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Comparing business loans in today’s competitive market is a business’ job to ensure that they choose the right loan for them as it may make or break them. But why is this so? Loans in general are something that a business cannot exist without. Loans can be categorized in a lot of ways, depending on the need of the business, and are offered by banks, financial institutions, and other alternative lenders.
How do business loans work?
If you’re a business owner in need of funds, you may be considering a loan. But do you really understand how business loans work? From the different types of loans available to the process for applying and qualifying, it’s important to learn all you can about these financial instruments before diving in. Let’s take a look at some of the basics.
Applying for and Qualifying for a Loan
The application process and criteria for qualifying for business loans vary by lender. Generally speaking, lenders will want to know about your personal finances (such as your credit score) as well as your company. They may also require collateral or ask for personal guarantees from any owners who have more than 20 percent equity in the business. Depending on the lender, you may need to provide additional documents like tax returns, bank statements, balance sheets, and profit-and-loss statements. After submitting an application and all required documentation, you should receive an answer within three days or less.
types of business loans
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Unsecured Business Loans
This type of business loan does not require any collateral in exchange for the loan. This business loan usually has high interest and penalty rates. This is because the lender has the highest risk in allowing for the loan to be approved. Additionally, an unsecured business loan will look into the credit score of businesses in order to see if they are viable for the business loan. Usually banks or regular financial institutions rarely offer unsecured business loans and alternative lenders are the ones to go to for this kind of business loan.
Secured Business Loans
A secured business loan is what is usually recognized as a regular business loan. A collateral that is usually in the form of a land, building, or even stocks is needed in order to secure the loan in this type of business loan. The requirements needed for this loan also needs to be very detailed as banks and other financial institutions are usually strict in approving this kind of loan. What pays off here however for businesses is that the loan amounts are usually big, repayment time is long, and the interest rate is minimal, for as long as the business is able to pay properly.
Chattel Mortgage
A chattel mortgage as a business loan is similar to a chattel mortgage when buying a car for personal use, but it is not limited to only a car. This loan allows a business to buy any equipment for their use but the said equipment will be used as a collateral until the business finishes paying off the loan.
Equipment Loans
Similar to a chattel mortgage loan, an equipment loan for businesses involves loans that will be solely used to purchase equipment needed for the business. However, a chattel mortgage is actually only a type of equipment loan, with other loans like: a lease agreement, and a hire-purchase agreement also falling into this category.
Line of Credit
A Line of Credit can also be considered a business loan. This kind of loan will work like a credit card where a business can use their line of credit for purchasing, payment, and the like. This type of loan can help a business in ensuring that it has funds available “on a rainy day.”
This can also be a big help to businesses as a line of credit does not incur any interests when the line of credit isn’t in use.
Business Overdrafts
A Business overdraft is similar to a line of credit kind of loan, but in a business overdraft account, a business is allowed to draw funds from a business account even if the account has no balance. While this may seem good to be true, there are of course specific limits when it comes to how much overdrawn can be done to the business account. Interest will be charged on the overdrawn amount but will not be charged on the remaining balance of the business account if it is not overdrawn.
Merchant Cash Advance
One of the most unique loans there is, a merchant cash advance is a business loan where the amount that was loaned is paid back through a percentage of the daily sales using your EFTPOS sales. With this kind of business loan, the interest will be agreed upon the onset and will immediately be applied to the amount to be paid and that will be the same amount that a business will pay no matter how long it takes the business to pay the merchant back.
This kind of business loan is beneficial to businesses as it is a quick method for getting cash by businesses. When a business decides to compare business loans, a merchant cash advance should not be left out in their lists.
Eligibility Requirements of Business Loans
Typically, applicants will need to demonstrate some form of creditworthiness and have sufficient capital in order to qualify for most loans. An interest rate will also be determined based on certain factors, such as your revenue and cash flow as well as the amount you wish to borrow.
Your capacity to pay back a loan will define the amount you can access – just like every other financial service.
Be a registered New Zealand business (Company, Partnership, Sole Trader)
The owners/directors will need a valid photo ID
For loans under $150,000 all we need is last 3 months business bank statements and for loans over $150,000 we’ll need simple managerial financial statements.
Have a minimum of $5,000 average turnover for the last 3 months
WHY COMPARE BUSINESS LOANS?
The greatest question one would ask is why is there a need to compare business loans? The answer is simple: because it can make or break a business. How so? Business loans are applied for when a business (a newly launched business or an existing business), needs additional funds in order to launch a project or is in need of funding as it has foreseen the lack of funds for the next few months that it needs to simply operate.
The business loans themselves differ in a lot of ways, from the loan amounts, repayment time, application time, requirements needed, and a lot more. If a business is in dire need of funds, they must choose the loan carefully or it might ruin their business plans and they’d need to start over again, but what if they don’t have the time for that?
To compare business loans is one way for a business to ensure that they are choosing the right type of loan that will not only benefit the business, but will leave them ample time to be able to pay it off, without having to worry about any surprise expenses or problems.
Length and Interest Rate on Business Loans
The length of time it takes to repay a loan will depend on which type you choose—term loans typically last one to five years while lines of credit usually have no set repayment schedule but must be paid back within one year or less. Interest rates can range anywhere from 6% – 20%, depending on factors such as your creditworthiness, collateral offered (if any), and current market conditions.
Taking out a business loan can be an intimidating prospect; understanding how they work can help alleviate some anxiety over making this important decision. There are many types of business loans available with varying repayment schedules and interest rates based on various factors such as creditworthiness and collateral offered (if any). Knowing what information lenders will want when applying for a loan—as well as how long it takes to receive an answer—can help make the process go smoother so that businesses can get access to much needed capital quickly and easily.
What are some tips for reducing your business loan interest rate, even further?
Research Current Rates and Loan Options
Familiarize yourself with what other lenders are offering so you can compare and determine the best option for you. Don’t just take a lender’s word for it; look into different types of loans, such as those offered by banks, credit unions, or online lenders. Compare rates, fees, and other requirements before making a decision.
Negotiate With Lenders
Gather all the necessary documents ahead of time (e.g., proof of income) so you can discuss them with potential lenders confidently and accurately explain why they should give you a lower interest rate than what they’re offering initially.
Improve Your Credit Score
Your credit score is one of the most important factors in determining the interest rate on your business loan. A higher credit score means a better chance of obtaining a lower rate from lenders. To improve your credit score, pay off any outstanding debts and make sure all bills are paid on time. It is also important to monitor your credit report regularly and dispute any errors that may be present.
Do your research on each lender
Understanding what each lender offers will allow you to negotiate more effectively and find the best deal for you and your business needs.
How to Apply for a Business Loan
Applying for a business loan can be an overwhelming process, but understanding the qualifications and proper documentations beforehand can make it easier. Before submitting applications to lenders, it is important to have a clear idea of how much capital is needed. Doing research on the different types of lenders and their various rates and obligations is essential when applying for a business loan as you want to get the best deal that is most beneficial to your company. When ready, applications can be submitted in person or online with required documents like financial statements, balance sheets, tax returns, proof of identity and more. Approval may take some time depending on the lender, however with patience and preparation you will be able debut your new venture in no time!
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THE BEST LOAN FOR THE BUSINESS
Sadly, there is no “best” loan for the business. What is the best thing to do however is to compare business loans and find what fits the business in terms of what it currently needs. Some of the factors that are worth considering when comparing business loans are:
The interest rate. Is it fixed or variable interest?
Fees. What fees are there in the loan that the business is applying for? There are application fees, discharge fees, ongoing fees, and early repayment fees to name some. Are there hidden fees?
Time of approval. Businesses must ensure that this factor is something that should be given weight when comparing business loans, this is because for some businesses, the time of the application process and the processing and approval speed of the bank or other financial institutions themselves is important.
Criteria for approval. This is also one important thing to remember when a business is comparing business loans. The business must ensure that most of the loans that it is deciding on has a criteria where it fits, or else they can just be shooting at the moon.
Flexibility in payments. The business needs to consider repayment flexibility as there will be times that the business can already pay off the loan but instead is stuck with it because the business loan itself has no flexibility.
The ability to redraw. Redrawing is beneficial as a business will be able to drawback funds from any early or prior payments that they made to the loan.
The loan contract term itself. This refers to the period the loan is actually active.
A CHEAP BUSINESS LOAN
While a business may opt to find a “cheap” business loan with little interest rates, this will not always be the case. Most “cheap” loans will, in one way or another, always have something else in return. In fact, this is similar to when finding the “best” loan for the business. The emphasis for businesses here is that they compare business loans thoroughly to find what they are actually looking for.
FAQs
How do I find various business loans?
Business loans are everywhere, especially in New Zealand. You can find some by simply searching online. If you are someone who is not accustomed to this, head to your nearest banks as they will always have a business loan available. Another way to look for business loans is through financial institutions similar to banks. And finally, the word-of-mouth marketing never fails, ask around and you’ll be surprised that you can already make a list to compare business loans.
How fast can a business get a business loan?
This depends as the factors affecting the loan vary. These factors may include: the lender, the loan itself, the business, the actual capital, the particular loan value or business loan applying for, the business’ credit limit, and even the nature of the business looking to apply for a business loan. This is why it is best to compare business loans first before applying for one.
But this does not mean that a business cannot be prepared in order to speed up the process. A business can be prepared for the questions that a bank or another financial institution
- The reason for taking out the loan
- The business’ cash flow
- The asset evaluation of the business
Is it possible to get a business loan if you have a Bad Credit?
Traditional lenders may be difficult to work with if you have a bad credit score but a variety of possible financial institutions are prepared to work with enterprises that have bad credit or no collateral such as online lenders. Just bear in mind that there are several key factors to consider when applying to any form of lender since each has its own set of rules, rewards, and downsides.
If you’d like to compare business loans in the market, check out Bizzloans’ loan comparison tool, and we can match you with lenders that welcome businesses with bad credit.
Is a Low Doc Business Loan the same as an Unsecured Business Loan?
No. A low doc business loan is a kind of loan where the applicant is granted the loan without the need of excessive financial documents and statements that are usually required by financial institutions or banks. An unsecured business loan on the other hand is a kind of loan that allows small business owners to secure funding without the need of any collateral or security for the loan, but this does not mean that the financial documents or statements needed are lessened.
Where can I find the best business loan rate?
Compare business loans right here in Bizzloans! Our world-leading software matches your details with our panel of lenders. Don’t waste hours by searching for a lender yourself. Simply fill in the form and our comparison tool above will help you find the perfect loan that suits your business’s needs.
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