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Business Credit: What Types Are Available for SMEs

Small business owner sitting at a table looking at a computer

Business credit can be broadly defined as the funds a business borrows to operate and grow. But there are many forms of business credit to suit the specific needs of companies. These can range from a simple credit card to a large commercial property loan.

Here’s a short overview of the types of business credit and how they are used.

Secured vs unsecured finance

Before delving into the types of business credit, a basic point of differentiation is whether the credit is secured or unsecured. When a business loan is secured, it means that property or another asset is used as collateral for the loan. If a loan is unsecured, it means that there is no collateral attached to the loan.

Business credit card

Although not meant to be a long-term solution, this form of credit helps businesses make purchases with a short interest-free period to repay the balance. The challenge with using credit cards for business is the interest rate, especially if there’s an outstanding balance increasing over time. There are also annual fees, which can be high for cards with more features, such as frequent flyer points and business travel insurance. Here are some tips for choosing business credit cards.

Invoice finance

With this type of business credit, a company’s invoices are used as collateral for a loan. Typically, an invoice finance company will lend around 80% of the value of the outstanding invoices after making sure they are creditworthy. The loan is repaid when the invoices are repaid. With invoice finance, businesses can get the funds they are owed more quickly instead of waiting for accounts receivable to be paid. One of the main shortcomings is the cost of invoice finance. If a business continuously uses invoice finance, it will have ongoing costs associated with it.

Equipment finance

Businesses can use this specialised form of credit to purchase equipment. Equipment finance usually has a fixed term with regular payments. Sometimes the equipment purchased acts as security for the loan (called a chattel mortgage). Also, some forms of equipment finance include a lump sum balloon payment at the end of the loan term, with the option to refinance this at the end of the loan term. Find out more about equipment finance.

Business credit line

Also called a business line of credit or credit line for business, this form of business credit gives companies access to a predetermined maximum amount of funds. For example, if a business gets a $100,000 line of credit, it can draw up to that amount to cover cash flow shortages and boost working capital. It will only pay interest on the amount being used. So if the business is only using $50,000 of its credit limit, interest is charged on what’s being used. In addition to the interest, business credit lines have establishment fees and ongoing monthly fees. Learn more about the pros and cons of a business line of credit.

Business overdraft

This form of credit is like a business credit line, but it’s directly connected to the business’s transaction account. It’s smaller than a business line of credit and used to cover temporary cash flow shortages.

Commercial loan

This type of business term loan is for large purchases, such as purchasing a business or a commercial property. These loans are secured by the property or asset purchased and have a term from a few years up to 30 years. Since they are secured loans, the interest rates are lower than for unsecured loans. Find out more about commercial loans and how they work.

Bank term loan

This type of business credit has been the mainstay of small business lending. With a bank term loan, you get a term loan with regular payments. Bank term loans are secured by residential or commercial property. One of the main shortcomings of these loans is the cumbersome application process and the time to get an answer on whether you have been approved.

Low-doc and no-doc business loans

A low-doc or no-doc business loan could meet your business credit needs if you don’t have financial statements and proof of income for the previous two years. Low-doc and no-doc loans are secured by residential property. The main shortcoming of these loans is higher interest rates due to the increased risk to the lender. Low-doc and no-doc business loans are usually provided by specialist non-bank lenders. The time to get approved for these loans can vary from a few days to weeks.

Online unsecured business loan

This business credit option has been growing in popularity with the rise in technology. These loans have short terms, usually no longer than three years. Instead of requiring large amounts of paperwork, applying for unsecured online business loans is simple.

With Moula, for example, we use bank or accounting data to determine the ability to repay a loan. Additional information, including credit scores, enables us to make fast lending decisions.

Get all the details about unsecured business loans from Moula.

Also, check out our Business Loan Calculator for interest and repayment estimates.


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