A business loan can help you make your next purchase, fund growth or manage cash flow for your business. But before you apply for one, you’ll need to work out which loan best suits you.
Here are eight steps worth taking before you apply for a business loan.
1. Understand your loan purpose
Being clear on why you want to borrow is the first step to choosing the right loan. It’s also often one of the first questions you’ll be asked by a lender.
Common reasons for taking out a business loan include:
2. Work out the loan amount
If you’re looking to borrow to buy an asset, knowing the amount you need will be reasonably straightforward. However, if you’re borrowing to cover a potential cash shortfall, working this out can be a little more involved. You can use the cash flow forecast tab within CommBank’s financial plan template to help you with this.
3. Calculate what you can afford to repay
The length of the loan will impact your repayment amounts. Your lender can outline the different loan term options in detail. But before you have this conversation, work out what you can afford to repay each month. You can do this by looking at your business’ past financials and completing cash flow forecasts.
4. Decide between a secured or unsecured loan
You’ll usually be able to choose to have your loan secured or unsecured. Each has its benefits as well as considerations.
- You offer an asset for the loan, such as property
- The interest rate will usually be lower than unsecured
- The lender may sell your asset if you’re unable to repay the loan.
- No asset is offered
- The interest rate is usually higher
- It can sometimes be more difficult to be approved for an unsecured loan.
5. Choose a fixed or variable interest rate
As with other types of loans, you’ll often have the choice between a fixed or variable interest rate for your business loan. A variable rate may suit you best if you’re confident you can repay the loan even if rates increase. A fixed interest rate may be more appropriate and help manage your cash flow better by providing certainty with your repayments.
6. Understand the fees and charges
Make sure you understand the true cost of any loan by comparing all the fees and charges. Some fees you may be charged include:
- Establishment or application fees
- Ongoing monthly fees
- Early repayment fees
- Exit fees
- Valuation fees (if you choose to secure your loan).
7. Get your paperwork ready
Preparing your business documents is an essential step that could help the lender make a decision sooner. Check out our guide to what information you’ll need to apply for a business loan.
8. Speak to an expert
A CommBank business banker can call you to discuss in more detail which business loans may suit you and answer any questions you may have.