For some Australian entrepreneurs, planning to launch a new business might often be associated with finding the perfect product to offer, selecting the ideal location to set up shop, or assembling the right team of like-minded individuals to work with.
For instance, if your new business idea was worth $150,000 to start with, on paper, getting the right mix of Product, Place and People may lead you to believe you are all set to go live.
However, there’s one huge challenge left to conquer: Where’s the money going to come from?
Answer: You’ll probably need a business loan to launch your new business – which differs considerably from your common home loan. Read on to find out all you need to know to get that very first of your business transactions rolling.
Business Loan Profile
The first thing to do to get a business loan, once you’ve determined how much you need of course, is to draw up a “profile” of the loan you are looking for. Your business loan profile is an essential list of features that you want to see in the loan you intend to take, and includes:
- Type of Loan
- Interest Rate
So why do you need to build your loan profile first?
Well, the fact of the matter is that, while your business loan may look attractive when you consider any one (or some) of these features in isolation, the loan profile might look entirely different once all your selected features are combined together.
Here’s a closer look at what makes up your loan profile.
Type Of Loan
The most common types of business loan choices available to Melbourne entrepreneurs include:
Fully Drawn Advances: This is where you draw the entire amount that you need to do whatever it is you need to do. In your case, you’ll apply for a fully drawn advance to the tune of $150,000. The advantage of this type of a loan is that you get a lump sum of money up front, and you’ll never need to worry about scrambling for the next installment.
Overdraft Facility: This type of loan is only available if you already own and operate a business account with a financial institution. In principle, what the overdraft arrangement allows you to do is spend more money than what you currently have in your account. It’s that simple! Of course, the Overdraft (or OD as Accountants call it) agreement has clauses on:
- Limits on how much you can overdraw
- Time limits on when you’ll need to repay the overdraft
- Rates of interest
- Penalties for non-repayment
Usually, financial institutions will require you to be a business customer with them for a certain amount of time before they extend you an OD facility.
Line Of Credit: A Line of Credit (LOC) loan, also called an Equity Loan, is a loan that is secured against some type of collateral – usually a personal or business asset. In your case, you might be able to pledge your home, office building or other assets (if you own them), against a $150,000 line of credit.
What this allows you to do is get the funding you need for your business, without actually going into further “debt” (though the LOC owing is very much a debt on your Balance Sheet!). However, be aware that:
- If you need a $150,000 business loan, and you only own collateral worth that amount, you will not necessarily receive a loan to the full amount. Lines of Credit are usually extended much lower than the actual market value of the collateral. That’s because the financial institution would like to “hedge” their loan against administrative costs, asset depreciation or other unseen events
- If you fail to live up to the covenants of the LOC agreement, your asset (home, office, factory equipment) could be at risk of being re-possessed by the lender
Usually, since these types of business loans are relatively “secure”, they come with much more favourable terms than unsecured loans.
Business Finance Fees
When opting for a particular type of loan, you need to be aware of various types of charges and fees associated with each one. These may include:
- Initial set-up or Account opening fee (Entry Fee)
- Periodic Administrative Fees (Monthly, Annual)
- Loan discharge costs (Exit Fee)
- Break costs – Charges associated with ending your loan contract before its due
When drawing up your business plan, it may be wise to set aside a contingency budget for penalties or default charges associated with your Melbourne business loan.
When choosing the business loan you need, interest rates should be a key (though not the only!) factor to consider. Your basic options include similar options to that in residential home loans, which include:
- Fixed Rate: Where the rate charged is disclosed up front, and is easy to understand.
- Variable Rate: These types of loans don’t have an “advertised” rate per se.
Rather, the rate varies from period to period, depending on some known benchmark rate – usually the Reserve Bank of Australia’s overnight lending rate, plus a certain minimum rate.
Many financial institutions bundle their variable rate products around the features you opt for. For instance, a Basic Variable product might contain fewer features than a Standard Variable loan, while a Discount Variable may offer a lower initial rate compared to their Standard Variable offering.
Time To Choose
So, what type of business loan are you looking for? This is the very first decision you will need to make when applying for your business loan. And the answer will depend upon:
- What your business model is; and
- The purpose of the loan
For instance, if you already operate a well funded business account, but occasionally need “top up” funds to cover unforeseen (or expected) business financing, then an Overdraft Facility should work well.
If your business revenue is fairly predictable, and you need fairly predictable expenditures to match, then perhaps a Fixed Rate, Fully Drawn Advance might be best. However, if you don’t need all that money up front, but don’t precisely know when you’ll need each smaller instalment, then perhaps a Fixed Rate Line of Credit loan may work best.