Best Business Loans: Tips for Choosing the Right Business Finance
Choosing the best business loan to meet your requirements can be challenging. Your choice will depend on a number of factors, including how long you’ve been in business, whether you have collateral, the loan terms and loan amount, and what you will be using the funds for. Here we’ll explore the types of loans and other finance options that can meet your needs.
A personal loan
Although not recommended, this is sometimes the only option for a new business with no track record. When a budding entrepreneur has no business experience but has a good personal credit history, a personal loan could be the answer. It’s important that the business is viable and generates income so that the new business owner can repay the loan. In the long run, the business will be able to access other forms of finance as it develops a credit history.
A business loan from family and friends
This is also a common option when starting a business. You don’t need to have a business credit history or score to get this type of loan and repayment terms can be more flexible. It’s important to keep this type of loan on a formal basis to avoid damaging relationships. This can include creating and signing an agreement about the terms and conditions of the loans. Get more details on this type of business finance in The Upside and Downside of Getting a Business Loan from Family and Friends.
Bank term loan
This is a traditional loan that banks offer to small businesses. With this type of small business loan, you make regular payments over the loan term. Although these types of loans have low interest rates, they have several shortcomings. First, the loan application process can be long and complicated, requiring large amounts of paperwork. After this, it can take up to eight weeks to find out if the application has been improved. Second, these are secured loans that require collateral, which usually means residential property. This means it’s not an option for business owners who don’t own residential property or don’t want to use their property as security for a business loan.
Business overdraft
With this form of finance, the lender gives you an agreed amount of credit which you can draw from your transaction account. In effect, you overdraw your bank account to access the funds you need. With a business overdraft, you only pay interest on the funds you are using. As there is no set repayment schedule, the business has the flexibility to make repayments when it has the funds. In addition to paying interest, there is a set-up fee and ongoing account fees with a business overdraft. Learn about the pros and cons of business overdrafts.
Business line of credit
This form of finance is similar to a business overdraft but the funds are usually in a separate facility. Like an overdraft, interest is only paid on the funds that are being used. There are also set-up and ongoing fees. In most cases, the lender has the right to recall the line of credit and request that the balance is paid in full. Get more details in What Is a Business Line of Credit?
Business credit card
If a business needs a smaller amount of funds, a business credit card could be an option. Applying for a business credit card is not the same as applying for a personal credit card. You need to have an ABN to apply and a good business credit rating. Business credit cards offer a range of features, such as frequent flyer awards and travel insurance. The main shortcoming of business credit cards is the high interest rate which can add up if carrying a balance on an ongoing basis. Choosing the right business credit card will depend on how you plan to use it. Get tips for choosing the right business credit card.
Merchant cash advance
This financial product applies only to retail businesses that have a large amount of EFTPOS and credit card sales. With this type of finance, the lender provides the business with a lump sum loan amount. To repay the loan, a small percentage of all EFTPOS and credit card transactions are paid directly to the lender. This can work for businesses in retail in hospitality that have large volumes of these types of transactions, but are not an option for companies in the business-to-business market. Find out more in What Is a Merchant Cash Advance?
Equipment finance
This is sometimes the best alternative business loan when a company is seeking finance to purchase machinery or equipment. With some forms of equipment finance, the item being purchased acts as collateral. If the business isn’t able to make repayments, the lender can repossess the equipment and sell it to recover the funds. Learn more about equipment finance.
Invoice finance
Also known as invoice factoring or debtor finance, this type of business finance is suitable for companies that offer credit payment terms. Typically, these will be for business-to-business transactions. With invoice finance, the lender provides funds based on the value of outstanding invoices. For example, if a business has $300,000 in outstanding invoices, the lender could provide 80 per cent of this value. Before providing the funds, the lender will check the credit ratings of the businesses that owe money for the invoices. Get the full story in The Pros and Cons of Invoice Finance?
Unsecured online business loans
These are rapidly growing in popularity and are considered to be some of the best business loans in Australia for SMEs. Fintech lenders – such as Moula – that offer these unsecured business loans online make it easy to apply for a loan. Leveraging technology – including artificial intelligence and machine learning – simplifies the process. Instead of completing stacks of paperwork when applying for a business loan, the loan application can be completed online in under ten minutes. The turnaround time is quick. Moula, for example, will provide an answer within one business day.
In addition, as an unsecured loan, no collateral is required. The future cash flow of the business is one of the factors that are considered when making a lending decision.
Here’s a business loan calculator that gives you estimates of principal and interest repayments for small business loans.
Alternative finance for business-to-business transactions
Most businesses that sell to other businesses offer invoice payment terms because their customers expect it and it’s a selling point. Raising invoices for products or services sold is much easier than getting paid upfront or getting cash on delivery. Despite this, it often causes cash flow problems for vendors. Research conducted by Moula revealed that 65 per cent of SME customers don’t pay on time and almost 40 per cent of these customers pay later than 30 days.
Moula Pay was created as a smarter way to offer business customers invoice payment terms. When customers purchase products or services using Moula Pay, the vendor gets paid upfront. This means they don’t have to worry about managing accounts receivable and chasing late payments. It basically is a way for companies to outsource their accounts receivable function.
Customers get up to three months interest and repayment-free, with the option to extend the repayment period.
Find out more about becoming a Merchant and getting paid upfront with Moula Pay.
Also, learn about the benefits of buy now pay later for business.
