Debt or equity small business finance?
Small business finance options can be divided into two categories: debt or equity. Debt finance is where you receive finance and need to pay the money back over a period of time. In addition to paying interest on the debt, some form of fee is usually charged as well.
With equity finance, you sell a share of your business to outside investors in exchange for funds. You can pay investor funds back to them if you wish to buy back the share in your business. You could also pay investors dividends based on the performance of your business. Equity funding is less risky for business owners but they won’t have as much control over the business.
Learn more about the different types of debt and equity finance.
Bank business term loan
A bank term loan is what usually comes to mind when people think of small business finance. A bank term loan could be from a few years up to 30 years depending on the circumstances. Unfortunately, this type of loan requires a large amount of paperwork and can take up to two months to get approval. Some businesses might even be required to submit a business plan with the application.
According to research conducted in 2017, banks rejected around 75% of term loan applications from small to medium businesses. Given this statistic, it’s understandable that many small companies would not attempt to get this type of loan.
Business overdrafts are a common form of finance used by small to medium enterprises. With a business overdraft, you run a negative balance on your regular business transaction account. You only pay interest on the money you use plus recurring fees. Business overdrafts are relatively easy to get if the business has been operating for several years and has a good record with the bank. They can be unsecured or secured, with secured overdrafts having a lower interest rate due to the lower risk to the lender. One of the downsides with business overdrafts is that they can be withdrawn at any time at the discretion of the bank. This means you could be required to pay the entire amount back at once, regardless of your financial situation. Find out more about business overdrafts.
Business line of credit
A business line of credit is similar to a business overdraft but it’s not automatically attached to a regular transaction account. With a line of credit, you get access to an agreed amount and only pay interest on what you use plus fees. Business lines of credit are for higher amounts than business overdrafts. For example, the minimum business overdraft offered by one Australian bank is $10,000 while the minimum line of credit is $50,000. Business overdrafts and lines of credit are suitable for solving short-term cash flow challenges but not recommended for long-term financing needs, such as buying machinery and equipment.
Business loan from family and friends
This is a common form of small business finance for new ventures. With these types of loans, it’s important to keep everything formal. This means to have an agreement in writing outlining how and when the loan will be repaid. Having an agreement in place beforehand can save relationships with family and friends when they provide small business finance. Learn more about getting business loans from family and friends.
This type of small business finance is used for purchasing specific machinery or equipment. These types of loans have terms between two and five years. While the loan is being paid, the equipment serves as collateral, so the interest rates are competitive compared to other loans. Find out more about equipment finance.
Buy now, pay later as business finance
Buy now, pay later finance has grown in popularity among consumers. It’s also a new way for small businesses to get unsecured finance. With Moula Pay, for example, you can purchase goods and services for your business. Once approved for the amount you need, you get three months to pay without any interest charged. After the first three months, you get nine months to repay the balance charged at an interest rate of 3 per cent per month.
Find out more in Buy Now, Pay Later for Business: What Are the Benefits?
Unsecured business loans as small business finance
This form of small business finance has been growing in popularity in recent years for many reasons, including to manage cash flow and improve working capital. Advanced technology enables online lenders to safely and securely analyse the finances of potential borrowers and quickly make a lending decision. For example, with Moula, a business owner can apply online for a business loan and the application can be completed in under 10 minutes. Based on the information provided, the potential borrower will receive an answer within 24 hours. As a short-term loan, the term of an unsecured business loan can be between six and 24 months. With loan amounts from $5,000, this type of loan can be classified as a business microloan if the loan is under $50,000.
Making a decision on small business finance
With any small business loan, you will want to check the terms and conditions of the types of finance before making a decision. Read the fine print to understand all the fees and charges that come with the business loan. Also, make sure you will be able to make the payments even if business conditions change. Having all the facts and knowing what the business loan will cost will help you make the right business decision.
Check out our business loan calculator for an estimate of business loan principal and interest repayments.