Generally most unsecured business loans offered by alternative lenders and banks require that you've been operating for at least one year. If you haven't, there are some lenders that offer unsecured startup business finance, depending on your unique circumstances.
Other sources of small business finance, such as invoice factoring and equipment finance, may have less stringent criteria for business age. However for business overdrafts or a line of credit you'll need to have been operating for at least a year as a minimum.
Business loans are a form of finance provided to businesses for a variety of purposes. The main uses include working capital, payment of suppliers and other cash flow requirements. These types of loans, in particular, unsecured business loans may have less restrictive requirements than typical loans offered by banks, enabling businesses to secure the funding they need. They can also provide further incentives and flexibility to the borrower that can reduce expenses to their business. Keep reading to learn how.
Businesses, both small and large, are the driving engine of the Australian economy. There's a great need for these enterprises to find ways to fund their operations and growth. Whilst most businesses find the lending process to be frustrating and complicated, small businesses are most vulnerable to these difficulties, due to scale. Therefore, it's extremely important to understand what business loan suits you best and how to maximise your application to lenders in order to produce the best result - we're here to help!
Should You Take a Business Loan Out for Your Business?
How to Maximise Your Access to Funding
Here are some ways to improve the odds of getting approved for a business loan:
Put yourself in the shoes of the lenders. Lenders are going to ask themselves why they should lend your business money. It's therefore important to display why you'd be a great customer for them, almost like a job interview!
In order to make your application as impressive as possible, you should firstly
understand your financial position as well as decide on assets you'd be comfortable offering as collateral, such as your house. Business owners who are willing to do this are the ones who most strongly believe in their business, right? If you can't do this, there's also unsecured business loans. Credit score and the consistency of cash flow are other factors considered as well - make sure to look professional - no gambling from the company account!
Determine how much money you need. Although it's tempting to borrow a large amount, it's best to start from an amount that you actually need. Loan amounts that are excessive relative to turnover can be a common cause for rejection.
Learn from your past mistakes. Like anything in life, it's important to learn. If you've been rejected before, try your best to figure out why. This ensures you don't make the same mistakes again when you look for another business loan lender.
Using poor credit as collateral. Other in the B2B space use poor credit with receivables as collateral. Alternative lenders, such as web only lenders, will charge you with a higher unsecured business loan rate but may have more relaxed standards.
Consider working with SBA lenders. Working with Small Business Administration-backed lenders is usually the first step you should consider. Most small businesses believe they aren't eligible, however this is not necessarily true. SBA loans often have lower interest rates and have more reasonable payment terms. Never fear, if they reject you it does not mean others will too.
Be clear on what you're getting into. This means you should understand the terms of the loans you are applying for. Key facts to look for are the Annual Percentage Rate (APR) of the business loan, the fees due as well as any prepayment penalties. Always be informed.
Online Lenders may be the best option for your business. Introducer can compare a range of online lenders, making sure to find a lender that best suits your needs. Online lenders can be more flexible but can charge higher interest rates and have poor transparency - another advantage of going through an online broker such as Introducer to help guide you through the purpose.
Small banks are usually more helpful. Big banks prefer to work with big customers. If you're planning for a flexible, unsecured business loan, it's best to try out small banks first.
When Should You Apply for a Business Loan?
It's important to have a good and defined reason to apply for a business loan. As we all know, not all debt is good, but that definitely doesn't mean there aren't some great reasons to leverage finance to benefit your business. If your business is ready to go to the next level but you are currently short of capital, you might want to consider applying for a business loan. Here are some great reasons to apply for a small business loan:
Expansion of a Physical Location
If your current business location is becoming too limited for your operations then there might be a need for you to expand. Expansion of a physical location is usually not cheap & you might need small business funding to make this happen. Expansion is a good indication that your business is growing and you need to make sure you're financially prepared to support this growth.
Building Credit for the Future
If you are thinking of applying for larger funding in the future, applying for a small business loan today is a great step towards setting you up for future success. Start with a small loan today to build your business credit & give lenders a reason to lend you more tomorrow.
Equipment
Purchasing new equipment to improve the operations and performance of your business can be expensive. Typical purchases include machinery, tools and IT equipment - all essential for the operation and growth of your business. Equipment loans sometimes require the equipment to be collateral, similar to a car loan.
Purchase More Inventory
Inventory is one of the highest expenses for most types of business. Just like the initial purchase of equipment, there's an ongoing need to replenish inventory with high-quality stock. Small business loans are typically very useful for seasonal businesses because cash flow is variable and there are times when extra cash is needed.
Whatever reason you are applying for a business loan, be mindful to take out a loan that will serve your business right. Ensure to pay the business loan over an appropriate period of time as your business flourishes. All business decisions involve risk and business loans are also one of them.
What are the Types of Business Loans?
It's important to compare business loans and ensure you're utilising the best option for your business needs. There are many different business finance options available and you should consider each of them carefully. Here's a list of the most common types.
Unsecured Business Loan
An unsecured business loan is a type of loan that does not require any collateral to back it. It is however, primarily based upon the creditworthiness of a small business borrower. When you have a great credit score, it's far more likely you will qualify for an unsecured business loan. Most big banks prefer to secure loans with collateral such as equipment, real estate or other similar business assets. Considering the nature of the asset offered as collateral, they will assess apply a loan-to-value ratio, determining how much you can borrow. It's important to remember that banks are different when it comes to setting value and managing their risk as they assess your business loan application.
Fortunately, there are various other lenders who consider unsecured business loans in a different way. They may apply a lien on business assets until the borrower fully pays the balance of the business loan. This allows you to obtain a small business loan without a necessarily superb credit score. When your credit score is lacking, you should primarily apply for unsecured small business loans.
Secured Business Loans
A secure business loan is a common type of funding for small businesses. It is different to the unsecured business loan option that is ‘secured' in the form of a personal guarantee and collateral (asset). Simply, this means that you promise to the chosen lender that you personally can pay the debt if needed & if not, the lender can employ the collateralised asset to recover their losses. By utlising a secured business loan you can access better loan offers with lower interest rates and longer payment terms. By offering security, the process of obtaining business funding can be made substantially more efficient, however, you need to ensure you meet your responsibilities or face complex issues in the event the loan cannot be paid. If you want to retain your assets and credit score you must pay the business loan.
Applying for business finance can be a daunting and frustrating task, even if you pass all the requirements and provide collateral, the lender may still not approve your application. Bankers are incentivised to strictly secure business loans as they want to eliminate as much risk as possible. If you have an amazing credit score, stable and profitable small business and a professional approach, your loan can be compared and approved fast. Although this process can take some time, peace of mind is invaluable. If you're looking for fast cash, this option probably isn't the best for your situation.
Residentially Secured Overdraft
A residentially secured overdraft serves as a safety net when your expenses are higher than normal. This may be used as an essential part of your budgeting process. Why? You will use your property interests as security for your overdraft. When you make this your default option, you can enjoy various benefits such as lower interest rates and no monthly fees. It is however important to choose a reliable service provider to make satisfaction guaranteed.
Commercially Secured Overdraft
Alternatively to a residentially secured overdraft, you can apply for a commercially secured overdraft. Commercially secured overdrafts are similar but instead of property, it is secured against the business's assets as collateral. Whether you want flexible short term finance or a variable interest rates, they can be provided by the right lender. Applying for a commercially secured overdraft can give your business the budget it needs, when it needs it. For example, purchasing materials for product manufacturing, or a short term business expansion or investment opportunity.
Residentially Secured Term Loan
Budget not sufficient to develop your small business? Do you want to buy premises for business expansion but have no cash in your bank account? Residentially Secured Term Loans might be perfect for you. Use your residential property as collateral to get a secured business loan on a term basis. With a longer term payment schedule, you can acquire better results from your business finance decisions. With low application fees, low monthly expenses and reliance on residential property this might be a great option to grow your business in the long run.
Commercially Secured Term Loan
An alternative to residentially secured term loans are commercially secured term loans. Instead of using your house as collateral, your small business could be sufficiently asset-rich to secure a longer term secured term loan. It's potentially a risky decision since you are leveraging the business itself, however when matched with the right lender under appropriate circumstances, the more reasonable payment options can allow for sufficient cash flow in the long run, providing money to improve and grow your business, whether working capital, equipment purchase or marketing expenses.
Business Loan Features
A business loan is by far the best option for business owners when they lack the budget or capital for business growth, marketing and the resulting success they're after. Instead of risky and dangerous loans from illegal providers, like loan sharks, they should apply for a business loan. When given the choice, you should make a dependable and reputable lending institution your first choice. You will be able to protect your valuable assets, such as residential property and equipment, whilst the lender will have appropriate assurance that you can pay off your debt within the loan term. As a borrower, in addition to choosing the right loan type, it's also important to understand the typical features included. To guide you, here are some business loan features you need to understand in order to make an informed decision.
Additional Repayments
Most business loans will have a feature that allows you to make additional repayments. When you have enough money to pay off your debt ahead of schedule, or don't want to have a long-term commitment, you can make additional repayments. If you plan on utlising this feature, it's important to understand if your lender allows for it, and to what capacity. If they don't have this capability, there are potential alternatives for you.
Redraw Facility
Redrawing from paid funds is a useful feature that can improve the usefulness of your business loan. When you apply for a loan with a redraw facility you can ‘re'-borrow the money you have already repaid. A redraw facility can make how you repay your business loan more flexible given that you can overpay when you have sufficient capital, to save interest, and then make use of those available funds if and when required. Like additional repayments, you can pay off your loan as quickly as possible but avoiding headaches in the process - you can always take out the extra you put it.
Lump Sum Repayments
Lump sum repayments refer to a single payment for a business loan. It allows you to repay your whole debt owing in a single period. If you have enough cash to fully offset your debt, you can clear it instantly with a lump sum repayment. This is useful if you have sold equipment or other assets and no longer require business finance to help your business's cash flows. Depending on your lender, you may be able to access this great feature.
Switching Between Variable and Fixed
When you apply for a business loan, you may choose a variable interest rate or a fixed interest rate. It is important to compare interest rates and calculate the interest rates on your small business loan that are best for your loan amount and cash flow situation. Both options have positives and drawbacks - it's best to figure out which one suits you best. With fixed interest rates you know where you stand, your repayments will be predictable on a regular basis for the period of your business loan. With variable interest rates, the rate may both increase or decrease. This means that your repayments will be less predictable. If rates increase, your minimum payment requirement will also increase, on the other hand, if interest rates fall, your payments may also reduce. If the loan is not essential to your business variable loans may allow you to increase your borrowing amount or provide you with potential upside to your business. It's important you make the right decision to ensure your business loan application is approved and you can make the required payments.
How to Find an Outstanding Value Loan
In order to understand if an unsecured business loan, or other small business loan, is worth it for your business, you need to understand how payments are calculated. Loans are provided by lenders in exchange for the repayment of the original amount (loan principal) plus additional interest (this compensates them for the risk in lending capital to your business as you may not repay the full amount).
Loans are repaid in a series of regular payments (installments) that clear the loan balance over time. The Present Value (PV) of payments must all be equal to the value of your loan.
Here's an example that demonstrates how this works:
Suppose your business takes out a loan of $100,000 (PV) for 4 years at a 6% interest rate. The loan stipulates that you will pay the due amount across 4 equal installments. This equates to $28,859 every year-end. The PV of the annual payments can be calculated using the annuity formula:
PMT = Periodic loan repayment = $28,859
i = Business loan interest rate per period = 6% per year
n = Number of loan repayments required = 4
PV = PMT x (1 - 1 / (1 + i) * n ) / i
PV = 28,859 x (1 - 1 / (1 + 6%) * 4 ) / 6%
PV = $100,000
Note: At the beginning of your loan, the PV of your loan installments are always equal to the amount of the loan (principal)
Calculating the Outstanding Loan Balance
As mentioned above, the PV of your loan installments are always equal to the amount of the loan. This means that as loan installments are paid off, the PV of outstanding loan installments should also be equal to the amount of the loan left owing, at that point.
The outstanding loan balance equals the PV of the remaining loan installments still due. You can use this information to compute your outstanding loan balance. For instance, after the payment of your first installment, the outstanding balance must be equal to the PV of the 3 remaining installments like the example below:
PMT = Periodic loan repayment = $28,859
i = Business loan interest rate per period = 6% per year
n = Number of loan repayments remaining = 3
PV = PMT x (1 - 1 / (1 + i) * n ) / i
PV = 28,859 x (1 - 1 / (1 + 6%) * 3 ) / 6%
PV = $77,141
Outstanding business loan balance = $77,141
To further check, you can perform another simple check. With every payment you make, the balance drops. For example, after your first payment, your outstanding balance is the principal amount + interest for the year - the first installment paid.
As a business owner, a business loan can be both a blessing and a challenge. Whether you are a start-up or an established business, additional funds are very often required. As long as you understand the commitment you are making to the lender, business loans can be successfully utilised to sustain and grow your business. As long as you are consistently dedicated to repaying and using your small business loans to improve your business, everything will fall into place - contributing to your ongoing success.
The above information has taught you most of what you need to know about unsecured business loans, small business loans, comparing business loans, interest rates and calculating business loans for your business. If you're thinking of applying for one, make sure to understand all this information so you are informed correctly as to which business loan suits your business best, and your requirements as a borrower.
Get in contact now to start your application for an unsecured business loan, or any other type.
