When you start your own business, there is a high likelihood you will need some sort of financing to help you get your venture off the ground. But what are the different types of business loans, and how can you access them?
Here we explain the different types of business financing available to you in Australia, and how to choose the right type of loan for your business.
How to finance your business
There are two main types of business financing available to you when you’re starting a business:
- Equity finance
- Debt finance
Equity finance involves putting your own money into your business or looking for investors who will be willing to put money into it. This can be less risky, as it means you do not immediately have to pay back any debts. However, if you don’t have enough money of your own to invest in the business, it can be difficult to find the right investors who are willing to back you. They are also likely to want a level of control over your business, which you might not want to give.
For these reasons, most startups have an element of debt finance, which means borrowing money from an external lender such as a bank – in other words, a business loan. But there are many types of loans available, so how do you choose the right type for your business?
Types of business loans
1. Traditional bank loan
This is the most common type of business loan. However, the application procedure involves a large amount of paperwork, and the lender will also probably expect to see financial statements and a business plan. In addition, applications can take a long time to be approved, so it could take several months before you receive any money.
The main advantage of this type of loan is that interest rates tend to be low, and you have regular monthly payments, so it’s easier to budget and plan ahead.
2. Line of credit
A business line of credit enables you to borrow a fixed amount, but you only pay interest on the money you spend. This provides a degree of freedom, as you only have to spend money when you need to.
However, this type of loan is not suitable for all businesses, as lines of credit usually start at $50,000, so it will not be right for you if you want to borrow a smaller amount.
3. Equity loan
An equity loan is secured against your property. It can enable you to borrow a large amount of money – up to 100 per cent of the value of your property. However, there is a large risk involved, as you could lose your home if your business gets into financial difficulties and you are unable to make the repayments.
4. Unsecured loan
This type of loan is becoming more popular, as it is easy to apply for and approval is usually quick. The lender analyses your business finances and makes a decision about whether or not they are willing to lend you money. The amount you can borrow will depend on the financial health of your business.
An overdraft is a way of providing your business with a safety net. For a monthly fee, your bank will allow you to spend more than you have in your account each month. However, you do have to pay interest on any overdraft money you spend.
5. Credit card
Most businesses in Australia have business credit cards. These can be a great way of accessing finance for your business. The card provider will look at your business finances and your credit score to determine what your credit limit should be.
If you pay the balance of your card off within the interest-free period, you don’t pay any interest. However, credit card interest rates tend to be notoriously high, so it’s essential to keep a check on your spending.
Find out more about the different types of business loans
If you are setting up a business and want to find out more about accessing finance, it’s important to talk to an experienced professional who can help you understand each type of loan in more detail. The team here at Cigno Business are always happy to give you the advice and support you need.