It is uncommon for a business to always have the required amount of cash flow to function well. At times, there is a huge opportunity for expansion and as a business owner, you do not want to miss it because of lack of funds. That’s the time you need a secured business loan to assist you.
Why go for a business loan?
Business loans are meant to help you plan major investments for the future of your business.
A typical business loan is different from other short-term forms of finance like overdraft and commercial line of credit in the way that it is used to directly fund initiatives related to business expansion, such as establishing a new office, buying new equipments, renovating existing facilities, or business acquisition.
You get all the loaned funds at the start of the contract and make regular repayments over the life of the loan.
Business loan options
An unsecured business finance such a business overdraft provides you access to funds that are for short term requirements. Such an arrangement usually offers a cheaper interest rate.
However, if you need funds for larger investments but on an occasional basis, you can consider a business equity line. This would be a secured loan.
Finally, if you are aware of the exact amount that you need for a longer term, then you must go for a proper business loan and skip the short cut.
If you know how much you need to borrow, you might consider a business fixed rate loan, which gives you the certainty of fixed month payments. But if your cash flow is volatile you might opt for a business variable loan, as you may be able to reduce repayments if needed.
Fixed business loans
If you need a certainty of monthly repayments, then you should go for a fixed interest rate. However, the interest rates are going to be a bit higher than market rates.
Also, watch out for features like additional repayments to be paid when cash flow is good as these can lower your overall repaid amount and interest incurred.
Variable options for business
If you are okay with little uncertainties in the interest market, you can go for a variable business loan as it allows greater flexibility. Some of the lenders also provide an option of interest only repayment for the initial period of five years while some allow redraw facility for accessing cash in emergency.
To get the best of both worlds, choose a split business loan that has both fixed and variable components to balance out the repayments.
The sheer variety of business loan products available in the market can overwhelm you and leave you confused. For a loan that can define the future of something as important as your business, it pays to consult a mortgage broker and let him handle the cumbersome process.
What you’ll need
The premiere eligibility to take out a business loan is to have running registered business. After that, the lenders would like to see that you can easily repay your loan. This is ensured by submission of documents that demonstrate your credit fitness. You might be asked to show:
- a history of financial performance
- evidence of solid cash flow
- evidence of current income and future projections
- ability to manage expenses and liabilities
- details of other loans and debts
In addition to this, you’ll have to provide a security for the loan, which can in form of residential or commercial assets of any kind. You’ll be required to provide security for the loan, in the form of either residential or commercial assets. This is known as business mortgage loan and the property in question does not have substantial existing loan over it. If the property gets accepted by the lender, then it can be a huge benefit for you as it will reduce your interest rates considerably.
Planning for the loan
Before you apply for a loan, you must have answers to the following questions:
- Do I need the money up-front or an on-a-needs basis would suffice?
- What is the maximum monthly repayment I can afford?
- Is my Loan to Value Ratio (LVR) in the appropriate range to avoid Lenders Mortgage Insurance?
- If I need a collateral, what assets can I offer?
- If the lender asks for a guarantor, who will be willing to guarantee my loan?
- How much accessible equity do I have?
If you are looking to acquire a range of expensive equipments for technological advancement or expansion of your business, then you can for an equipment finance which can help you achieve your goals without hurting your working capital.
With the financed funds, you can rent or lease equipments for a set period of contract. Accordingly, many different kinds of equipment finance are available, namely finance leases, hire purchase and equipment loans.
- If you want your business to stay abreast with all the technological advancements, then you can go for an equipment finance lease. This means that you can lease equipments for a specific period and then renegotiate for the same ones or new equipments after that period is over. This way you can have access to the latest equipments without spending capital constantly.
- If you’re looking to own the assets (till the contractual period is over), then hire purchase would suit your business.
- Your other option is equipment loan which is also known as chattel mortgage. It is a fixed interest loan secured by mortgaging an asset. It gives the borrower tax benefits in terms that GST is not paid on loan repayments.
When considering a business loan, the risk profile of the business is looked at carefully to understand your chances of regular re-payments or defaulting on them.
As a general rule, lenders look for three main things:
- the loan security – its level and nature
- cash flow risk – whether you’ll be able to pay monthly repayments
- business risk – whether you’ll ultimately be able to repay the debt