What Make Business Loans Effective
Business loans are a type of financing specifically for commercial organizations. They provide businesses with adequate funds for various projects.
If you’re a startup or SME owner who doesn’t have enough personal money to fund projects, business loans are an effective way to get things done, helping your company stay afloat, expand or thrive.
Secured Vs Unsecured Business Loans
Business loans can be secured or unsecured.
- Secured requires collateral, which is any of your business property with monetary value. This can be the business entity itself, or other assets that your business owns, such as stock, vehicle, equipment and machinery. If your business fails to repay the loan, the lender can seize and sell the collateral to recoup their money.
- Unsecured allows your business to borrow money without pledging any collateral. This puts the lender at a high risk of not being repaid. To compensate for the risk, it typically requires a large down payment and a high interest rate.
Types of Business Loan
Business loans are classified into several types, each with different loan terms and purpose. The most common include:
- Traditional-Term Business Loan - Typically offered by banks and other large financing companies, it lets you borrow a large lump sum amount upfront, which you repay along with interest over a set period.
- Short-Term Business Loan - Often provides a smaller amount of money than a traditional business loan, you can borrow a set amount of capital upfront and repay it along with fees and interest over a short period.
- Merchant Cash Advance - You can borrow a lump sum of capital, which you repay with interest through a set percentage of your daily credit card sales.
- Invoice Financing -You sell invoices to a lender, who fronts you a portion of the invoice amount. The remaining per cent (usually 20%) is held until the invoice is paid.
- Equipment Loan - You borrow money to purchase business equipment outright. The equipment typically serves as collateral for the loan. You then pay back the total amount lent plus fees.
Business Loans Are Effective Financing for Businesses
You can use other types of financing to fund your business projects, like venture capital or even personal loan. However, they do not offer the many benefits that business loans provide for business owners. These include:
Complete Business Ownership
Alternative financing like venture capital funding can provide a significant amount of capital for your business and boost your business profile. However, you need to sell part of your company to venture capital investors. By doing so, the investors have the right to get involved in your business’s decision-making process.
With a business loan, on the other hand, you get adequate funds for business projects while retaining the full ownership of your business. You will not have to worry about other people directing your business strategies and management. However, make sure to repay your loan on its agreed loan terms. Otherwise, you might lose your business assets to repossession.
Convenience and Fast Processing
A lot of alternative business financing, including borrowing money from other people or starting a fundraising project, takes a long time to accomplish or requires a lot of negotiation before you can get the thumbs up. With a business loan, on the other, it’s very easy to get in touch with the lender and discuss your options.
Online lenders are especially convenient because a big part of the loan application process is done online. You just call their official business number or fill out an online form to get things started. This convenience is very beneficial for busy business owners who have a lot of stuff to attend to in one day.
Reasonable Interest Rates
Business loans generally offer favourable interest rates because of high competition. Countless finance companies, including banks, are luring customers with attractive loan deals. As a result, the interest rates and terms are usually reasonable than a personal loan and other financing options. Business loans from the banks and traditional financing companies usually have long terms and low interest rates.
Keeping All the Profits to Yourself
If you take money from investors to expand your business and make it profitable, you will need to share with them the profits you make. The more profitable your business becomes, the more money they get in return for their investments.
With a business loan, on the other hand, you don’t need to share with the lender the profits you make from business expansion. You simply have to return the money you borrowed along with its interest within the agreed loan terms.
Increased Revenue Without Using Too Much Working Capital
Lucrative business projects often require adequate funds to get started. If you don’t have enough working capital for the operational needs, these projects won’t take off.
A business loan provides the funds to get all your business endeavours accomplished even when you don’t have the working capital. Not only will the loan helps you increase revenue, but you will also establish a connection with the clients behind these lucrative projects. This helps you reach more clients and boost your business reputation, eventually leading to business growth and increased profit.
Business loans are tax-deductible in Australia
Businesses in Australia can claim tax deductions for all interest payments on business loans. The interest that is deductible from your tax bill includes those accrued:
- On business loans not paid by June 30
- From personal loans and personal credit card used to fund business, which can be claimed in the personal income tax filing
Maintain a good record of all the interest payments you made on business loans. You will need it as proof when claiming tax deductions at the end of each fiscal year. Your tax claims will be likely rejected if you can’t provide this record.
A Few Reminders Before Applying for Business Loans
When taking out a business loan to fund a new project, make sure that the potential return on investment of the opportunity outweighs the cost of the loan. If you get a commercial contract for $15,000 and you need to purchase a piece of new equipment that costs $5,000 to get the job done, you can take a business loan to buy the equipment. Getting a $5,000-loan that’s payable in 2 years to buy the equipment and paying a total of $1,000 in interest would give you $9,000 in profits.
Be careful with your calculations, however. Don’t let your excitement for the new project makes you underestimate the true costs of your investment and overestimate your profits. It is always smart to perform a revenue forecast when weighing the pros and cons of a new business endeavour. Decide based on hard numbers, not gut instinct.
Before applying for a business loan, consider the:
- Purpose of the loan
- Loan amount
- Interest rate
- Loan fees, down payment and charges
- Your business’ capability to make repayments
Aside from these factors, it is also wise to consult with finance experts to know the best loan product for your business needs.
Are you ready to take your business to the next level? Our Business Loan Specialists can help find the right financing to help you start a new project or take your business ideas to the next level. Call us on 1300 722 210 or fill out our Pre-Approval form.