There are essentially five primary forms of financing for businesses in Australia. Which one is most suitable for your business comes down to a number of factors – in general terms, businesses that are well established have a slightly more comprehensive range of options. Still, many of these factors are also related to what the finance is for and, ultimately, which option is most suitable for the business.
Here’s a quick rundown of the options…
- Business loan
- Commercial loan
- Line of credit
- Hire purchase agreement
- Chattel mortgage
1) Business Loans
A business loan is often the very first option that lenders will put forward, however it’s worth considering whether there are any other finance options available to your business before opting for a business loan. Firstly, you may not even be eligible for a business loan from many lenders. If your business is a startup or has been running for less than two years and/or is not registered for GST, you may not be eligible for a business loan.
If you do qualify, you need to be able to show that the money you receive will be used for what are called ‘approved business purposes’. This means things like the acquisition of another business, or business expansion, or for capital purchases.
There are many business loans available with a range of different interest rates and other charges. Lenders will generally consider a business loan for amounts upwards of $10,000 – $20,000 and on up to $1,000,000 from some lenders.
The loan can be secured or unsecured. Secured loans are generally secured against either residential (ie your home) or commercial property (if you own it). Unsecured loans may be an option, but they generally command higher interest rates than secured loans. From a tax perspective, interest and other fees associated with the loan are fully tax deductible.
The loan is normally made available as a lump sum.
Things to consider with business loans…
- Is your business eligible?
- You pay a larger amount in interest and other fees the longer the term of the loan
- A secured loan will cost less, but you are putting your home or commercial property on the line if you cannot repay it
Which businesses is a business loan most suitable for?
Small/Medium Enterprises that are established and that need a relatively large amount financed.
Which businesses is a business loan not suitable for?
Small or startup businesses; businesses with a very variable cashflow; where finance is for specific capital equipment items, including car/machinery etc.
2) Commercial Loans
Commercial loans are very specifically for the purchase of commercial property, either in the course of property development or another type of business. Commercial loans are offered by many lenders for the purchase of retail, industrial, residential and commercial property and are generally secured on the property purchased, unless the business applying for the loan is a large company, in which case the loan can be secured on the general assets of the business, for example the trade debtors (customers owing money to the business).
Which businesses is a commercial loan most suitable for?
Larger business wanting to buy property.
3) Lines of credit
The main difference between a line of credit and a lump sum loan is that with a line of credit the lender gives your business access to funds, genrally as an overdraft facility on a bank account, with a limit imposed on that overdraft. The main advantage is that you only pay interest on the amount you use, if it less than the limit. The downside is that interest rates on lines of credit tend to be higher.
Which businesses is a line of credit most suitable for?
Businesses that need short term finance, as long term use of a line of credit can get expensive.
Which businesses is a line of credit not suitable for?
Businesses needing longer-term finance, for example for the purchase of specific, larger items of equipment such as machinery or motor vehicles.
4) Hire purchase agreements
As the name suggests, hire purchase agreements are a way of financing certain purchases by renting or hiring the item. Generally these agreements run from one to five years.
The upside of a hire purchase agreement is the ability to have the use of the equipment (often a car) while paying for it over a period of time AND the fact that the whole cost of the hire purchase agreement is fully tax deductible, which is not the case if your business buys the capital item.
The downside (if this is a downside) is that your business does not ‘own’ the equipment and that if you decide you don’t need the equipment before the hire purchase period is up, you will have to pay an early termination fee.
Some agreements allow you to purchase the equipment at the end of the period for an agreed amount, which is normally significantly less than the original purchase price.
Which businesses is a hire purchase agreement most suitable for?
Businesses that need specific items of equipment immediately.
5) Chattel mortgages
A ‘chattel mortgage’ is essentially a mortgage on a ‘movable item’ as opposed to a purchase of land or property. It is generally used by businesses needing to acquire one or more vehicles and preferring to spread that cost over a longer period of time than would be possible for example with a hire purchase agreement.
These are your main options for business finance – if you need any more help deciding which is the best option for your business, get in touch with us!
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