Business Lending: How to Choose the Right Option

If you are a business owner, the many forms of business lending can seem overwhelming. A good place to start is to determine the reason for your business finance. The reason for the loan will influence the best finance option. It could be to grow your business, improve cash flow, purchase inventory or buy equipment.

For improving cash flow or purchasing inventory, for example, a business overdraft, line of credit or unsecured business loan could be the answer. These types of finance can usually be obtained quickly to meet short-term cash flow needs. Although the interest rates for short-term finance can be higher, the overall interest paid could be lower due to the shorter loan term.

If the reason for the business loan is to purchase commercial property or a competing business, a longer-term and higher loan amount will be needed. For instance, commercial loans are for larger purchases and have long terms of up to 25 years.

Another factor that will influence your choice of business lending is the interest rate. For example, if your small business loan is secured by collateral, the interest rate will lower than in unsecured business loan. While a bank term loan will come with a lower interest rate, the loan term will be longer than a short-term loan so you can end up paying more interest overall. So the lower interest rate loan will not necessarily be the best choice for you. For instance, if you need funding fast to take advantage of the exceptional price for inventory for a limited time, you can get an online unsecured business loan quickly. If you approach bank lenders for a term loan or other bank finance, you would have to wait and could miss out on the opportunity.

The interest rates on credit cards are higher than many other financial products. But if you use credit cards wisely, and pay off the balance during the interest-free period, the can be an effective form or business lending.

You will need to choose between secured and unsecured business lending. With a secured business loan, you pledge collateral, such as a residential property, as security for the loan. If you don’t have suitable collateral, you will need to choose unsecured business finance.

Various forms of business lending are available in the form of fixed or variable interest rates. If you choose a variable interest rate, make sure you will be able to make the payments if the interest rate goes up.

Your finance requirements will determine the loan term, which is the duration of the loan. If you are making a large purchase, such as property, you will need a long loan term. To meet a cash flow shortage, a short-term loan will be more appropriate. Some forms of business lending, such as business overdrafts, lines of credit and credit cards, don’t have a limited term.

Examples of loan terms include:

• 6 months to 2 years for unsecured business loans
• 1 to 10 years for bank term loans
• 1 to 5 years for equipment finance
• 10 to 25 years for a commercial loan.

Serviceability is your ability to repay the loan. When seeking finance, you will want to be sure you can make payments as required. Some types of business lending, including business overdrafts and lines of credit, offer more flexibility in repayments as you can repay when your cash flow improves. Other types of loans require that you pay principal and interest each month. Before taking out a business loan, carefully consider whether you can make the loan repayments.

If you are seeking business lending to grow, you will want to consider your return on investment. Make sure the return you get makes it worthwhile. To calculate the potential return on investment on purchasing inventory, marketing and equipment, check out the Moula ROI Calculator.

It’s important to know all the details when choosing a business lending option. Some forms of business lending include hidden fees and charges. So read the fine print, including the terms and conditions, to ensure you won’t get any negative surprises.  

For a comprehensive overview of business loans, see The Complete Guide to Business Loans.