Last editedMay 20222 min read
Taking out a business loan requires a lot of forethought, and deciding on the right lender for you is no light decision. To help guide you through the process of choosing the best loan option for your business, we’ve outlined some of the most important considerations to factor in when seeking a loan for business.
Top 6 considerations when looking for a business loan
Let’s delve into the most important considerations business owners should be aware of when looking for a small business loan.
1. Access to funds
One of the first things you should ask yourself is how you prefer to receive and access your borrowed funds. This will involve deciding whether you want your funds available in full upfront, or you prefer to receive it in instalments at regular intervals.
You may also want to look into options such as overdrafts, lines of credit or a fully drawn advance to help manage cash flow, purchase equipment or expand your business.
2. Loan terms
Another key consideration when it comes to small business loans, are the terms of the loan agreement and how that fits in with your capabilities as a business.
Upfront loans, for instance, are typically paid back at intervals with interest. The amount paid at these intervals will vary according to the terms of the loan. Consider how much you can realistically afford as repayments when finalising payment terms. However, bear in mind that the longer the loan term, the higher the overall cost due to mounting interest.
3. Security and collateral
Secured loans can cost you less than unsecured loans, however they involve putting up collateral, or other forms of security, in order to secure the loan. This security might include property or high value business assets.
These secured loans typically come with a lower interest rate, however in the case that you don’t repay the loan, your property or asset can be seized. Depending on how your business operates, this could effectively end your business prospects.
4. Fixed vs. variable interest rates
In Australia, two types of interest rates are available: fixed and variable.
With a fixed rate, the interest rate remains consistent throughout the duration of the loan. With a variable rate, the interest may go up or down according to the market. Naturally, a variable rate comes with more risk for businesses, but could pay off if interest rates go down. Using research and your own risk assessment techniques to decide whether a fixed or variable interest rate is right for your business.
Another thing to be aware of when taking out a business loan is the fees you may be liable to pay. Different lenders will demand different fees, but they can include application fees, monthly fees, early repayment fees and exit fees. Always make sure you’re fully aware of all fees involved when looking for a small business loan.
6. Documentation and plans
Lenders typically request a thorough business plan and other documentation from a business when coming to a decision regarding a business loan. They may request financial statements, cash flow forecasts and detailed financial history, among other key documents. This is so as to assess the risk of lending to a business.
Make sure you have all this paperwork in order and handy when making your appointment with a lender. Spending time organising and compiling these documents to make sure your financial picture is as transparent as possible can really pay off when it comes to getting approved for a loan.
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