There are a wide variety of business (commercial) loans available in the market. These loans are typically used to finance a business’s major capital expenditures (e.g. equipment) or its operating or expansion costs. Different types of business loans are available to suit different purposes. They can be complex and multi-faceted, as well as long term or short term. In this article, we’ll provide you with an overview of the most common types of business loans, along with their pros and cons.
What types of business loans are available?
An unsecured loan on the other hand requires no underlying asset to be provided as security. Unsecured loans therefore pose potentially greater risk for the lender, and as a result tend to have a higher interest rate.
Overdrafts and lines of credit. Both of these commercial financing options allow you to access additional funds for your business. An overdraft facility can be attached to your business banking account, enabling you to withdraw funds up to a pre-set limit even if you have no money in your account. A line of credit is a similar facility, but it’s a standalone account. Overdrafts and lines of credit can be useful for managing a business’s short term cash flow needs, but interest rates tend to be quite high and interest is usually charged as soon as any funds are used.
Equipment finance. There are three basic ways to finance the equipment you need to run your business:
1) By taking a secured loan using the equipment itself as collateral.
2) By hire purchase. Under this form of financing, the lender retains ownership of the equipment and allows you to use it. When you make your last repayment, ownership of the equipment transfers to you.
3) By leasing. Leasing is similar to hire purchase, except that there is no transfer of ownership at the end of the lease.
Debtor finance. Many businesses have money owing to them in the short term from their customers (e.g. they supply products on 30 day accounts). In these situations, you can use debtor finance to allow your business to receive the funds owing to you straight away. A lender will provide finance based on the value of your business’s debtors.
Cash advances. A business can be provided with a cash advance based on its regular monthly, quarterly or yearly sales. The repayments are based on a percentage of sales, rather than being a fixed amount like the repayments on a standard business loan. This form of business financing may be comparatively easier to obtain, but the interest rate charged is usually higher.
Business credit cards. These are similar to personal credit cards. They provide the business with a pre-set credit limit that they can use for everyday expenses. Like individual credit cards, they may provide an interest-free repayment period but typically charge high rates of interest if repayments are not made in full during this period.
As you can see, there are a variety of business loan options available. To choose the best one for your business’s needs, you need to consider the purpose of your finance, whether your needs are short or long term, and the pros and cons for the various options available.
When making an application, your chances for approval will be better if your business has a good credit history and you can demonstrate your ability to make the necessary repayments.
To help you navigate your business financing, Tomorrow Finance offers a business loan comparison and referral service. Working with Australia’s leading banks, we’re committed to helping Australian businesses find the right financing option.
To speak with our experts, phone 1300 754 562 or contact us online. There’s no obligation and our service is 100% free!Back « Applying for a small business loan.
Instantly compare home loans which suit your needs, and get the banks to work for your business.