While a personal loan can be used for a variety of purposes including funding business projects, business loans are especially designed for business endeavours. As such, they offer many benefits that personal financing does not provide, like tax deduction and low interest rates.
Type of Business Loans
Business loans have several types. Their benefits are typically linked to the purpose they serve.
1. Business Term Loan
Usually offered by banks and large financing institutions, it allows borrowers to get a large lump sum of cash upfront, sometimes amounting to millions of dollars, which is then repaid with interest over a predetermined period.
2. SBA Loan
It is a type of business financing that’s guaranteed by the Small Business Administration and provided through an SBA-approved lender.
3. Equipment Financing
The loan specifically for buying business equipment, which becomes collateral for the loan.
4. Merchant Cash Advance
You receive a lump sum of cash upfront but instead of making one fixed monthly payment, the financing company gets a percentage of your daily credit card and debit card sales, plus a fee.
5. Invoice Factoring
The factoring company grants you money to improve your business’s working capital and cash flow in exchange for unpaid customer invoices. The factoring company would be responsible for collecting from the customer when the invoice is due.
6. Invoice Financing
You also use your unpaid customer invoices to get funds. However, instead of selling your unpaid invoices to a factoring company, you use them as collateral to get a cash advance.
7. Business Credit Card
A revolving line of credit allows your business to use funds up to your credit limit. Working just like a personal credit card, you can use the card as needed as long as you make minimum monthly payments.
8. Microloan
Generally $50,000 or less, this financing is offered by nonprofit organizations and mission-based lenders to startups and businesses in disadvantaged communities.
Advantages of Business Loans
Business loans offer a lot of benefits for startups, small businesses and large companies.
1. You can borrow a significant amount of money for major business projects
Unlike personal financing which is usually capped at $50,000, a business term loan allows you to borrow millions. This is especially helpful if you’re funding a major business project, like an expansion to other areas, provision of new business facilities and massive technological upgrades.
2. You have full control of the money you borrow
- Business financing allows you to borrow money without selling a percentage of your company’s ownership to investors in exchange for funds. As a result, you can use the money however you want and run your business according to your plans. There won’t be any other entrepreneurs interfering with your decisions. You won’t need to work alongside any other people or take into consideration the opinions of others.
- Your lender is not going to tell you how to spend the money. They may ask for your business plan to understand how you intend to run your business, but they won’t have any part in the decision-making after granting you the funds. As long as you’re going to repay the money with interest, nobody cares what you do with the money you borrow.
3. You can easily access the funds
- Instead of waiting for your business profit to grow before reinvesting them, it’s more practical to get financing from lenders. You won’t have to wait for years to raise money for various business projects, whether it’s for buying new equipment or new product development.
- Looking for investors to fund your business is also a long process, especially for startups. Most of the time, investors want to provide financing to established and profitable businesses to get their investment back with a return as soon as possible. Unfortunately for startup and small business owners, developing a track record of stability and profitability takes time.
4. The interest rate is usually low
- Most business loans offer low interest rates to attract customers. While lenders aim to get a healthy return on they’re lending, the competition is the lending business is high, which creates a favourable atmosphere for borrowers who are looking for the best deals.
- Typically, business loans also have a lower interest rate than personal loans because the latter do not require collateral and can be granted in just a day or two. The personal financing lenders charge a higher interest rate to compensate for the high risk of granting you the funds without collateral and in-depth background check.
5. You will enjoy a tax deduction
The interest you pay on a business loan is tax-deductible. These deductions include the interest accrued on:
- Business loans unpaid by June 30
- Personal loans and personal credit card used to fund business projects, which can be claimed in your personal income tax filing
Before claiming your tax deductions at the end of each fiscal year, keep a good record of all the interest payments made by your company on business loans. The Australian Taxation Office needs to see these records before granting your tax claims.
6. You won’t have to repay the loan if your company fails
If you take out a loan for your corporation and it fails, you won’t need to repay the money. Instead, your business is liquidated, which means that its assets are sold to repay all or a portion of the total money that you borrowed. This means that in the event of loan default, it is only your corporation that will go bankrupt, not you as its owner.
7. You can increase your working capital
You can use the money you get from business financing to increase your working capital, especially if your company is going through a financial crisis. You can maintain your operating cash flow and cover any short-term operational needs and unexpected expenses without touching your emergency fund.
8. You won’t need to pledge any collateral
- There are many lending companies that offer business financing without requiring any collateral as long as they can present a profitable business proposition. Big businesses will also be assessed on their income, cash flows and stability to ensure that they can repay the loan within the agreed term.
- SBA loans are also unsecured. Backed by a federal agency, a startup or a small business can easily get financing even without an asset to pledge.
- Unsecured business loans usually have a shorter term and higher interest rate than secured business financing because of the higher risk for lenders.
9. You won’t have to share your business profits
- Business financing helps you expand your business or fuel its growth, leading to more profits and long-term success. Once this is attained, you won’t need to share your profits with anyone else. No matter how big or small the profits you make from your projects, you will repay the same amount of money, plus the interest, to your lender.
- This is in contrast to getting funds from investors. While they may give you more than enough money to grow your company, they’re also expected to partake not just in the business decisions but also in the fruits of your labour. The profit you have to share with them will also be directly linked to how much your business is making.
10. Your business credit will improve
Taking out a business loan improves your business’s creditworthiness. After responsibly making on-time payments and completing off your loan within its term, your credit score will improve. This helps you easily get approved for financing with lower rates and friendlier loan terms in the future.
However…
Not all companies qualify for business loans
- While business loans offer a lot of benefits that personal loans and investors cannot provide, getting approved for this type of financing is not easy-breezy. Lenders typically require a business plan before making a decision. This is to ensure that your business is stable and profitable in the long run to repay the loan.
- Aside from your business plan, other requirements include good cash flow, stable income, length of time in the industry and good credit standing. Typically, you need to be in the business for at least a year. In other words, seeking business financing as a startup is tough.
A personal guarantee may be required
- Even if you’re not required to pledge any collateral, the lender may still ask a personal guarantee in exchange for the loan. A personal guarantee enables the lender to seize your personal assets (not your business properties) if you can’t repay your debt.
- This won’t be a problem for you if your business makes enough profit after taking out the loan. The issue only starts when your project fails and you can no longer make on-time repayments.
You might not be approved of the amount you are asking
- If you’re asking for a substantial amount of funds, a lender may only grant around 80% of your request. This is generally because, after assessment, they believe that your business doesn’t need all the money that you’re hoping to borrow. If you already have fully costed plans, this can be a problem as you have to find ways to carry out your project in a more affordable way.
While business loans can help your business grow and expand, it is important to carefully consider your long-term business needs, strategies and objectives before taking out one. Make sure that you can repay the money you’re borrowing. If you fail to make the repayments within the agreed term, your business and personal assets as well as your creditworthiness is at stake.
Positive Lending Solutions has a team of commercial loan experts who help business owners across Australia get the funds they need to start a new business take their current business to the next level.
Call 1300 722 210 or request a Quick Quote now.
