There are many different small business lenders in Australia, all offering a bunch of different small business loan types. That makes for a lot of prospects to sort through when looking for the right option for your small business. Other articles that on this blog go into more detail about loan specifics, but this article will give you a quick run-through of what to look for when you’re first choosing your small business loan:
How You Want to Access Your Funds
Whether you need to access your funds on a semi-regular basis or if you need funds up front and in full will determine what kind of a small business loan you will need. An overdraft or line of credit is designed to help with cash flow while a ‘fully drawn advance’ is an upfront loan designed to help buy new business equipment or expand your business.
Upfront loans are paid back in regular intervals of a portion of the loan plus interest. The actual repayment amounts will depend on the term, or length, of the loan. To figure out what kind of a loan term is right for your business you will have to calculate how much you can afford in in repayments. Essentially the longer the loan term, the less you will have to pay in each instalment but the overall interest cost will be higher. You can estimate these costs using a business loan calculator.
Secured loans can be a bit cheaper than unsecured business loans, however, they also require you to put up collateral, or security, for the loan. This can include various types of assets, including property or business assets. While secured loans will have a lower interest rate, be aware that the lender can seize your property or asset if you can’t pay on time. For this reason, many small businesses aren’t comfortable putting up their house as collateral for a small business loan in Australia. Many other small businesses simply don’t own an asset or property that can be used as security.
Fixed vs. Variable Interest Rates
There are two kinds of interest rates offered on small business loans in Australia: Fixed and Variable. A fixed rate is, as it sounds, a set interest rate that remains the same throughout the term of the loan while a variable interest rate changes with the market. With a fixed rate, the lender will bear the risk if the interest rate moves, while with the variable rate you will accept this risk. With a variable rate you could end up paying less over the term of the loan, however, you also run the risk of the interest rate rising beyond your business’ ability to pay.
Different lenders will have different fees for their small business loans. These can include establishment or application fees, ongoing monthly fees, early repayment fees, exit fees: the list goes on. While one lender may offer a lower interest rate, you could be paying more overall in loan fees when compare to another lender with a slightly higher interest rate. Including any kind of hidden loan fees when comparing monthly repayments will give you a better idea of the true cost of the loan.
Some lenders (mostly banks) will ask for detailed business plans when applying for small business loans in Australia. These documents should include financial statements, such as a profit and loss statement, cash flow projections and a basic financial history at the least. Some lenders (Moula included) won’t require this kind of documentation as part of the loan application; instead, they’ll use business and accounting data to assess the risk of lending to an existing business. You can use a Cash Flow Forecasting Template as a guide if you’re unsure as to what should be in the plan.
A New Way to Compare Small Business Loans in Australia
It can be challenging to compare small business loans in Australia. This is because financial institutions, including small business lenders, have presented loan pricing in different ways. In early 2019, Moula and a small group of online business lenders introduced SMART Box™, a simple way to compare small business loans in Australia. In a nutshell, SMART Box™ is a document that includes key loan elements and pricing metrics. These include the Loan Amount, Disbursement Amount, Total Repayment Amount, the expected Loan Term, Repayment Frequency, Total Cost of Credit, Average Monthly Payment, Total Interest Payment (TIP), Annual Percentage Rate (APR), Cents on the Dollar, and Factor Rate.
Using SMART Box™ makes it possible to easily company small business loans offered by online lenders in Australia. Find out more in What is SMART Box™ and How Does It Help Business Owners?
If you decide to apply for a business loan online, this tool will help you compare your finance options, including any fees and charges connected to your loan.