Whether you’re an entrepreneur or an already established large corporation, having the right loan can make all the difference in your continued success. When used responsibly, business loans can keep your company’s head above water, or preferably, help you scale.
In this article, we’ll help you choose from the 6 most common loan types and why you should use them.
1. Unsecured Business Loan
As one of the most popular small business loan options, an unsecured business loan is especially useful for entrepreneurs that don’t have collateral.
Since businesses don’t need to back their loan up with securities, like homes, cars, or other assets, the approval process is immediate. However, some banks may ask you to provide a personal guarantor, who would become responsible for your loan if you can’t pay it.
Banks see unsecured loans as riskier, meaning you’ll be restricted in how much you can borrow. Most Australian unsecured business loans range from AUS $200k-$500K.
2. Secured Business Loan
Unlike an unsecured business loan, a secured loan requires collateral, usually in the form of an investment or straight cash. Most banks don’t cap secured loan amounts for 15-25 year loans.
Although larger loan amounts are available and you can borrow for many years, businesses are expected to take on the bulk of the risk. If you default on your loan, you could lose your family loan or car. It’s important to shop for a low interest rate and have a repayment plan in place.
3. Line of Credit
A line of credit is beneficial to businesses that need ongoing access to finance. Similar to a credit card, a line of credit allows you to withdraw any amount you want up to an approved limit.
Businesses won’t have to pay interest on funds they don’t touch, which will lower your loan costs significantly. Companies that experience unpredictable cash flow may want a line of credit handy during off-season, a sudden economic downturn, or a seasonal shut-down.
If you want a line of credit, be prepared for drawdown and line fees. You’ll be charged extra every time you withdraw from your loan or for keeping the line of credit active.
4. Equipment Loan
Equipment loans are specialized and designed to finance business assets, like agricultural machinery, construction equipment, cars, and electronics.
Unlike other loans on this list, equipment loans don’t offer you the flexibility to pay for other items you’ll need for your business. Only get an equipment loan if you’re facing difficulties paying for a replacement or equipment upgrade out of pocket.
5. Buy Now Pay Later (BNPL)
Buy Now Pay Later loans to provide individuals, and businesses access to as little or as much capital as they need, but you won’t be charged interest on what you withdraw; just a flat fee.
Borrowers will pay back the amount borrowed in fixed installments along with an additional monthly fee, which is typically AUD $10-$15. If you choose to extend your repayment schedule after signing off on the loan, you’ll be charged a small percentage of what you owe.
While the approval process is fast (as little as 24-hours), the fees can become quite pricey. Still, if you need money quickly and don’t mind paying a monthly fee, you’ll gain a lot of capital.
6. Invoice Finance
Slow-paying customers are often the bane of every small business’s existence. An MYOB survey determined that 77% of companies are impacted when a customer doesn’t pay.
Thankfully, invoice financing can give you access to the capital that’s tied up in an unpaid business invoice. Lenders will provide businesses with 85% upfront, then send the rest later to limit the amount paid in fees and charges. What’s more, you won’t need to put up collateral.
