
Banks usually have a longer approval time, require more paperwork and security than non-bank lenders.
Consider a business credit card, overdraft or line of credit where regular or smaller funding is required.