Points to Consider when Applying for a Business Loan

cf1f8722-334b-4ac6-94df-327a6d45853cWhen applying for a business loan, it is essential to prepare a detailed business plan and fully inform the lender about your proposed venture.  This information helps the lender to provide you with the right type of finance and advice.

Decisions to make:

Deciding that your business needs a loan is only the first step.  There are a number of things to consider before you approach a lender:

  • How much do you need to borrow?
  • What type of loan will you need?
  • How long will you need it for?
  • Can the business afford to repay the loan, interest and any one-off or ongoing fees that come with the loan?
  • What security can you offer the lender and how this affects the interest rate offered?

Access to borrowed funds:

If access to the funds on a semi-regular basis (eg. to help with cash flow to keep the business operating while waiting for your customers to pay for goods), ‘at call’ loans such as an overdraft or line of credit are designed for this purpose.  However, if the funds are required to purchase a new business or piece of capital to expand your existing business you will need the funds ‘upfront’.   This is also known as a ‘fully drawn advance’ and provides you with the entire loan amount all at once.

Loan terms:

Loans provided upfront will need a portion of the loan plus interest paid back at regular intervals.  The repayment amount will depend on the term or length of the loan.  To determine the loan term suitable for your business you will need to calculate how much you can afford to service the loan.  Be aware that the longer the loan term the more total interest you will pay.  Note that loans that are at call have no fixed terms.

Ongoing funding:

construction equipmentThis is the average amount of an overdraft or line of credit that is used at any one time.

Example: An overdraft limit of $40,000 may be provided to provide money for the occasional big expense, however on average $6,000 is utilised.  Thus $6,000 is the level of ongoing funding required.

When applying for an overdraft limit, things to note for are that the higher  the overdraft limit, the higher the fees, and clauses where the lender can demand repayment of the whole loan at any time.

Fixed or variable interest rate:

The choice of rate will affect the stability of repayments, overall cost of the loan and the loan features available.  With a fixed rate loan the lender bears the risk of interest rate moves, while with a variable rate the borrower will bear this risk.
Ultimately, the choice of variable or fixed rates will depend upon how much read more..