Applying for any type of loan, whether for personal or business purposes requires a certain amount of forethought and planning. Not only is it important to compare the options out there, it’s essential that you understand what’s on offer – and what will work best for you.

When it comes to comparing and applying for business loans, Credit World makes the whole process as simple as possible. Borrowers can compare the options side-by-side, taking note of the various features on offer, to work out how which option will best benefit their business.

But of course, before you get into the business of comparing business loans, you need to know what to look for. We’ve put together the following need-to-know on business loans, so you can learn when you should consider applying, what you’ll need to apply, how to weigh up the options, and how to make the most of the loan.

What is a Business Loan?

Just like a consumer loan, a business loan is a lending product offered by financial institutions to provide borrowers with a specified sum of money. With fees and interest applied, the loan can provide upfront or ongoing funding to the borrower, which will then be paid back to the lender over an agreed period.

Again, like a consumer loan, business loans can offer borrowers a variety of features and options. Some lenders may provide tailored lending solutions to businesses, helping them get the business loan they need, under conditions that are favourable to the way their business works day-to-day.

Comparing business loans may allow businesses to find secured and unsecured options, with fixed or variable rates of interest applied. Flexible repayment options may also be available, offering the choice of principal-and-interest or interest-only repayments, with or without a lump sum balloon payment at the end of the loan term.

Repayment terms may also be flexible, allowing borrowers to make repayments weekly, fortnightly, monthly, quarterly, half-yearly, yearly or seasonally. Depending on the lender, the business loan may have a specific minimum loan amount, with variable loan terms available, usually ranging from one to ten or fifteen years.

Access to funds can also vary. An ‘at call’ loan such as an overdraft or line of credit could help with cash flow, helping the business to operate while waiting for customers to pay for goods or services. On the other hand, a ‘fully drawn advance’ loan provides funds needed upfront, perhaps to buy a new business or expand an existing business by purchasing new equipment.

How do business loans differ from consumer loans?

There is a number of ways business loans differ from consumer loans in Australia, from the information required by the lender during loan application, to the obligations and requirements of the lender in regards to the provision of the loan.

  • Interest Rate Disclosure: When advertising consumer loans, the lender must include the interest rate and APR (annualised percentage rate), taking into account all upfront and ongoing fees to make it easier for borrowers to compare their options. Commercial loan advertising and documentation doesn’t need to include the interest rate or APR, making comparison much harder.

  • Protection: When it comes to protection, the level of protection afforded to consumer loan borrowers is higher than that of business loan borrowers. With consumer loans, the Australian government regulates what lenders must disclose to borrowers, how interest is calculated and how loans are enforced, while setting limits on default charges. Commercial loans feature the lowest level of protection for borrowers, however, it’s worth noting that commercial borrowers are protected against unconscionable conduct and misleading and deceptive conduct.

  • Regulation: Governed by the National Consumer Credit Protection Act 2009, consumer lending is watched over by regulators designed to look out for the best interests of borrowers, including the ACCC, APRA and ASIC. On the other hand, business loans are not governed under the NCCP and so do not have the same regulators looking after borrowers.

  • Access: While consumer loans are typically easy to search for, compare and apply for, business loan information is not always readily available, as many commercial loan providers don’t advertise the details of their loans to the public, and can only be accessed by a broker.

  • Dealing with Disputes: Borrowers of consumer loans have the assistance of regulatory bodies ACCC, APRA and ASIC to assist them with disputes with their lender, with the option to take the matter to the Financial Ombudsman Service Limited (FOS) or the Credit and Investments Ombudsman (CIO), if needed. However, if a dispute arises regarding a business loan, a third party such as a broker is needed to provide the business owner with intermediary force against the lender.

When should I consider a business loan?

Knowing when to apply for business loan can be an important factor in the success of a business. When opportunities arise, the business needs to be agile enough to take advantage of them, which often means gaining access to funds needed to expand, upgrade or make capital purchases.

However, getting access to those funds can involve taking on business debt, which means weighing the cost against the return in order to make the right decision. When it comes to business loans, it can be helpful to know the difference between good and bad debt.

In general, good debt allows a business to increase its net worth, or helps it generate value. This could include borrowing to invest in property, taking out a loan for education or training, or getting finance for any investment that improves or increases the net value of the business over time.

On the other hand, bad debt generally involves a loan that is used to invest, but the result of that investment sees the net value of the business declining. A car loan, for example, could be regarded as bad debt.

With that in mind, knowing whether the business loan you are considering will be a good debt or bad debt, may help you decide whether or not you should apply. It’s also worth knowing whether your business can afford the loan, whether security is required and available, and whether you can afford to continue making repayments.

Pros and Cons of Business Loans

Looking at the pros and cons of business loans may also help you decide whether taking out a business loan is right for your business.

Business Loan Pros

  • Business loans can offer plenty of options, depending on the lender and the borrower’s circumstances
  • Business loans may be able to offer reasonable interest rates and flexible payment terms, making the loan affordable and worthwhile for the business.
  • Borrowers applying for a business loan may benefit from fast approval and availability of funds, again depending on the lender and the borrower’s circumstances.

Business Loan Cons

  • Many lenders favour secured loans, which can make getting approved for a business loan more difficult for businesses with no collateral.
  • Lenders tend to give preference to established businesses, which may make it more difficult for new businesses to get approved on a competitive loan.
  • Small businesses may find their business lending options are limited compared to larger companies.
  • Getting approved does not guarantee business improvement, especially if the loan amount does not cover the full amount applied for, or if the loan repayments and accruing interest are not dealt with correctly.

How Best to Deal with Business Loans

To make the most of a business loan opportunity, it’s important to choose the right loan – and deal with it correctly until the loan is fully repaid. In terms of application, it’s best to know what’s expected of you by the lender, as this can improve your chances of getting approved.

You may need to provide a detailed business plan, and then fully inform the lender about your proposed venture. This not only shows the lender that you understand your business and your business needs, it can also help the lender provide you with the right type of finance and advice.

Before applying for a business loan, factors to consider include how much you need to borrow, what type of loan you will need, and how long you will need it for. You will also need to think about whether the business can afford to repay the loan, including any fees and interest, as well as what security you can offer the lender.

When comparing the options, it’s a good idea to work out what features you want from the business loan. This can include whether you want a secured or unsecured loan, whether you want a fixed or variable rate of interest, and what features and options may be useful.

Strengthening your business loan application may also be advisable. This may involve maintaining accurate, up-to-date financials in your day-to-day business life, and making sure you have enough money to cover costs, treating any other loans or credit the business has correctly. It may also involve maintaining a good credit history by paying off your debts on time.

So, with all that information under your belt, it’s time to get comparing! Use Credit World to compare business loans, and find the best option for your business today.