Without a doubt, your business will need access to capital as it grows. So, you need to know what are the different types of business loans available.
The financing options at your disposal range from long term low-interest loans to same-day funding. And with fintech lending becoming more popular, this widens the range of available financing.
As a business owner, you need to research all the funding options to make an educated decision. But therein lies the problem.
Since there are so many different loan types for businesses, it’s tricky to determine which loan type is the best fit for your unique business circumstances. Understanding the various loan types available is crucial, as each unique business should carefully consider its own needs and situation when evaluating which loan type is most suitable.
But don’t worry, you’re in the right place.
This article explores the types of business loans Australia has to offer.
Understanding Cash Flow and Business Loans
When it comes to business loans, understanding your cash flow is absolutely essential. Cash flow is the movement of money in and out of your business, and it directly impacts your ability to repay any loan you take on. Lenders will often request a cash flow statement to get a clear picture of your business’s financial health before approving a loan. This document shows whether your business consistently brings in enough revenue to cover expenses and debt repayments.
For unsecured business loans, a strong cash flow position is even more important, since there’s no collateral backing the loan. Lenders rely on your cash flow statement to assess the risk and determine if your business can handle additional debt. By managing your cash flow effectively, you not only improve your chances of securing the right loan, but also ensure your business remains financially stable. Whether you’re looking to cover day-to-day expenses or invest in growth, understanding your cash flow will help you choose the loan that best fits your business needs.
Five Types of Business Loans Available to Small Companies
Type #1. The Business Line of Credit
Arguably one of the most common types of short-term business loans, the business line of credit offers a lot of flexibility.
This is an all-purpose loan, which means you can use it for any expense that incurs within your business. Better yet, you only pay an interest rate on the money you withdraw, not the entire approved sum.
But you should know that the business line of credit is not really a loan. It’s more like having a business credit card. These facilities are often linked to a business transaction account, which allows you to easily access funds as needed.
How?
You don’t get approved and receive a specific sum upfront. Instead, your business gets qualified to determine the maximum funds you can access. Think of this as having a pool of funds you can tap into whenever necessary. However, you can only access funds up to an approved limit set by the lender.
Due to that, many businesses use this type of loan to cover unexpected expenses. But it’s also okay to use the business line of credit to cover the following:
- Cash flow
- Operating expenses
- Payroll
When it comes to repayments, you only need to repay funds you have drawn, and repayment amounts can be flexible, similar to making minimum monthly payments on a credit card.
Lastly, you should know that there are unsecured and secured business lines of credit. An overdraft facility is a similar product, also linked to a business transaction account, and is commonly used to manage cash flow.
Type #2. SBA Loans
Among the different types of long term business loans, SBA loans are a type of business term loan commonly available to businesses with excellent credit history. A term loan is a financing option where a business borrows a lump sum and repays it over a set loan term, which is the duration agreed upon for repayment.
Even so, SBA loans are highly desirable, and many small businesses apply for them.
Why?
By getting this loan, you get the benefit of long term repayments and meagre interest rates. SBA loans often come with a fixed interest rate, which provides predictability in repayments and helps with financial planning.
However, the approval process is time-consuming.
To put this in perspective, it takes about 45 days to get the loan if there are no hurdles during the vetting process. And that’s after you gather all the necessary documents and submit your application.
But if you don’t need the funds immediately to boost your cash flow, an SBA loan could be one of the best choices. The reason being that the low interest rates and long term repayments may allow you to significantly increase your sales.
Type #3. Accounts Receivable Funding
If you need funding fast, accounts receivable funding, also known as invoice factoring or financing, allows you to access cash by leveraging your unpaid invoices. You trade your outstanding invoices for money.
But keep in mind that you won’t get the total amount as listed on your invoices.
Typically, lenders will only give you between 80%-90% of the entire sum. They’ll keep the remaining money since they’re basically buying your invoice. And the invoices are also collateral in this deal.
But how do repayments work?
There is a weekly fee that gets billed until your customer covers the invoice. Then, you get the percentage of the invoice once the lender receives the total amount from your client. However, keep in mind that there could also be a fee for that.
Lastly, invoice factoring is excellent for companies that struggle with late invoices that seriously strain their cash flow. They can use the money to cover all operating expenses.
Type #4. Small Business Loans
When it comes to the types of business loans available to small companies, small loans are among the top choices.
This is because it’s relatively straightforward to get this loan and the interest rates might not be that high. After all, the lenders determine the rates and terms based on the business itself. Lenders will assess eligibility criteria such as business registration, financial health, and may require recent bank statements to verify your financial stability.
Various factors affect the term and the rates, and these may vary from one lender to another. And, generally, the better your business stands, the more favourable conditions you get.
Also, these loans are available with online and offline lenders. It’s worth mentioning that banks may cap the use of funds, although this doesn’t happen with fintech lenders.
That being said, small business loans can be used for different purposes. But it’s mainly to cover significant upcoming expenses or the costs related to growing your business.
Type #5. Equipment Financing
This is one of the best types of business loans to get if you don’t want to pay for the equipment right away. It’s because you can finance it through a loan and get some tax benefits in the first year.
But the use of these loans isn’t limited to replacing old equipment. You can also utilise them to introduce new products or services into the market.
Similar to some other loans, equipment financing works particularly well for growing businesses. You can use it to take your company to the next level and avoid significant upfront costs. Still, you should make sure that the loan won’t put a strain on your cash flow.
With this loan, there are collateral requirements that vary depending on the lender you choose.
But the silver lining is that the equipment you get is regarded as collateral. This means that you don’t have to tie up your business or personal assets to the loan. Should you default, the lender seizes only the equipment to cover the expenses. These types of loans are secured by physical assets such as vehicles or machinery. Other forms of equipment finance include hire purchase and chattel mortgage. A chattel mortgage is commonly used by businesses to buy vehicles and equipment, with the asset serving as security for the loan.
Another benefit is that lenders rarely introduce credit barriers.
The Approval Process for Business Loans
The approval process for business loans can vary depending on the lender and the type of loan you’re applying for, but there are some common steps you can expect. Typically, you’ll need to submit a detailed business plan, recent financial statements, and tax returns. These documents help lenders evaluate your business’s financial situation, cash flow, and overall creditworthiness.
If you’re applying for a secured loan, you’ll also need to provide information about the collateral you’re offering. For unsecured loans, lenders will place greater emphasis on your cash flow and credit history. Online lenders often streamline the application process, sometimes offering faster approvals, but it’s important to carefully review the loan terms and conditions before accepting any offer.
Seeking independent tax advice during the application process can be invaluable. A tax professional can help you understand how different loan options might affect your taxation position and ensure you’re making the best decision for your business. By preparing the right documents and understanding the approval process, you can improve your chances of securing the loan that fits your business goals.
Business Owner Considerations
As a business owner, choosing the right business loan involves more than just comparing interest rates. You need to consider how the loan’s repayment terms will affect your cash flow and overall financial situation. For example, equipment finance can be a smart way to acquire new assets without a large upfront cost, while invoice finance can help you manage cash flow by unlocking funds tied up in outstanding invoices.
It’s also important to think about your personal finances, especially if you’re considering a secured loan that may require a personal guarantee. Carefully review the repayment terms and make sure they align with your business’s cash flow patterns. Every business is unique, so take the time to evaluate your specific needs and explore all available loan options.
Seeking professional advice can help you navigate the complexities of business finance and ensure you’re making informed decisions. By weighing all these factors, you’ll be better positioned to secure the right loan for your business and support your long-term success.
Which Loan Is for You
To understand what types of business loans are best, you need to carefully assess your current finance and revenue. Additionally, you need to account for future growth and the reasons you’re taking a loan. Many businesses borrow money for purposes such as expanding operations or making significant investments. Some loans provide a lump sum upfront, which is repaid over time.
Note that you need to be particularly cautious if you’re taking out a loan to cover operational expenses or cash flow. In that case, it might be better to look for some short-term financing options such as accounts receivables funding and the business lines of credit.
When considering repayment, keep in mind that many loans require monthly repayments, and you can often choose between a fixed or variable interest rate depending on your needs.
But whatever you choose to take, you shouldn’t rush it and feel free to solicit professional help.
Unsecured Finance Australia is here for you.
We offer unsecured business loans starting from $5,000 up to $300,000, which could be just what you need to give your business that much-needed push.
We ask for minimal documentation and offer 24-hour approval.
You can find out more about our unsecured business loans here
