What is a business loan?
When a business applies for funds from a bank, lender or credit union, it is applying for a business loan. Short term loans for business may be ‘secured’ (underwritten by collateral such as property) or unsecured, with interest varying accordingly. Short-term loans are paid off in a few months, whereas long-term credit is paid back over several years.
What is a short term business loan?
Typically in Australia, short term small loans are to be fully paid by the client business over 24 months or less. However, some loaning institutions (banks, lenders, credit unions etc.) may also classify loan products with repayment terms of up to 36 months as ‘short-term’.
How do short term business loans work?
A business first applies to a lender for the funds. The approval of the short-term business finance application is not guaranteed, as each lender has its due diligence process and business loan requirements. The lender may request information such as revenue numbers and current debt position before it makes a final decision.
Each business loan short term product has an interest rate applied and paid on top of repaying the ‘principal’ (the original sum loaned). If approved, repayments can occur weekly, fortnightly, monthly or at another regular interval according to the terms and conditions.
Where applicable, a business can use property or assets to guarantee or underwrite a loan – resulting in a secured loan. This property is known as ‘collateral’ and may be sold or received as compensation if the loan is unpaid. If a business cannot provide such a guarantee – it must instead apply for an unsecured loan. Secured loans typically have a lower interest rate than unsecured business loans – if all other variables are equal.
What are the differences between short and long term business loans?
The difference between short and long term business loans is the net time taken for repayment, including interest. While cash short term loans have a repayment period of under 24 months, long term business loans can extend up to 30 years (usually underwritten by significant collateral). Many lenders offer a broad suite of loan products with various repayment terms and conditions, so it is always worth conducting thorough research before applying.
Why might you want a short term business loan?
The saying is that it ‘takes money to make money’. A business may apply for a loan for any number of reasons.
It might be to purchase new capital and machinery to improve a production line. Maybe you require a small business loan to move to a more appropriate commercial space. Perhaps the business has a new line of products in development that needs an additional injection of cash. Loan products offer access to these funds without a business needing to empty the bank account and deplete cash reserves, keeping liquidity in hand to account for unforeseen costs.
Because the time to repayment is shorter, short term loans can offer greater flexibility for some businesses than a long term alternative. A company can access funds to proceed with its plans without being as locked in or highly leveraged for the next decade or more (as with some long term loans).
That said, the maximum amount of funds available is typically higher for long term loan products. Also, any small business administration SBA loans part-guaranteed by the government will usually be long term.
Who is eligible for a short term business loan?
Any Australian business with a current Australian Business Number (ABN) or Australian Company Number (ACN) may be eligible for short term commercial loans. Each loaning institution will have additional criteria that they may apply, such as a minimum annual revenue. Decision-makers in the business should read and understand all terms, conditions, and lending criteria for different short term lenders before applying for a loan.
How do you apply for a short term business loan?
For those wondering how to get business loan, the following guide may help:
Identify the best loan product for your business.
Many lenders operate in Australia, offering different types of loans for business and varying repayment terms and conditions. A business must conduct thorough research and due diligence to identify the product that best suits its needs. Search the available options, check the lender’s reputation, and make sure your business fits the lending criteria.
Fill out and submit a loan application.
Once you find the loan product that best suits the business, you must fill out and submit an application form. Each lender will have its process for this – some may require the applicant to create an online account and submit additional documents.
Wait for the application to be processed.
The processing time for a short term business loan may vary. Some fast approval lenders claim they can process applications within one business day, whereas other institutions typically take longer. The business should not submit too many applications at once, as it may get perceived as ‘credit hungry’ – which could affect its business credit score.
If approved, receive the funds
Should the application for a short term loan be successful, the business should shortly receive a deposit of the funds into its nominated bank account.
Commence making repayments.
With the money deposited, the repayment cycle begins. The business must pay instalments on time and in full to maintain a healthy credit score and prevent collection actions against it. The amount repaid per instalment depends on the loan agreement.
How can you maximise your chances of success?
To maximise the chances of approval for a short term business loan, consider the following:
- Take action to keep your company credit score high. Pay bills and suppliers on time, don’t apply for too many loans at once and steer clear of court actions or ASIC notices. A healthy business credit score may assist your chances of approval, while a negative one may increase the likelihood of rejection. Few lenders will assess your application with no credit check.
- Choose the right lender. Some lenders cater specifically to certain types of businesses or industries, offering products such as a ‘startup loan’. If a speciality lender is available, you may be more likely to receive approval from them than from other institutions.
- Read the terms and conditions. Read what detail is required, ensure that your business matches lending criteria and supply any additional documents promptly.
What short term business loans are available in Australia?
In the Australian market, there are a range of business loan providers and options available that are designed to suit small start-ups to established corporations. The best short term business loan for your company will depend on a range of factors, including:
- The interest rate. The rate of interest charged on your loan amount. The higher the interest rate, the greater your ongoing costs. However, some loans may come with higher rates but fewer fees and more features, meaning the overall cost is lower by comparison.
- The fees. The lender may charge a range of fees, such as application fees, mandate fees, service fees and more. Be sure to read the terms and conditions and product disclosure statement (PDS) of the loan product to be aware of all potential costs.
- The loan term. Short term business loans typically range for 1-3 years. Many lenders offer long-term business loans up to 30 years as well (typically secured by properties or other mixed securities).
- The features offered. Business loans may come with competitive features, such as the ability to make extra repayments without penalty.
- The lender. Different banks and lenders may suit different businesses. For example, if your company has been operating for some time with several years of financial statements, a traditional, big four bank may be likely to offer you a loan. If you have a newer business with less financial documentation, smaller, competitive lenders may be more likely to approve you for a short-term loan.
Before your business applies for any credit product, it is crucial you compare these factors to narrow down your options. Comparison tools, such as comparison tables provided by websites like Canstar or Finder, can come in handy here.
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