Business loans 101: How to compare and get the best deal

Business loans 101: How to compare and get the best deal

  • Around half of all Australian small businesses get funding via business loans or other financing solutions.
  • It’s important to try before you buy – figure out the best business loan for you by comparing them.
  • When you’re ready to apply, make sure you have a solid business plan in place.

Forget the white-picket fence and the 2.5 kids. For many of us, the ability to start, own and run our own small business is the real Great Australian Dream. That’s probably why 97% of all companies across this wide, brown land are small, with more than two million small businesses according to the latest statistics.

You could safely say that small business is the lifeblood of the Australian economy. Even for those who’ve never owned a business, they’ve likely worked in one themselves or know plenty of people who have.

But those massive figures also have their drawbacks. Because small business is such a competitive minefield, shutdown rates are relatively high. The failure rate for small businesses in 2018 was 12.7% higher than at the same time the previous year, according to a study by data and analytics provider, Ilion.

Thankfully, there are plenty of safeguards and alternatives to shutting down the business you’ve poured all your blood, sweat and tears into. Many owners look for investors to inject some cash during turbulent times. Others get assistance from friends and family in exchange for a partial share of the company.

But you don’t have to beg investors or give up a piece of your dream just to keep your company afloat. In fact, with the right business loan, you can sail through those choppy waters and still be in complete control of your small business on the other side. Around half of all Australian businesses have access to a financing facility other than a credit card – so if you’re looking to dip your toe into a business loan, you’re in good company.

As with any major business decision, it’s important to conduct your due diligence and make sure your finance provider is the right fit for you. So if you think a business loan could help grow your operation – or simply keep it afloat during seasonal fluctuations – then read on to learn how to compare the best business loans for your circumstances.

This is a business opportunity

Key questions to ask yourself before the loan application

Hold your horses. Just because you’ve decided a business loan could be the solution to your current challenges, that doesn’t mean you should call up your bank immediately and apply for one. Depending on your circumstances, your cash flow and your plans for the future of your business, there will likely be a number of factors that will contribute to which loan provider you should go with.

So start slowly by asking yourself the following questions:

  • What amount do I want to borrow? Would a few thousand dollars help with much-needed stock or upgrades? Or do you need a larger sum (or even a line of credit) for multiple business investments?

  • How long have I been in business? Loan providers will look at your business’s history when evaluating whether to approve your application. The longer you’ve been in business (and provided that business has remained relatively healthy) the more you’ll be able to borrow, in most cases. However, if you’re a young or new business you may not be approved for big loans, or may instead have to accept terms with high interest rates.

  • What do I want to use the loan for? Are you looking for a small top-up to keep everything running smoothly during a seasonal low (e.g. retail fluctuations), or do you want a major injection of cash to expand your business? Having a clear business plan for the loan will help both you and your provider visualise how it will be spent.

  • What industry am I in? Established industries like retail or construction are packed with hundreds of thousands of small businesses. If you’re in more of a niche market, however, it might be worth investigating which lenders have provided loans to similar businesses in the past. You might also like to educate any potential providers on your industry and how your business functions within it.

  • Have similar businesses taken out a loan recently? Do you know any other business owners who have taken out a loan? Would they recommend their provider? It’s well worth asking around to get some first-hand information about the business loan process.

  • Do I have a solid business strategy in place? Strategy, strategy, strategy – it’s what could get your loan application over the line. Plan out each step of what you will do with the funds so you can deliver over and above what the provider expects. So if you don’t already have a business strategy in place, now is the time!

Business partners negotiating

Finding the right product

Just like comparing business credit cards, when the time comes to compare banks and other financial lenders you’ll want to go in armed with as much information as possible. After all, a $5,000 business loan won’t always mean you’ll repay $5,000. Because there are fees and interest charges, that number will rise. Similarly, if you put up an asset as collateral you’ll need to understand the possible outcomes should you default on the loan.

While not an exhaustive list, the following should be front-of-mind when the time comes to start comparing business loans:

  • Interest rates: Is the rate competitive compared to what you expected? And if anything went wrong, would you still be able to pay back the loan plus interest?

  • Fees: Are there application fees like an origination fee or initial draw-down fee?

  • Loan amount: How much you want to borrow will often impact the interest rate and any fees.

  • Collateral: Do you want a secured or unsecured loan? For the former you’ll have to put up an asset as collateral, while for the latter you won’t – but you will be hit with higher rates.

  • Terms: Make sure you thoroughly read all the terms and conditions of your loan agreement so you’re not caught out.

  • Speed: How quickly can the provider deliver funds to you? Will it be an immediate transfer once approved or will it take a few weeks? The latter may be unacceptable if you need cash straight away.

  • Repayment cycle: Will you be making loan repayments weekly, fortnightly or monthly? And how will that impact your budgeting and cash flow?

  • Total repayment amount: As mentioned before, you’ll not only be paying back the amount you borrow. Calculate the total interest plus any fees you may incur to get a complete picture of the loan amount.

The two plans you need to solidify

So you’re ready to start comparing, but hang on a moment – do you have these two plans in place?

1. A business plan for your future – with the additional funds

Just like starting a business or looking for a partner/investor, you’ll need a business plan in place when applying for a loan. In it, you should outline what the funds will be used for and where. Also include notes on your business’s history and what circumstances have led you to seek out a loan.

You can check out a number of business plan templates online to help get you started.

2. How you plan to pay off the loan – without incurring further major debt

You’ll also want a plan outlining how you will pay off the loan. This could be a simple description of how you will use the loan to purchase new stock, sell those items and then repay the loan. Or it could be a calendar that shows deadline dates when you will pay off portions of the business loan.

Your lender will want to see evidence that you are good at managing money, so collect any and all financial information related to your business to show them you are a good prospect for lending.

somebody lend me some money

The pros and cons of a business loan

Pros:

  • Unlike taking on an investor or selling off a percentage of your business, you’ll still be in complete control of all decision-making.

  • Lenders aren’t entitled to your profits – just the debt you’ve incurred.

  • Low interest rates compared to other financing options.

  • The funds are usually available for immediate use.

  • You can deduct the interest on your business loan for tax purposes.

Cons:

  • Most lenders offer secured loans, but not all accept unsecured.

  • Some lenders prefer established businesses over startups.

  • Loan approval doesn’t always equate to business success.

The bottom line is that every business is different, with its own unique set of challenges and goals. So just because a loan product worked for a competitor in your industry, that doesn’t mean it will be the right fit for you.

Comparing business loans is the ideal way to find a lender that matches your circumstances. There’s no obligation, no risk, and the potential to get your company on to bigger and better things.

Have you ever taken out a business loan, or are you looking to do so in the near future? What difference would an injection of cash make to your day-to-day operations? Share your story by commenting below.

Comments