You have a lot of options open to you when searching for small business loans. Make sure you run a full comparison before you make your choice.
Your company needs a business loan and you’re preparing yourself for the application process.
But are you sure that you’ve found the right loan? What happens if you’ve applied for a business loan, only to find that it isn’t fit for your needs?
One restaurant owner found out…
The owner of a restaurant decided to take out a business loan with a major bank. The loan terms seemed fair, though the business owner didn’t pay much attention to the terms and conditions.
They went ahead with the loan with confidence. After all, the restaurant recorded solid new profits and had several assets to its name.
And all went well…for a while. The problem came when the business owner wanted to renew the loan. The bank refused, leaving the business owner in a position where they had to repay the remainder of the loan in one go. The loan amount requested and the business purpose for the funds are often key factors in a lender’s decision to renew or refuse a loan.
Thankfully, that restaurant owner managed to find another, more suitable business loan. However, their story highlights the importance of understanding what you’re signing up for. And to do that, you need to know how to compare business loans. Most lenders will assess your business purpose and the loan amount you are seeking as part of the application process.
These are the four tips that will help.
Understanding Business Finance
Business finance is at the heart of every successful business, guiding how funds are managed to achieve both short-term and long-term goals. For business owners, understanding the range of finance options available is essential to making smart decisions that support growth and stability. Business loans are a popular tool for managing cash flow, purchasing stock, paying staff, or funding business expansion.
When considering a business loan, it’s important to compare business loans from multiple lenders to secure the best interest rate and loan terms for your situation. The right business loan can make a significant difference in your ability to manage cash flow and respond to opportunities or challenges as they arise.
There are two main types of business loans to consider: unsecured business loans and secured business loans. Unsecured business loans do not require you to put up assets as security, making them a flexible option for businesses that may not own significant assets or prefer not to risk them. However, these loans often come with higher interest rates due to the increased risk for lenders. On the other hand, secured business loans require collateral, such as property or equipment, which can result in lower interest rates and potentially larger loan amounts. To better understand the key differences between secured and unsecured business loans, it’s important to compare their features and determine which is best suited to your needs.
Understanding these differences is crucial for business owners looking to choose the right business loan for their needs. By carefully comparing business finance options and considering your business’s unique requirements, you can make informed decisions that support your ongoing success.
Tip #1 – Consider Future Interest Rates
Let’s say that you have two loan options available to you. One of them carries a slightly higher interest rate than the other.
That seems to make the choice obvious. You’ll go for the one with the lowest rate to reduce your monthly repayments.
However, that could set you up for a fall later on. For example, the loan with a higher rate may also have that rate fixed for five years. This is an example of a fixed interest loan, and business loans can have either variable or fixed interest rates, which affects the repayment structure and stability of payments over time. The loan with the lower rate may only have a fixed-rate period of two years before moving to a variable interest rate. The loan term—the total length of time you have to repay the loan—also affects your monthly repayments and the total interest paid.
It’s possible for the variable rate to end up being higher than the fixed rate on the other loan. As a result, you actually end up paying more on the loan that started with the lower rate.
The point is that you have to look beyond the initial offer when comparing interest rates. Look beyond higher interest rates to see if the loan works out better for you in the long run, and consider whether the loan offers variable or fixed interest.
Tip #2 – Look at the Entire Package
Not every loan offer will provide you with the same features.
For example, you may have a loan that offers a business line of credit, which is a flexible business line allowing you to access funds as needed. Or, the lender may offer a business overdraft on your account to sweeten the pot for your loan.
These added features sound great. However, they typically come at the cost of a higher interest rate. Plus, they may have fees attached to them that make them difficult to use. Some loans may also include upfront fees, such as establishment fees, which can increase the initial cost of borrowing.
This isn’t to say that you should avoid additional features when looking for a loan. The key is that you consider what you need instead of accepting features just because they sound good.
Examine the entire package when looking at a loan so you understand what you’re getting and what it may cost you.
Tip #3 – Research the Lending Criteria Beforehand
The right business loan depends on your business’s specific needs and goals, so it’s important to consider what will work best for your situation.
Every lender has its own criteria in place that determines whether or not they accept your loan application.
The problem comes if you try to apply for too many loans or lines of credit in a short space of time. This could have a negative impact on your company’s credit score.
The reason is that lenders will see multiple applications and assume that you’re finding it hard to get a loan or line of credit. They may make inquiries of their own, which could lower your credit score even further. Ultimately, your multiple applications end up making it even harder for you to get a loan.
This is why it’s so important to research a lender’s criteria before lodging an application. You want to feel as sure as possible that your application will get accepted so you don’t have to apply elsewhere. Lenders may take everything from your financial status to the type of business into account. Most lenders will review your credit history and may conduct credit checks as part of the application process. You will typically need to provide financial documentation such as bank statements, BAS statements, tax returns, profit and loss statements, and a business plan to verify your business’s income and viability.
When comparing business loans, examine the criteria as well as the offer. You may find that a large money offer comes with criteria that you’re not confident of meeting. In such cases, it may be better to go with a lower offer for the more favourable criteria.
Tip #4 – Unsecured Business Loans vs. Secured Business Loans
The choice between a secured or unsecured loan is one of the most important that you’ll make. Small businesses and small business owners often need to compare two business loans—secured and unsecured—to find the best fit.
To make the right choice, you need to know what you’re getting with each loan type.
Secured loans are the most familiar and they’re what the major lenders will offer. Typically, they involve you placing an asset that you own up as security on the loan. For example, you may use your business premises as security for a small business loan. Commercial property or residential property can be used as collateral, and owning such assets can result in more favorable loan terms. Equipment finance is another option for businesses that need to purchase or lease assets like machinery or vehicles, where the business owns the equipment used as security.
Of course, this means the asset gets placed at risk if you default on the loan. However, that added security also increases the lender’s confidence. As a result, you may find that this type of business loan comes with a lower interest rate and more favourable terms.
With an unsecured loan, you don’t have to place an asset up as security on the loan. This makes the loan ideal for new businesses or those that don’t want to risk losing valuable assets.
Of course, not having an asset as security increases your risk as a borrower. This typically manifests in higher interest rates and restrictions on the amount you can borrow. However, these issues often depend on the strength of the business.
Business loans can be used for a variety of purposes, including to purchase stock, which is a common reason for borrowing.
It’s crucial that you consider your business’ circumstances before choosing which of these loan types to go for. Each has its own pros and cons and you’ll usually find that one’s more suitable for your business than the other.
When considering repayment, keep in mind that some loans may allow you to pay off the loan early, but you should check for early repayment fees and consider how the loan balance will be affected.
Business Overdrafts and Lines of Credit
Business overdrafts and lines of credit are flexible finance options designed to help business owners manage cash flow more effectively. With a business overdraft or line of credit, you can access funds up to a pre-approved limit, giving you the ability to cover unexpected expenses or take advantage of new opportunities as they arise. Interest is only charged on the amount you actually use, making these options cost-effective for managing day-to-day business finance needs.
Both business overdrafts and lines of credit can be structured as secured or unsecured, depending on your financial situation and the lender’s requirements. The interest rate may be variable or fixed, so it’s important to understand how changes in the cash rate could affect your borrowing costs over time.
Before applying for a business overdraft or line of credit, business owners should carefully assess their business needs and overall financial situation. Comparing loan fees—including establishment fees, ongoing fees, and monthly fees—across different finance options is essential to ensure you’re getting the best deal.
By understanding how business overdrafts and lines of credit work, and by comparing the available options, business owners can make informed choices that help them manage cash flow efficiently and keep their business running smoothly.
Choose Your Business Loan
With these tips, you now have a better idea of how to compare business loans.
The key is that you always consider your company’s circumstances before making your choice. A loan product that works for one business may not work for yours.
Business loans can offer several advantages, including quick access to funds and flexible repayment options. Additionally, some business loans may provide tax benefits, such as deductions or credits, which can improve your business’s cash flow.
Perhaps you’ve decided that an unsecured business loan is right for your company. That’s where we can help you.
With Unsecured Finance Australia, you can access loans of up to $300,000. We also offer flexible repayment periods and can provide approval within 24 hours.
Please note: The information provided here is general advice and does not take into account your specific circumstances. You should consult with a financial professional before making any decisions.
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Apply online today to find out if you’re eligible for one of our unsecured business loans.
