There is a huge range of finance options available to small business owners, but comparing them across the market can be challenging. From a line of credit to invoice financing to an unsecured loan, there are plenty of ways to bring in the capital you need to scale and grow, but how do you make sure you’re getting the best deal?
The lowest rate is not always the obvious choice. Perhaps you’ve got particular requirements around timing and when you need the funds, or perhaps you want a specific term for the loan. You may be looking for finance to fund a complex transaction, which means there are very specific requirements that are front of mind for you. Regardless of the type of finance you’re after, you want to be absolutely sure that you’re identifying options which complement your business needs.
Identifying your needs and sought-after features is vital. Your end goal is to have a loan agreement that facilitates your business vision and supports your financial goals. To this end, there are five key things to keep in mind.
1. Loan purpose
Carefully consider why you’re taking out finance as this will dictate the type of product that matches your needs. For instance, if you’re a small to medium sized business and you have unpredictable cash flow, then a business overdraft may be your best bet as you can link this to your business account. If you purchase goods from a local or global supplier you may want to opt for trade finance as this will enable you to pay interest on the amount offered for each transaction. On the other hand, if you want to earn rewards or frequent flyer points then you may want to consider a business credit card.
2. Interest rate
While some lenders may attach a fixed rate on the amount you owe, others will use a factor rate which is charged on the principal loan amount. When comparing business loans, keep an eye on the comparison rate as this will give you the best indication of the interest charges for that product. Check to see how often the lender charges interest, such as whether it’s daily or monthly, as this will help you compare rates more accurately across different products.
3. Repayment terms
The repayment terms should sit well with your business cash flow and your ability to service repayments. Some lenders may have flexible repayments terms while others will require fortnightly or monthly repayments. Work with your accountant to see how often you can realistically make repayments on your loan.
4. Loan fees
There are a series of fees and charges that will come with your loan. When comparing products side by side, look at the application or establishment fee, any ongoing account-keeping fees, legal, documentation, and early termination fees.
5. Customer service
Lenders often assign a business advisor to help you with your research and application process. Consider the level of customer service offered by the lender. Do they have a 24/7 online chat service? Do they clearly explain the steps required to apply for a product? Do they discuss eligibility with you such as whether your business needs to have a certain annual turnover? This will help you weigh up your options.
Final thoughts
Once you’ve compared your options and you’re pretty sure you’ve got a winner, there are some things to be careful of when preparing your application. Lenders tend to give consideration to how long you’ve been trading and the time that you’ve been operating under your current structure. If you’re applying for a loan and you’re restructuring or if you’ve been through several restructures in the past, then the lender may be hesitant.
Think ahead: if you were the lender receiving this application, what would these details suggest to you? It may be worth chatting to your accountant or business adviser to get a read on how your application will be perceived.
You’ll also want to be sure that you’ve articulated the purpose of the loan. How will the funds be allocated in your business? How do you intend to repay the loan? Give the lender your cash flow projections to show that you can comfortably service the loan over the specified term.
In summary
- Articulate the purpose of the loan
- Use the comparison rate to compare loans across the market
- Take the time to understand the features and benefits of each option
- Understand the repayment terms and work with your accountant to set yourself up for repayment success
- Look out for loan fees, including application or establishment fees, ongoing account-keeping fees, legal, documentation, and early termination fees.
Alex is the co-founder and CEO of Valiant Finance. He brings a wealth of experience from his time as a banking consultant at McKinsey, and has a background in Business and Law.
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