These days, Australians are turning to entrepreneurship more than ever. As such, numerous businesses get launched each year. Running a company can be a great approach to earning a livelihood. However, most small business owners face significant challenges.
Financial stress is a real problem that many entrepreneurs experience. Most lack adequate capital to run their operations efficiently. When comparing business finance in Australia, you may want to look at various opportunities to help sustain your company. Fortunately, any business in Australia can apply for a loan to keep going.
This guide explains the different kinds of loans and what factors affect how much you can borrow.
An Overview Of A Business Loan
A business loan is a way to finance your company’s operations by borrowing additional capital from financial lending institutions. The money borrowed can be invested in growing your business in several ways, including buying machinery, acquiring supplies, paying for wages, and so on.
The borrowed money is the principal amount and should be paid plus the accrued interest within an agreed duration. Business loan differs from personal loans in many ways. For instance, personal loans have no restrictions on how you can utilize borrowed money. With business loans, you can’t use the borrowed money for purposes that aren’t business related.
Types Of Business Loans
There are various types of business loans in Australia. Below are some of them:
1. Traditional Bank Loan
This is one of Australia’s oldest and probably the most common types of business loans. It involves borrowing money from banks to finance your business. One feature of traditional bank loans is that you’ll be required to fill out many forms.
Additionally, you’ll be required to provide a business plan and financial statements of your company for the bank to approve your loan. Meanwhile, bank loans usually have low-interest rates because they’re secured with collateral.
2. Business Overdraft
A business overdraft is another type of loan you can consider to finance your company. A credit limit is typically placed on this revolving loan. Funds are available for withdrawal to operate your business up to an agreed or predetermined amount.
The overdrawn amount plus the interest must be paid within a specified period or when you deposit money in your account. Apart from the interest, most business overdraft loans include other charges like accounting and establishment fees.
3. Invoice Financing
If you sell products or services on credit, invoice financing is another option you can consider to enhance cashflows in your business. It involves working with an invoice factoring company to settle your company’s receivables.
The company you’ve partnered with will buy your debts at a discount. This way, you won’t have to wait for the customers to settle their dues. You can get the amount you need from the invoice factoring company. Meanwhile, the invoicing company will be responsible for recovering the money that customers owe to your business.
4. Business Equity Loan
This is a type of loan you can take out against a commercial property. In other words, you’ll use your buildings as collaterals for the loan. But the best part is that you can borrow up to the full value of the collateral you put up for this loan.
5. Business Credit Cards
This is another popular type of business loan in Australia. The primary benefit of this form of financing is that most lenders offer an interest-free period on charges. Hence, you don’t have to pay the interest if you settle the amount you owe within the stipulated period.
Business Loan Eligibility Factors
When you decide to take a business loan in Australia, one of the big questions you must answer is how much you require. The various financial lending institutions consider these factors in deciding how much to lend to you.
1. Duration Of Your Business
Undoubtedly, most small businesses fail to take off during the first few months of operation. So, the duration of your company counts when qualifying for loans. Significantly, the requirement for the longevity of your company will vary from one lending institution to another. The longer your business has been in operation, the higher the chances of qualifying for loans.
2. Your Credit Score
Most lending institutions in Australia will consider your credit score before lending you the amount you need for your business. This refers to a three-digit number between 300 and 850. Ultimately, your credit score determines your creditworthiness.
If your credit score goes towards 850, then you’re a good candidate for loans. If it’s lesser than 300, you’ll barely qualify for any loans. So, before applying for any loan, ensure your credit score is good to get qualified.
Takeaway
A loan can be one of the most effective approaches to financing your business in Australia. It enables you to get additional capital to finance your operations and enhance your cashflows. You can compare the types of business loans mentioned in this article and select one that best suits your needs.
