How to compare business loans: loan types, fees and interest rate
There is now such a variety of finance options available to small business owners that comparing them can be a challenge. From a line of credit to invoice financing to unsecured loans, there are numerous ways to obtain the funding that you need to scale and grow, but how do you make sure you’re getting the best deal?
Unfortunately, the advice is not merely to go for the loan with the lowest interest rates and fees, as particular business requirements need appropriate loans. A seasonal business may need funding to pay employees before invoices have been paid; this is where invoice financing would come in. But a construction company needing to purchase a new piece of equipment would have to look into an equipment loan.
Here are five things to keep in mind when comparing loans
Identify the purpose of the loan
- Identifying the type of loan that will complement your business needs is the first step. Applying for the right loan type will significantly improve your chances of approval. There’s a wide range of small business loans tailored to specific needs, these include:
- Line of credit – A business line of credit approves you for a particular credit limit that you can use as and when needed. You can access the credit as and when you wish, and you are only responsible for paying back what you use, plus any fees stated by the lender. Interest is only charged on the amount that is used, not the entire amount approved.
- Business Overdraft – You can apply for a business overdraft on your business banking account to allow you to overdraw to a certain limit. Fees often apply. Withdrawals can be made when the account is empty, but it all needs to be repaid, and interest is charged on the amount of credit used.
- Term loan – This is simply a set amount of money borrowed from a bank or other financial institution which you must repay over an agreed period. It either comes with a fixed or variable interest rate and a set date when the loan will be paid off.
- Invoice financing – Invoice financing companies purchase outstanding invoices for a large percentage of their total value while keeping a small sum of payment for themselves.
- Business credit card – These work similarly to personal credit cards, but you can add multiple cardholders, and it is only used for business purchases. They can help you meet immediate cash flow needs and often generate benefits from reward programs. An interest-free period is usually offered, but after this, the interest rates can be high.
- Equipment finance – There are many equipment finance options to help you purchase or lease the equipment needed for the business. These include commercial loans, equipment hire purchases and finance leases, so you’ll need to research to decide which is right for your business. Click here to read our in-depth articles about equipment financing.
Decide which interest rate you want to go with
There are two types of interest rates—variable and fixed.
Fixed interest rate
Fixed interest means the interest rate given at the start of the loan will remain the same for the entire term of the loan. You will know exactly how much your repayments are every month and can prepare for this.
Having this information and the exact date the loan is due to be repaid (provided the repayment schedule is followed) can give you peace of mind from the outset.
Variable interest rate
A variable interest rate will change according to the market conditions, so the interest rate given at the start of the loan may change at any point over the term of the loan.
This means you could end up paying a lower interest rate if the market changes, but you also could end up paying more if the average market rate increases.
Check to see how often the lender charges interest, knowing whether it’s daily or monthly will help you to compare rates more accurately across products.
Know the repayment terms
Your business cash flow needs to be able to accommodate the repayment schedule of the loan realistically. Some lenders require fortnightly or monthly repayments and others are more flexible. It may help to work with an accountant to identify how often you can make repayments on your loan.
Find out about any hidden fees.
Multiple charges could be placed on your loan, here are 6 to look out for:
The process of assessing and approving a loan can be time-consuming for lenders. Verifying details, reviewing paperwork and financial statements, and deciding on the level of risk all take time. Some lenders try to make up for this by charging a fee for this process. This is usually a percentage of the loan amount so it can add up.
These arise when the lender needs to approach any third party business for advice about your loan. For example, a lender can ask an appraiser for help in determining your loan eligibility, and this fee would be added onto your account. These fees vary from case to case, and the details are often found in the small print. If you notice any unexplained expenses on your account, always ask the lender to confirm what they are for.
Early repayment or break fees:
Lenders earn the maximum amount of interest when the loan is repaid over the full term, so they may try to discourage people from repaying early by adding early repayment fees. As a borrower, you want to repay your loan as quickly as possible, and these fees could hinder you from doing so. Always ask about break fees and double-check the terms and conditions.
If a lender prefers a particular form of payment, like direct debit, for example, they may charge for using other payment methods. This is usually to incentivise people to pay the preferred way.
Banking or dishonour fees may be charged when an attempt to debit your account is unsuccessful. They may be charged by both your bank and the lender, so be aware of the conditions to avoid any surprises.
Maintenance fees are typically a fixed dollar amount charged monthly to keep your account or loan operating. These can add up over the term of the loan so ensure you price it up before deciding.
Look at these possible fees and charges when comparing financial products side by side, a loan that looks very attractive initially may have some big drawbacks when it comes to costs the lender adds on.
Look at the standard of customer service
If possible, read any reviews about the lender to see if other customers are happy with the service they received. Knowing what is important to you can help when it comes to comparing loans. Do you want to be able to contact someone 24 hours a day? Do you prefer speaking over the phone or through an online chat service? Has the lender been open and upfront about eligibility requirements and fees, or did you need to dig a bit deeper? Keep these things in mind when weighing up your options.
Some lenders will be more suited to your needs than others, and you can save a lot of time and energy if you know what you’re looking for. You will be able to find a loan that fits with your requirements; you just have to be prepared to shop around.
If you’re currently looking for a business loan our free service lets you compare loans from over 70 lenders—both big and small. You can get approval in as little as 24 hours, apply for any amount between 5K and 20M, and receive funds straight into your account once approved.
Seeing industry-leading loans side by side in our easy-to-use comparison tool helps you choose the best one for you: the loan that fits right into your business vision.
Still have questions? Let’s talk
Confused? Not sure if this applies to your situation? Phone us on 1300 190 429 for some free, no obligation advice.
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