How do you choose the right loan for your business needs?

You're at the point in business where you think it's time to look at financing, but there are so many different types of loans on the market, that often it is overwhelming to know which one you need for your business, now and in the future. When each loan comes with its own set of features, terms and conditions it can be a struggle to know the difference between the loan types, so how and where do you begin picking the right one?

Any lending has an impact on your business. So it's really important that your business gets the right loan for your needs as it can affect future borrowing capacity, the total costs of funds including interest and fees, and your ability to make repayments and expand in the future.

To determine which loan is right for you, carefully consider what your business needs the loan for, what repayment terms you can handle and how much money you need. On top of that, one key factor to keep in mind is your end goal, and what you want your future circumstances to look like. What is the point of getting this funding? Is it to buy a new shiny piece of equipment, or perhaps to help with short term cashflow issues?

Keep reading below to see what loan might be right for you; we have broken down the difficulty by outlining a few of the main types of loans your business may need, and the things you should consider when looking at business finance.

Commercial Loans

Generally speaking, a Commercial Loan refers to a loan for the purchasing of commercial property (real estate). This loan takes security over the building as part of the funding arrangement, otherwise known as a mortgage or a charge against the title. A Commercial Loan isn't specifically business finance as it can be used by an individual, a company or trust to purchase commercial assets.

This could be for the purchase of:

• Warehouses
• Factories
• Office spaces
• Retail outlets
• Industrial sites
• Residential unit blocks
• Restaurant spaces and many more

Some people find Commercial Loans appealing as they are a secured loan to bricks and mortar. A lot more tangible than an unsecured facility.

Business Loans

Business Loans are the most common finance option for trading entities and allow you to borrow a lump sum money for business purposes. They come in many different shapes and sizes, and offer flexible options with many products to choose from that cater to your specific needs.  

Whether you are a new business owner, looking to expand your business or need help with your cash flow, there is a Business Loan suitable to you.

A Business Loan could help you:

• Purchase additional stock and supplies to meet demand
• Hire new staff
• Make renovations to your space
• Implement marketing tactics for continued growth

Business Loans can be for short term or long-term financing and can either be secured or unsecured.

A secured loan is one that is guaranteed by an asset - a property. Sometimes this is your house. Unsecured loans do not require any security, but due to this the interest rate will typically be much higher than that of a secured loan.

Line of Credit (LOC) or Overdraft

A Business Line of Credit or Overdraft is a type of flexible business finance that allows you access to cash, up to a set amount predetermined by the lender.

Like a credit card, a Line of Credit charges interest only on the money that you withdraw. Most Lines of Credit are revolving, meaning you can use a certain amount, pay it back and then use that portion of the loan again; while others may end after you've spent and paid off the full credit amount.

You can access funds from a Line of Credit whenever you need them as it is a separate facility, where as an Overdraft can only be accessed once your account goes into the red or debit, as the facility is linked to your trading bank account. As the name suggests, it allows you to draw "over" zero.

Businesses use these loan types to borrow on an as-needed basis instead of taking out a fixed loan.  

This type of loan helps when you:

• Have unexpected business expenses
• Pay small regular expenses
• Need assistance managing cash flows
• Want to be consistent in payments and smooths out variable monthly income and expenses
• Have emergency expenses

An example of how this type of loan may benefit you, is if you are self-employed, your monthly income is irregular, or you experience delays between performing the work and collecting the cash known as "end of month EOM" terms. You may generally rely on credit cards to deal with these cash flow shortfalls; however, a Line of Credit or overdraft could be the cheaper option. It typically offers lower interest rates and more flexible repayment schedules.

Debtor Financing or Trade Facility  

Debtor Finance turns unpaid invoices into quick and efficient cash flow. Unlike traditional loans that use bricks and mortar as collateral security,Debtor Finance allows you to borrow against the value of your unpaid invoices and uses your unpaid invoices as security. In effect, you get a short-term loan (based on your invoice term) to reinvest back into your business and keep growing.

Many businesses, especially when selling to other businesses, offer invoice payment terms which give customers an extended period of time to pay for products or services. This payment period is usually 30 days but can range from 7 to 90 days. The costs of accounts receivable can become significant and Debtor Financing can be a way of fixing that periodic cash flow problem.  

Typically, Debtor Finance suits those businesses who have a long lead time between purchasing their assets and the final invoice when the sale is completed. Industries such as transport, manufacturing, wholesale businesses, construction and trades, the fashion industry and recruitment and labour hire are good examples.

What benefits does a Debtor Finance facility offer?

• Small flexible line of credit - the loan increases as your sales increase
• Ability to purchase in bulk and receive supplier discount
• Receive cash flow using the strength of your Accounts Receivable
• The product is tailored to your overall situation and business needs
• Convenient and flexible cash access as required (e.g. for seasonal fluctuations)
• Confidently able to accept larger contracts because of healthy cash flow
• Ability to reinvest immediately back into the company for increased growth in sales and other business improvements

Debtor Finance can provide your business with a unique financing structure that will enable business growth by allowing you to focus entirely on operating the business whilst maintaining a sufficient cash flow. You can eliminate the stress resulting from late payments and avoid the resulting adverse effects on your business.

Equipment Finance

Equipment loans are exactly what the name suggests- a loan that�s purpose is for purchasing equipment and or assets for your business.  

An equipment finance loan can allow you to purchase new or used:

• Vehicles and Yellow Goods (for commercial use)
• Specialised machinery - farming and agricultural
• Medical and dental machinery
• Restaurant ovens, cookware, chairs, tables and catering supplies
• Internal fit outs and furniture
• Office equipment  
• Computers and other technologies
• Manufacturing and industrial equipment, and more

Interest rates for these types of loans can commonly vary dramatically so it pays to shop around. (We can help you with this!!!) They are also typically secured against the asset that you acquired. This can be beneficial because you're not required to put up security of your own, and the interest rate is quite reasonable. But if you don�t meet repayment deadlines, the equipment or asset could be repossessed!

At different stages during your business growth, you will often need to purchase, replace or upgrade various kinds of equipment to keep your business flourishing and have maximum productivity and efficiency. Consider an Equipment Loan here!

With these loans we've discussed above and all the numerous other types of lending out there, it can make knowing which one is the right one for your business a tricky process.  When it comes to choosing which loan may be best, avoid the worry and confusion and simply contact us at SFE Loans_today for a hassle-free chat about your finances and business needs.

Not at the loan stage just yet and requiring help with your Business Plan and Strategies? Our partners at Helix Planning offer comprehensive business strategy consulting services across all aspects of a business's operations and can provide a measured and personalised strategy to achieve better results and growth for your business.