If your small business is in need of a loan, we know that trying to find the right lender for your businesses needs and the right type of loan can be an extremely confusing and complicated process.
When your small business is applying for a loan, it is crucial for you to prepare and develop an in-depth business plan and to fully and transparently inform your chosen lender about the proposed venture. The information that is offered will help the lender to provide you with the right type of finance solution, along with any advice moving forward.
In order for you to make the right decision, you must first answer a few essential questions:
- How much does your small business need?
- What will the money be used for?
- How fast do you need to acquire the money?
- How long will it take your small business to pay the loan back?
- How long have you been in business?
- What is the current financial situation of your small business?
- How much, if any, collateral are you required to put forward for your loan?
By thoughtfully answering these simple questions, it will help to determine if your small business should seek to pursue a government-backed loan, a loan or line credit from a bank, or, a cash advance, line of credit or a loan from an alternative lender.
If you are unsure of what type of lender is best suited for your small businesses, then we have devised an in depth breakdown of what you must know about each type of lender before applying for your small business loan.
Conventional Bank Loans:
A conventional bank loan, either through a mortgage or a traditional loan, is similar to that of a homebuyers loan, however, they are not offered of secured by a government entity. Finances for a small business are most generally acquired through traditional bank business loans.
One of the biggest benefits of conventional bank loans for small businesses is that they, most often than not, carry low interest rants. Along with this, as no federal agencies are involved in the decision making process, the approval process can generally be much faster. However, these types of conventional bank small business loans typically involve considerably shorter repayment terms and often involve balloon payments. It is also much more difficult for small business to gain approval for these types of conventional bank loans. Even though in recent years, approval rates have increased and improved for small businesses, the big banks only approve marginally more than 20% of the loan requests that they receive. On the other hand, smaller banks approve fewer than half of the loan requests that they receive.
Alternative loan lenders are especially attractive to small businesses that may not have a particularly excellent financial history as their approval requirements tend to be much less strict and are much more flexible. Alternative lenders usually offer quick and straightforward online applications, typically can make approval decision in just a few hours and can provide small businesses with same day loans.
The benefits of working with an alternative lender are that your small business is not required to have an immaculate financial history, there are only very few restrictions for what the money can be used for, and, the most attractive of all, the loans can be approved almost instantly.
The disadvantage, however, is that the interest rates that are attached to these loans may be somewhat higher than those rates that are charged by the big banks. Alternative loan lenders for small businesses are much more willing to provide small businesses and companies with a loan, even if they do not outstanding credit ratings and this increased risk that these alternative lenders take onboard is simply reflected in the interest rates that they charge.
Conventional banks and alternative lenders will assess your small business’s risk profile when they are considering and revising your loan application. By understanding what lenders look for when they are considering small businesses that are at a high risk will assist you in presenting your business in the most favourable manner.
Generally, lenders will examine:
- The level and nature of the security of the loan. In other words, what you can offer to give them if you cannot repay the loan, also known as collateral.
- The businesses ability to make regular, and on time, loan repayments, also known as the cash flow risk.
- The businesses ability to eventually repay the debt in the allotted time, along with any other debts that the business may have obtained.
As a small business owner, you will need to be able to effectively assess the level of cash flow for the businesses specific circumstances. To a lender, one of the most important factors that is considered when offering a loan is the projected cash flow requirements of the business, as this is the amount of cash that is left after expenses that will repay the loan, not income. This will also exhibit you as an effective manager.
Types of Loans
Loans from conventional lenders such as banks, and alternative lenders offer the following loans for small businesses:
Working Capital Loans:
Working Capital Loans have been designed as only short-term, temporary money solutions for small businesses that require money in order to assist them in running their operations. Working Capital Loans are both attainable from conventional banks and alternative lenders.
One of the largest advantages of obtaining a Working Capital Loan is that it offers small businesses the capability to keep their daily operations running while the seek other processes to increase their revenue.
On the other hand, one of the downsides of obtaining a Working Capital Loan is that they often are attached to higher interest rates and have shorter repayment terms.
Both conventional banks and alternative lenders offer small businesses their own class of equipment loans. These equipment loans offer small businesses money for essential office equipment, such as computers or copy machines, or other necessary equipment such as machinery or tools.
Rather than making large, initial purchase of these items that must be paid upfront, Equipment Loans allow for the business owners of these small businesses to make fixed monthly repayments on these items.
Obtaining an Equipment Loan is advantageous for small businesses as they aid in preserving cash flow and as they do not require any large down payments and some of these items may receive tax write-off benefits.
One benefit of Equipment Loans for small businesses is they are considerably easier to obtain than other types of loans for small businesses as the equipment that is purchased can be used as tangible collateral for the loan.
Merchant cash advance:
Merchant Cash Advance loans are offered to small businesses based on the amount of their monthly credit card transactions. Small businesses can often receive a loan, or cash, advance of up to 125% of their monthly transaction amount.
The terms that are associated with repaying the merchant of a cash advance varies from lender to lender. There are some merchants that take a fixed amount from the business’s account each day, while other lenders will take a percentage of the sales that are made daily to the credit card.
The benefit of a Merchant Cash Advance for small businesses is that they are comparatively easy to obtain, the cash advance can be received in just a couple of days and that loan is repaid to the lender directly from the sales of the credit card.
One of the biggest downsides of Merchant Cash Advance loans is the expense that is associated. The interest on these loans can be as high as 30% per month, however, this number depends on the lender and the original amount that was borrowed.
Lines of Credit:
Similar to that of Capital Loans, lines of credit offer small businesses with the money that is required for their daily cash flow needs. This type of loan is not recommended for larger business purchases and can be available for a range of time spans, anywhere from as short as 90 days and as long as several years.
When obtaining a Line of Credit, small businesses only take the amount that they need and therefore only pay interest on what they actually use, rather than paying interest on the entire amount of the loan. This type of loan generally have longer repayment terms and give small businesses the ability to build up their credit rating, should they make the interest repayments on time.
The disadvantages of Lines of Credit are the added fees that are applied to small businesses that are at risk of building a considerably large amount of debt with this loan option.
Professional Practice Loans:
Professional Practice Loans have specifically been designed for those who provide professional services, such as those small businesses that are in the healthcare sector, offer accounting, services or legal, insurance and veterinary fields of practice. Professional Practice Loans are generally offered to small businesses to purchase a practice, obtaining new equipment or to refinance debt.
Franchise Start-Up Loans:
Franchise Start-Up Loans have been designed for entrepreneurs that require financing in order for them to open up their own franchise businesses. These Franchise Start-Up Loans are offered to small businesses by conventional banks and alternative lenders and the money can be used for working capital, to pay any fee associated with starting up the franchise, to purchase equipment or to build stores or restaurants.
Now that you have got the basics covered, you are more informed and ready to make the decision of which type of loan and provider is right for you and your small business.
Unlike other alternative lenders, LoanOne understands how Australian small businesses work and will provide small business owners with easy, fast funding solutions that will help your business grow.
The business loans from LoanOne are different to other, traditional business loans as the loans that we offer are flexible, paper-free and unnecessary extensive supporting documents are not required. We aim to help businesses who need loans fast!
LoanOne offers businesses:
- A fast and easy online application and a timely loan approval.
- The most secure technology that will ensure that any information that you submit online remains strictly confidential.
- A friendly customer service experience via phone or email.
- No hidden fees! We have competitive fees that are consistent with financial industry standards and are completely transparent.
With LoanOne, get fast, simple and safe loans!
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