How to Choose The Right Loan as an SME.

Searching for loans can be overwhelming as an SME.

Scroll through any loan product and you’ll see dozens of options that might be right for your business. But before you’ve made your choice it’s important to understand the maturity of the loan you hope to secure.

Generally speaking, loans can be split into short-term and long-term facilities.

Short term loans will have a quicker maturity. This means you need to repay them fast, typically in a matter of months. Loans with a longer maturity, on the other hand, are repaid over many months or years.

Choosing the right one is crucial. Loans are one of the most important commitments a business can make. But how do you know which one is better for you?

Short term loans enable better financial flexibility.

Short term loans are a good band aid fix. They give you the capital injection you need to address a more immediate shortfall of cash. This is especially true when you know your current cash flow problems will be resolved quickly.

For example, you might have a large receivables account but not enough spare cash to cover a large expense from a supplier. A loan with a short maturity allows you to cover the cost without signing up to a debt facility you don’t need.

Shorter loan terms also reduce your risk exposure. When you take out a loan, you assume a certain amount of risk. With shorter-term loans, the repayment period is shorter, which means you are exposed to fewer risks that could undermine your ability to repay the loan.

In addition, a short term loan will give you better financial flexibility. By repaying a loan in a shorter time frame, borrowers free up their cash flow sooner. This allows your business to allocate funds to other investments, savings, or expenses, or even take advantage of new opportunities that may arise.

In a fast-moving economy with many unknowns, reducing your risk and freeing up your cash flow are important considerations.

Long term loans allow you to master your debts.

Loans with longer maturities have two key benefits, debt consolidation and more manageable monthly repayments.

(1) A longer repayment term allows you to refinance multiple loans into a single repayment. This simplifies your financial commitments and reduces the stress of missing a payment. For developers and SMEs working across projects and suppliers, this can be a slam dunk that saves you sleep.

(2) Loans with longer maturities typically have smaller monthly payments than loans with shorter maturities. This can make it easier for borrowers to manage their cash flow and fit the loan payments into their budget. It also gives you more flexibility with your cash flow. As the repayments are lower, you have more spare cash to allocate to other investments, opportunities, or savings.

The main negative of long-term loans is the higher level of commitment.

As you repay the loan for more time, you will pay more in interest and have a higher risk window. If your business is in an uncertain time or you expect your sales to slow, be cautious about long-term loans.

To summarise.

There is no right or wrong answer for which loan type is best. It all depends on your situation and what your business needs. Ensure you understand any loan facility’s benefits and risks, and always read the fine print.

If you think your business might need finance in the coming months, we may be able to assist you with a property-backed loan. Give us a call to see how we can help you.

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.