Business loans provide companies with financing they are unable to cover themselves, such as working capital needs, equipment purchases and real estate expenses. Business loans come with interest rates that differ depending on lender and type of loan taken out.
Lenders consider both personal and business credit scores when determining eligibility for loans, with minimum credit score requirements typically between 640 to 680.
Definition
A business loan is borrowed money borrowed by companies to cover expenses they cannot cover in the short-term, which must then be repaid according to its terms and conditions.
There are various types of business loans, both secured and unsecured. Secured business loans can be secured against assets like plant equipment, stock or accounts receivable as collateral while unsecure loans do not need collateral but may come with higher interest rates. Popular forms of business financing in Australia include equipment finance (also referred to as goods loan or chattel mortgage) and invoice financing which are commonly used to purchase vehicles or machinery assets, working capital loans and overdrafts are also common forms of lending for business loans.
Purpose
Food truck businesses require equipment, and expanding into new locations across town often necessitate financing solutions. A business loan should always be treated as debt with interest payable over time; so make sure your plans for using the funds match with what a loan provides before applying.
Alternative funding solutions might include approaching friends and family for funds. Make your requests formal and clear so as to prevent miscommunication that could strain relationships, as well as offering a repayment schedule which lenders usually require in writing. Some loans require collateral such as property or accounts receivable while others don’t, though you might still need to sign a personal guarantee promising to pay any debt incurred if the business closes down.
Types
There are various business loan types, each of which has different requirements. Some require collateral such as equipment or real estate while others can be obtained without needing collateral; these various loans will determine the amount borrowed, interest rate and term available to a borrower.
The Small Business Administration (SBA) offers loans to small businesses through a network of lenders, with competitive rates and terms but stringent eligibility criteria, such as size standards and an in-depth business plan. Many online lenders also have simplified application processes that make it easier for borrowers with imperfect credit histories to qualify for funding. Other solutions may include factoring, which involves selling your invoices directly to third-party financiers for immediate cash – also known as accounts receivable finance or invoice financing.
Interest rates
Business financing solutions come with various interest rates and fees, depending on the lender you use as well as factors like your company’s creditworthiness, time in business and revenue. It also takes into account any collateral used as security. APR rates provide an accurate picture of how much the loan costs.
Bank loans tend to offer the lowest rates for small business loans, though their qualification requirements can be strict. Lenders offering alternative business financing, like online lenders and peer-to-peer platforms, tend to have more flexible requirements but charge higher interest rates; additionally, prime rate has steadily been rising over the past year which impacts lines of credit and loans tied to it.
Closing
Closing process for business loans varies depending on their type and size; generally lenders will require annual financial statements for both borrower and guarantor(s), who typically are owners of the business; some lenders also require down payments as part of the closing process.
If the loan is secured by real estate, lenders will perform property valuations, environmental work and title commitments before closing. Quick responses to requests for information and documents from lenders will help speed the closing process and get funds more quickly into your hands. It is wise to partner with a lender who understands the Small Business Administration lending process well as well as experience dealing with the agency – SBA Express loans may even speed things up!