How do I compare different business loans?
Often when comparing loans, people jump straight to the interest rate and don’t go much further. In reality, though, there’s a lot more to comparing business loans. The interest rate can even be misleading if you don’t account for factors like fees and different loan types.
What are some of the elements that you should be looking at when you compare one small business loan to another?
- Interest rates – The interest (shown as a percentage added to the loan total each year) is certainly a good place to start. A difference of a less than one percentage point can mean thousands of dollars difference in the cost of a loan over a number of years, so finding a low rate is important. However, you need to remember that different types of business loans – such as secured and unsecured loans – can often have quite different interest rates to account for things like risk levels. You need to compare apples with apples to acquire good information.
- Fees – In addition to the interest, almost every lender charges fees on a loan. These could be initial set-up fees, regular ongoing fees for maintaining the account or occasional fees for things like late payments or making extra payments to reduce the loan amount. These can add up to quite a significant sum over time, so you need to factor those costs in as you compare loans to look for the most affordable option – finding the cheapest business loan in Australia comes down to more than just interest rates.
- Interest type – Not every loan has the same type of interest. Some automatically come with a variable interest rate that changes over the course of the loan (allowing your business to take advantage of interest rates falling), while some might have an option of a fixed rate, which stays constant and allows for more effective budgeting. Some can even do a mix of both, allowing you some protection against rising interest rates and some benefit if they go down. It’s worth knowing, though, that many fixed-rate loans revert to variable rate after a set time.
- Additional features – Other aspects of the loan can also change its value to your business, often without affecting the cost of the loan in any way. For example, a business loan that allows early repayments free of charge and has a redraw facility is very handy – it enables you to pay the loan off faster if you have the finances available, but also allows you to draw that surplus money back out again if you find yourself in a season of shortfall. That’s a very useful option to have.
- Loan term – Different lenders will have different time frames when they want to be repaid by, which can change from loan to loan. A short-term loan will have higher repayments, but you’ll pay less overall, while the reverse is true for a long loan. Many lenders will give you a choice, allowing you to pick the best option for your situation. Short-term loans (like unsecured business loans) might have a term of only a few months, but it normally won’t be longer than one to three years. By contrast, a long-term secured loan can have a term of up ten years, or more in some cases.
- Loan amount – Not every lender offers the same amount and some might not be willing to offer the amount you want. For example, a lender might potentially offer up to $300,000 (for an unsecured business loan) to one customer, but only $80,000 to another customer with a less established business and a lower credit rating. This might be a deal breaker, although if their other terms are particularly good that might leave you with a difficult choice. Conversely, a loan might be ruled out as an option for your business due to the minimum amount being too high.
- Repayment flexibility – While many loans have monthly repayments, some lenders have more flexibility – many offer fortnightly or weekly repayments and some can even work with businesses that have sporadic or seasonal cash flow. This means you can pay in a way that works for your business, which can be pretty handy.
If you’re on the hunt for a business loan, why not start your search with Savvy? You can compare small unsecured business loans from top Australian lenders all on the same page, and find a loan that’s suited to your business.
What kinds of business loan are there and how do they compare?
We have plenty of choice when it comes to both lenders and types of loan in Australia, with a loan for almost every occasion, but that can make things a little confusing when comparing business loans to find the best choice. Realistically, you need to start by working out what type of loan is best suited to your business and situation. Once you’ve done that, you can start comparing specific loans and lenders for that type of loan – looking at fees, interest rates, features and the rest.
So, what are some of the types of business loan on offer and how are they different to each other?
- Secured loans – These are business loans which include some kind of asset used as collateral for the loan. These can also include finance types such as business mortgages and chattel mortgages. Because the asset provides the lender with more security, these loans generally have significantly better rates compared to other business loan types (such as unsecured loans). However, you need to have a significant asset you’re willing to offer as collateral for these to be an option.
- Unsecured loans – These are business loans that don’t have collateral or a deposit, although you can still purchase business equipment or anything else with these loans. They’ll generally come with higher interest rates, but the trade-off is they’re much easier to get approval for and don’t normally require any deposit or collateral.
- Business credit – Business credit, although technically a kind of loan, works quite differently to more conventional loans. It includes things like lines of credit, business overdrafts, and business credit cards. It normally has quite a high interest rate, but the advantage of business credit is that you can withdraw and repay it whenever you need and only pay interest on the amount you’re using. You need to be careful, though, as overusing credit can impact your credit rating.
- Specialised loans – There are also other types of more specialised loan product on the market, such as a merchant advance or invoice financing. These can have unusual types of collateral, or methods of making repayments, meaning they’re tricky to compare to conventional loans as the numbers work quite differently. Invoice finance, for example, is actually giving you money that someone else owes you, rather than borrowing money from a lender that you repay over time.
The type of loan suits your best will depend on your business and its needs. Once you’ve established what kind of loan is best for your situation, there’s nothing to stop you comparing your options. Just make sure you’re comparing like with like if you want useful answers.
What factors affect my business’ borrowing power?
Although it’s important to compare lenders based on their respective borrowing ranges, you may not ultimately be approved for the amount you want. This is because lenders calculate borrowing power based on a variety of factors which pertain to your business. It’s important to keep these in mind when considering what you might be able to borrow. The key factors which can impact your business’ borrowing power include:
- Revenue: the more your business earns, the larger the repayment it’s likely to be able to support
- Expenses: it’s not just what it earns but also its ongoing costs which will help inform what you can afford per instalment: higher expenses can lead to lower available revenue and less available funds to pay off your loan as a result
- Liabilities: in the same way, any outstanding debts will eat into your business’ borrowing capabilities
- Assets: if your business owns several assets, it’s likely to be able to borrow more than one which doesn’t have any on its books
- Credit score: a strong recent record of repaying debts will boost your chances of approval for a larger loan, but a poor score could stimy them
- Expected growth: if lenders can see that there’s significant potential for your business to grow over the coming years, such as via a business plan supplied in the application process, you may be able to borrow more
How can I save money on my business loan?
When comparing business loans, it’s important to keep an eye on various cost factors to help you choose not only the most suitable loan but the most affordable for your business. By following some (or all) of the below methods, you can maximise your chances of securing a cheaper overall loan by the end of your repayment cycle. Some key factors which can impact the cost of your loan for the better are:
Repaying your loan over a shorter term
By selecting a shorter loan term, your business is liable to pay less in interest and fees than it would be over a longer term (in most cases). This is down to how loan costs are calculated: with a more rapidly decreasing outstanding debt, the interest you’re charged will also decrease at a faster rate. On top of this, a shorter term can also lead to decreased occurrences of annual fees being charged. Because longer loan terms chip away at your debt more slowly, you’re far more likely to pay more under this sort of arrangement. However, above all else, it’s important your business remains comfortable covering its repayments and doesn’t overreach and put itself at undue risk of default or stress.
Paying above the minimum wherever possible
By that same token, taking any opportunity to contribute extra on top of your standard repayments will help you ensure your loan is paid off more quickly and your overall debt is reduced. It’s important to not underestimate the importance of making additional repayments across your loan term: on a $75,000 loan over three years at 5% p.a., contributing an extra $100 per week would save you over $1,000 over the course of the agreement and shave six months off your total loan term. Paying your loan off as quickly as this can also boost your chances of approval for lower-rate finance in the future.
Applying for a secured business loan
If your business has an asset which can be used as collateral for a loan, such as equity in a commercial property or expensive equipment such as machinery, a secured loan can give you access to finance at a lower overall cost. Because these loans are seen as safer from a lender’s perspective (given that there’s a tangible asset which can be used to recoup any potentially lost funds), they typically come with lower interest rates and fees overall.
Types of business loan
The most common type of business finance, unsecured loans enable businesses to access the funds they need without attaching an asset to the loan as security. Some lenders may allow you to borrow up to $500,000 and, because there's no collateral, offer same-day approval.
If your business already owns valuable assets, such as property or expensive equipment, you may choose a secured business loan instead. These loans may increase your borrowing power beyond what an unsecured loan can offer and, crucially, typically come with lower interest rates.
Business loans don't always have to be worth hundreds of thousands. If you're operating a small business and need a boost to help you keep on top of your expenses or expand your company, you may be able to take out a loan starting from as little as $5,000 and unlock further capital.
Just because you don't have all the required documents for a standard business loan doesn't mean you're out of options. Low doc finance enables you to use alternative documentation, such as other business financials, in the application process to access the funds you need.
A commercial line of credit allows you to draw from your loan account whenever your business needs access to their funds, instead of managing a lump sum and repaying it like a regular loan. This can add flexibility to your finance arrangement, providing money when you need it.
Invoice finance presents another option to business operators looking to free up cash through outstanding invoices yet to be paid by their customers. Your invoice finance can either be invoice discounting or factoring, which present different options when it comes to your invoices.
A common reason for seeking out a loan is to purchase commercial equipment. You can do this either with an unsecured arrangement or one with the equipment itself as collateral, with the latter potentially increasing your borrowing power and lowering your interest rate.
With this finance, when your business purchases product, your supplier provides an invoice which you send to your financier and pledge to repay by a set date. From there, your supplier sells the invoice to your financier at a discounted rate, while you repay the full amount to your financier.
Under an inventory finance agreement, your lender pays your supplier directly for inventory, which allows it to be signed off and sent to you. From there, you can pay off your debt within a pre-determined period to your lender, which may be longer than the regular debtor period.
An overdraft facility is attached to an existing financial account belonging to your business, such as a transaction or savings account, and enables you to borrow up to a set limit after the account’s balance reaches zero. These overdrafts are repaid with interest, but only on what you use.
You may simply be in a position where your business needs a boost to its cash flow. If this is the case, there’s a range of stop-gap solutions which may be suitable for your situation, from standard unsecured loans to specialist cash flow loans, invoice finance or even an overdraft.
Why compare business loans through Savvy?
The pros and cons of business loans
Access the funds your business needs
A business loan can help your business cover its costs or make purchases it may not otherwise have been able to make if its funds are tied up elsewhere.
No deposit or security required
There’s no need for you to put any cash or assets upfront as part of the agreement if you don’t wish to. Business loans are available unsecured and can fund 100% or more of your chosen purpose.
Pay at your own speed
These loans enable you to choose a repayment term and schedule which best suits your needs as a business, enabling you to pay it off quickly or manage it over a longer period.
Free early repayments
One of the key benefits of these loans is that, should your business be in a position to do so, you can pay above the minimum required amount for each instalment and pay it off sooner.
Pay more overall
Of course, the drawback of taking out a loan is that you’ll be required to pay interest and fees along with each repayment, albeit commercial borrowers can claim interest as a tax deduction.
Not available to all businesses
Although there are loans available to most businesses, conventional funding won’t always be open to smaller, newer businesses due to trading and turnover requirements.
What will help me get the best business loans in Australia?
Your credit rating can have a big impact on what sort of terms a lender might offer you. Great credit can unlock some of the best rates on the market.
How established your business is and how well it’s doing can make a difference to your loan rates – an established business is a safer bet for a lender. Keep good records to show if your business is doing well.
A secured loan always gets better rates than one with no collateral. Even a decent deposit can make some difference to a lender and potentially improve your loan offer. Banks like to know you’ve got something invested in this.
In Australia, business lenders offer vary a great deal. With everything from big banks to small online lenders there’s a lot of variety in the market. It always pays to shop around and compare your options to find the best terms.
Frequently asked questions about comparing business loans
Helpful business loan guides
Still looking for the right finance for your business?
Explore a range of business loan options suitable to your financing needs and apply online through Savvy today.