Some business loans have a bad reputation. They are usually very easy to access and come with high interest rates that have in the past caught out many borrowers. However, when measured like-for-like with traditional financing options and considering the short term obligations and opportunities that face most small businesses, a business loan may very well be the best option.
Here’s a collection of reasons why they might make sense for your business:
Business loans give you quick access to funds when you need them.
Perhaps your business runs on hard times and needs quick access to funds to meet sudden or unexpected expenses. Or perhaps an opportunity presents itself that requires more liquidity than your business currently has on hand. Applying for a traditional bank loan could take weeks and if there are any discrepancies in your application (or worse in your credit history) could take even longer. The reality is that some small business expenses need to be paid yesterday! And in these situations a business loan (which can often see you with cash in hand within 24 hours) can be very convenient.
You pay less overall
Woah woah woah, hold up! The repayment amounts on an unsecured business loan are normally higher than traditional business finance, not lower? Yes it’s true the interest you pay on an unsecured business loan will be higher, but that does not mean you will pay more. Take this example:
You borrow $50,000 from any of Australia’s major lenders to purchase a new piece of equipment for your business. The rate will vary but for commercial equipment you can expect an interest rate of around 9%, and let’s say you take the loan over a 10 year term. By the time you have made your last repayment you can expect to have paid around $25,000 in interest.
Alternatively, you approach a business loan lender for the same sum of $50,000. You have some cash on hand but don’t quite have the full sum that you need to pay for your new piece of equipment up-front. If the loan is taken over a period of 12 months, you would pay back around $9,000 in interest. In other words the longer term often outweighs the lower interest rate, and makes a business loan more affordable overall.
The right option for your business will depend on your circumstances. If you have absolutely no cash on hand it may be difficult to pay back a loan within 12 months. But if like many small businesses you find an investment just out of your reach, the savings are there to be had with business loan lenders.
You can improve your credit score for future loans
One of the largest inhibitors to growth for many small businesses is an inability to access finance due to low cash flow or a poor credit score. One of the easiest ways to improve your credit score is to apply for a smaller, more manageable business loan that reflects your businesses cash flow. This will in turn improve the likelihood that you will be approved for larger loans in the future.
Short term depreciation of assets
Taking our previous example, imagine you operate a window cleaning business and take out a loan to purchase new ropes, harnesses and safety equipment. With regular use, it would not be uncommon for much of this equipment to become obsolete within a year. With a business loan, you would be able to structure the repayments to the useful life of the product, while on the other hand with a long term loan you would be required to continue making payments even after the equipment has stopped adding value to your business. With the exception of the additional interest you might pay with a loan taken over a longer period, it does not make too much difference whether you pay now or later, but if possible it would certainly make good business sense to limit long term liabilities.
Business loans are usually far more flexible than traditional long term financing options. For example, many business lenders will allow you to make repayments only on the days when your business is operating so you’re not required to make a payment when your business isn’t bringing in any revenue.
Ultimately the financing option you choose will depend on your business’ circumstances, such as your ability to make repayments or the purpose of the loan. The surest path to success is to spend some time researching the options available with different lenders and ultimately pick the loan that best suits you.
For more information on how a business loan might add value to your business, visit the Reckon Loans page here: https://www.reckon.com/au/loans/