Business Lending Options – what’s the best for you?

Business Lending Options - what's the best for you?

There are so many business lending options available in Australia for small businesses. 

However, choosing suitable options for you and your business is not always so easy. 

Making the wrong decision now could have negative impacts on your business for years to come. So following, we’ll take a closer look at the best business lending options for your current business situation and business lifecycle.

The main reason for business lending

As a small to the medium-size business owner, lending money can be daunting and, in many cases, scary. So the best thing to do is work out why you want to lend money or get small business financing which may include buying some new equipment, improving cash flow or paying off debts. Working this out will allow you to determine the best financing options available to you quickly. 

For example, a business overdraft, line of credit, or unsecured business loan could be the answer for improving cash flow or purchasing inventory. 

If you have been in business for a couple of years with a decent trading history with the bank, then you should be able to get this financing reasonably quickly. The only downside is that these types of quick short term loans come with higher interest rates. However, because the loan is short-term, the interest paid will not be that bad as you might be lending the money for 1 or 2 years.

Suppose you are thinking about getting a commercial property loan to buy that factory, industrial estate, or another business. In that case, the loan amount will be higher, the interest will be less, but the loan period will be far longer, up to 30 years.

 Interest rates of business lending

One huge factor in determining how much you will borrow is the interest rates. Nowadays, in 2021 the interest rates are low according to the RBA.

While they may be low, they will still have to be paid every month, so you have to know that secured loans backed ( or property-backed business loan ) by your property will come with a lower interest rate than an unsecured loan.

While a bank term loan ( over 25-30 years ) will come with a lower interest rate, the length of the term will mean that you are stuck paying this off ( for what seems like forever ) unless you can pay it off sooner, which means that you are paying lots of interest for the loan over the next 25 or so years. Hence, lower interest loans may end up costing you more. The only beneficiary is the bank, as they end up with all those juicy monthly payments from you. 

So, unless you can take a long term view of your business and are pretty confident that you can repay the monthly interest, this may not be the best option. Remember, if it’s a secured loan and you miss a few payments, the bank can sell your property to recover its money.

If you want to get money fast to take advantage of a good deal or some sale on machinery ( like the instant asset write off for 2021 ) and don’t have the best credit history, you can quickly get the funds online from the many non-bank lenders like us at Sparrow Loans. However, if you want to wait for a bank to get you the money quickly, this could take many weeks, meaning you miss out on some great business opportunities.

You could always use your credit card if you are confident that you can pay this off quickly, but as we all know, interest rates on these cards are super-high. So be careful with this option as you don’t want to be too over-reliant on credit cards.

Secured or unsecured business lending

Eventually, you’ll have to work out if you have assets such as a family home to use as secured lending against a loan. However, suppose you don’t have a loan or other significant investment that you can use as security. In that case, you’ll have to go with an unsecured loan for your business finance, which may result in higher interest rates and limitations of the loan.

Fixed or variable interest rates

If you decide to go with the fixed interest rate, you have the security knowing that your rate is locked in for an extended period, perfect in times of business uncertainty as you can manage and plan your cash flows. The only downside is that fixed interest rates are generally higher than variable rates. If you go with a variable rate, there’s always the threat that the RBA could increase interest rates meaning you have to repay more each month which could play havoc with your cash flow. A good option is to put half on fixed and half on variable, so you don’t have all your eggs in one basket, leaving you exposed to interest rate fluctuations.

Loan term loans

Long term loans are generally made on large asset purchases such as machinery, property, business purchases or even construction loans. So if you have any cash flow issues forget about long term loans- definitely go with the short term loan option.

Some examples of loan terms include:

  • 6 months to 2 years for unsecured business loans – these are fast, cash loans with amounts generally from $50,000 to $2 million.
  • 1 to 10 years for bank term loans 
  • 1 to 5 years for equipment finance
  • 10 to 30 years for a commercial loan – for property purchases and are generally secured loans

Are you able to service the loan?

You have to always have in the back of your mind whether or not you can repay the monthly interest payments and the loan. There are some types of loans like lines of credit and overdrafts, which offer more flexibility allowing you a bit more freedom for monthly interest repayments. A line of credit is excellent as you have the money there in your account, and you only pay interest on the amounts you use. In addition, it gives you the added security knowing that you have the extra money in the bank just in case of a rainy day, which is the perfect lending option for many small businesses. But again, remember you will have interest payments commencing the day you actually use the money. And, if the company goes bad, you still have to repay the loans; keep that in mind.

Return on investment

If your business loan is to grow your business, you need to do the math and see if the sums stack up. This is where an accountant is a good idea as they’ll be able to tell you if the loan is worth it or not. Measuring the ROI or return on investment is something you can do here.

Making the best decision on business lending

It’s essential to know all the finer details, and all options are on the table when choosing a business loan. However, if you feel that you need a helping hand, please call Ulrika at Sparrow Loans for the best advice on all your lending options.


About the author

Ulrika Lobo

Ulrika Lobo is the lending specialist at Sparrow Loans and has over ten years of experience in the commercial business loan space. Ulrika co-founded Sparrow Loans to provide Australian SMEs with a faster and easier way to access finance. Ulrika is responsible for managing the lending process from underwriting to execution and settlement and post-settlement support.