the lowdown
What is a business loan?

At their core business loans are simple. It’s a sum of money provided by a lender to a borrower which must be repaid plus interest over an agreed number of months or years. The complications arise when you get into the details.

Getting a business loan

Obtaining a business loan today is not as difficult as it was prior to the global financial crisis but it can still be an arduous process. Many lenders will require specific documentation and an in-depth examination of the business before making capital available.

Credit history is often a stumbling block, especially if your business is on the newer side and hasn’t had the opportunity to develop a thick credit file with a great deal of borrowing history. However, even if that’s not the case, in the time it takes to wait for a business loan to come through the opportunity you’re examining may have passed by.

Often the most effective way to obtain working capital is to use a buy now pay later business credit card and facilitate business expenditure that way.

Business loans are still a valid route to obtaining capital, but if you’re going to take that route then you should consider what that means for you and your business.

Variations of business loans

Lenders often charge borrowers extra fees for early repayment and the interest rate will be proportionate to the risk the lender associates with providing the loan based on the borrower’s finances. However those finances are often a snapshot of the business over a fixed period of time and do not always accurately reflect the true picture of the business’ financial health.

Interest can also either be fixed, an agreed percentage that lasts the entire length of repayment, or variable, which changes depending on the lender’s interest rate and the national bank’s base rate.

Business loans are a form of credit and come in many shapes and sizes, each one serving  a different purpose. There are those built for long term projects, made for speed, aimed at helping a business hit hyper growth, and many others.

Many of these loans take time but fintech lenders are helping speed up the process for small to medium sized businesses (SMBs) to access loans.

However, no matter how fast the loan is, they tend to require significant information from the SMB applying for it. It can help to have all that information to hand but it can still take time. It also depends on how much money has been requested.
Business credit cards are often a better choice as they can provide borrowed money as it’s needed thanks to an established relationship with the lender.

How long does a business loan last?

From a spending perspective, a loan can last as long as you want it to depending on your financial planning. But for repayments there’s a rule of thumb that between 3 months and 2 years constitutes a short term loan. Longer than 2 years is where medium to long term loans start to come into play.

You won’t always need or want to take 3 months to repay your loan. Sometimes you’ll want to borrow money for a matter of weeks to take advantage of a situation and repay it nearly immediately to minimise the impact of interest. The only reason you haven’t been able to do that until recently is because the financial products didn’t exist or the interest rates didn’t make sense economically speaking.

For those who want to make use of credit regularly, loans may not be the answer. Using buy now pay later business products, a revolving credit facility, or business card overdrafts may be more effective.

Security of business loans

Besides the interest rates, processing time, and early repayment charges associated with business loans they have a couple of other drawbacks related to how secure they are.

Despite their variety, business loans come down to two broad categories, secured and unsecured. Both have their place but have inherent issues.

Secured loans are called that because the money you borrow has been secured against something. That could be the business itself or other assets, whatever it is will be at risk of being repossessed should you fail to meet your loan repayment obligations.

Unsecured loans are not secured against an asset. Instead, it demands a personal guarantee, that means you or whoever the guarantor is could be personally liable for the repayment of the loan should the business fail to make payment deadlines.

Business loans are a viable route for SMBs to obtain capital and operate. But with alternative financing opportunities available with fewer drawbacks it’s not always the best choice for a business.

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