What can you do with a business loan?
You might, for instance, need additional funds to purchase new equipment, or upgrade or move premises. Your business might need to expand its stock and inventory levels, you may require new office furniture, or it might be necessary to upgrade your IT.
Both new and existing businesses will at times require additional funding to be able to undertake a marketing campaign, or update their website. Alternatively, you might require some additional funding in order to stay on top of cash flow or to consolidate high interest debt.
These are just some examples of the circumstances in which you might need to apply for a business loan in order to cover expenses that the business is not able to pay for itself at that time.
What you will need to get a business loan?
If you are considering applying for a business loan, potential lenders will need to understand your business, its financial position, and what its plans are for the future.
The first step should be to ask yourself some important questions about any potential business loan, and why you might need it. For instance:
- How much does the business need to borrow?
- Is finance required up front, or on a needs basis?
- What type of loan is going to be right for the business?
- What length of time is required?
- What can the business afford to repay, taking into account interest, set up fees, ongoing costs, etc?
- Do you have any other debts or liabilities?
- Will you be required to offer the lender security?
Understanding your finances
In order for a potential lender to be able to understand your finances, you will need to have a thorough grasp of the current position of the business as well.
A cash flow statement is an important tool, as it shows how money comes into the business, and where it goes. This might include current income, net profit, expenses and future projections, for instance. Any business seeking finance will also need to have in place a business plan.
Other things to consider
When you take out a business loan, interest is charged differently to other types of loan, as the lender will likely be factoring in how they view the business’ future success.
However, the interest rates charged for a business loan will be lower than the rate charged on credit cards, and you won’t be required to give up a share of your business as you might when you obtain finance via an investor.
There may also be other fees associated with a business loan. These can include an upfront fee for establishing the loan (the size of this will depend on the size of the loan), and ongoing fees for the administration of the loan.
Business loans also have tax and GST implications, and it is advisable to discuss these with an experienced financial adviser before seeking finance.
How to apply for a business loan?
You will likely be more successful in obtaining a business loan if you are well prepared, have a clear understanding of your current financial position, along with plans in place for the future growth and development of the business.
Therefore, you will need to have a clear picture of the amount of money you want to borrow and what you intend to use it for. Having a business plan will help in this regard. It will also be helpful to have your latest credit report, as a potential lender will reference this. A lender will also want to see your financial statements, including balance sheet, income statement, cash flow statement and statement of retained earnings.
You will also need to be able to discuss with potential lenders your current position with the ATO regarding any tax debt. This is especially important if you are currently in a payment arrangement with the ATO, as this may mean that a lender is unwilling to offer a business loan.
Part of the process of applying for a business loan may also include providing proof of your identity and personal income.
Business loan interest rate types and repayments
What is the difference between a fixed and variable rate?
In essence, a fixed interest rate loan means that the rate at which you pay interest on the loan is set for a predetermined period of time, and will not change regardless of any alteration in the official Reserve Bank rate. You will generally pay a higher rate of interest with a fixed rate loan than a variable rate business loan.
A variable rate business loan means that the rate of interest changes in line with fluctuations in the Reserve Bank rate. This will then impact on your monthly repayments, which can rise or fall in line with the changes in the official rate.
Fixed interest rate loans
With a fixed interest rate business loan, your payments are the same and predictable, and you know in advance what you will be charged over the entire life of the loan. This can be helpful in managing your cash flow and planning for the future.
Variable interest rate loans
A variable interest rate business loan means that your monthly repayments can change, and so at the outset the overall cost of the borrowing won’t be known. It does, however, give you flexibility and the opportunity to capitalise on any interest rate falls, but you also need to be aware of the possibility that interest rate rises impede your ability to repay the loan.
Which type of business loan is going to be right for you?
Both loan types have advantages and disadvantages, depending your particular circumstances. Whether you opt for a fixed rate or variable rate loan will affect the stability of the repayments, the overall cost of the loan, and the features that come with the loan.
You will generally pay a higher rate of interest with a fixed rate loan than a variable rate business loan. This is because the lender is bearing the risk for interest rate changes, as opposed to a variable rate loan, where you as the borrower are bearing that risk.
If your business is in an early growth phase, a fixed rate loan may be the right option, as it gives you stability and the ability to look forward and plan ahead. If you are more established, and/or have some capital reserves, a variable rate business loan might be the answer, as you will likely be paying a lower rate of interest and have the flexibility to capitalise on changes in the official interest rate.
What is a balloon payment?
A balloon payment (sometimes called a residual amount) is a payment that you are required to make at the end of a loan period to cover the remaining part of the loan that has not been paid off.
If a business loan is structured so that a ballon payment is required at the end of the agreement, the monthly repayments over the life of the loan will be lower. If there is no ballon payment, you can expect to repay more of your loan each month.
Including a ballon payment in a loan can be useful as means of managing cash flow, although it is important to ensure that you have budgeted to be able to repay the residual amount when it falls due.
Balloon payments are generally used in chattel mortgages, a form of business loan usually used to purchase plant or equipment, and where that asset acts as security for the loan. If you are unable to meet your repayments or the balloon payment, the lender is entitled to repossess the asset.
How we can help?
At Finnciti, we are business loan specialists and can help you to take advantage of the different types of business loans available to you.
As part of the process, we can assist in the preparation of cash flow statements and business plans, and guide you through the business loan application process, connecting you with lenders who can provide the sort of financial products your business requires.
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