How do business loans work?

One of the very first obstacles that you have to face as a new business owner is funding your firm. Altogether, startup costs can add up to a hefty sum. 

If you think that you can’t afford to finance your company, don’t fret! That’s what a business loan is for.

Here, we will lay out what business loans are, how they work and how you can use online resources to get the help that you need.

What is a business loan and how do they work?

Like the name suggests, a business loan is offered by lenders to finance your business-related expenditures. This means that these loans, if approved, can be used for any business expense, including startup costs, loan repayment, company expansion and so much more. A very common type of business loan is a term loan, which allows you to repay the money that you borrowed through monthly repayments over a fixed period of time.

What do I need to get a business loan?

Banks, brokers and individual investors are the most traditional lenders for business loans. Your loan application process may require you to bring a few documents to the table – your identification, an overview of your business plan, financial forecasts and additional calculations for your business are among the most common requests. These items usually give the lending institution a general idea of how risky your business is and allow them to decide if your company is worth lending money to. 

Hopeful business owners also typically have to create a cash flow analysis of their business plan, which gives banks a better overall picture of how you plan to use your money to improve your business. Learning how to make a cash flow analysis can be crucial for you as a future business owner. These plans tell you where the money is slated to go and if your business is financially stable for the near future. Be sure to calculate the cash inflows and outflows for your business to get a clear sense of where your company is headed.

Interest rates and you

Interest rates and any additional fees from your monthly loan repayment are how lenders make money. They take on the risk of lending in return for revenue. 

Depending on how well your loan application goes, your business plan will generally dictate your loan amounts, your loan term and your interest rate. Lenders usually take a holistic approach before deciding on an interest rate for your secured business loan — meaning that they look at the aforementioned documents as well as your credit score before setting a rate. For example, if you generally have good credit, you’ll be quoted for a lower interest rate because you are less likely to default on your loan. 

As a good indicator of how much business lending rates are fluctuating, check market reports from government sources like the Reserve Bank of Australia before putting your applications together. These reports can inform you about trends in interest rates and if it’s worth applying for a business loan now versus later. Keeping these numbers in mind can help you save you money in the future.

Business loans for small businesses

If you’re a small business owner, applying for a loan can be an uphill battle. 

Even if you are approved for a small business loan, that doesn’t always mean that you’re in the clear. According to the most recent market report from the Reserve Bank of Australia, small businesses are “twice as likely to default on loans as large businesses,” which means that “interest rates on loans to small businesses [are] notably higher than those to larger businesses.” 

Even so, you can try your luck applying for the following types of loans:

  • Unsecured business loans: Unlike a secured business loan, which takes collateral into account, an unsecured business loan does not require any collateral from a business in order to be granted. This is a great business loan to apply for if you’re just starting your company.
  • Business line of credit: Think of a business line of credit as applying for an additional credit card but for your business instead. Most use a business line of credit for short-term funding, which then gets paid off every month, just like you do for a personal credit card bill. Business lines of credit differ from a business credit card by offering a bigger credit line and for paying off larger sums of money like property lease and payroll. Having a business line of credit can also help build your business credit, rather than relying on your own personal credit score.
  • Invoice financing: Invoice financing uses proof of recent sales as collateral. The application process for invoice financing is usually very quick, and can be a great short-term solution if you ever need a chunk of money in a pinch.

How online lenders can aid your small business

Another alternative lender option for small businesses are online lenders. With the rise of the internet, online lenders have risen up to aid many businesses by providing an additional loan option.

Depending on the platform, an online lender may look for different things before approving any loan applications. Each online lender will investigate what you plan to use the money for and your cash flow plan, often offering unsecured loans and a flexible loan repayment term for clients in need of extra funding.

UnLock small business loans with UnLock

At UnLock, we work with SMEs to fulfill their funding needs. We do not require collateral to approve a small business loan. As one of Australia’s leading online credit loan companies, UnLock is dedicated to helping you secure funding for your company.

Contact UnLock today to see what we can do for your business.