Businesses need money to make money. Unless you have angel investors clamouring to fund your company, you will probably need to borrow money sometime during your business journey. That’s where small business loans come in.
There are many types of small business loans and knowing which one will be best isn’t always as simple. Here are four strategies that can help make the process easier and more cost-effective.
1. Ask for a loan before you need the money
Applying for a small business loan should be about preparation and decision making rather than a desperate scramble for cash. Before you make any decisions about a small business loan, assess your business and its profitability and aim to get your company in good financial shape.
Also, traditional bank loans take time. If you figure out how you’re going to borrow money ahead of time, your small business loan is more likely to have terms that are favourable to you. You’ll be able to put your energy toward growing your business rather than worrying over where the money’s going to come from when you need it.
2. The right type of small business loan
There are several ways to borrow money, each with its own set of pros and cons. Let’s look at Moula’s business loans guide for Australia:
- Traditional bank term loans: Being a secured loan (requiring collateral), the interest rate will be lower. Since it’s a term loan, you will have a regular monthly payment. The main downside is the time it takes to get approved, which can be up to two months.
- Low-doc or no-doc business loans: If you don’t have financial statements for the previous two years, a low-doc loan could be the answer. The main drawback of these loans is higher interest rates due to the increased risk to the lender. Approval times for these loans can vary from a few days to weeks.
- Invoice financing: If you don’t want to wait to receive money from your customer invoices, you can work with an invoice finance company to receive the funds sooner. When you create an invoice, you ‘sell’ it to an invoice finance company. They pay you a percentage of the total invoice value immediately and charge an advance fee of the invoice amount. When the customer pays the invoice, you get the remaining funds minus any charges.
- Business credit cards: Business credit cards are a popular form of small business finance in Australia. Although the interest rates can be high for business credit cards, most offer an interest-free period on charges.
- Online lenders: Things are changing fast because of the internet. While our parents may have had to walk into a bank for a small business loan, you can now do it while you’re drinking coffee at home. Lenders like Prospa and Lumi offer several small business loans, some of which receive funding in minutes. You may end up paying more in interest, but, considering your needs, it may be worth it for the speed.
3. Get your finances in order
Most lenders will want to see your revenue records, business plan and tax statements, and they’ll want to know what you plan to use the money for. Gathering all your information before you start the application process may lead to a less stressful experience.
4. Pay attention to your profitability
Before you make any decisions about a small business loan, assess your business and its profitability. Getting a small business loan can be a little scary, but it doesn’t have to be.
Going about it methodically and ensuring that your company is sound can help set you up to turn your loan into dynamic growth.