If you are thinking about applying for a business loan, here is some information you should think about so your business can get the right loan for the business needs.
What is a business loan?
A business loan is one of the most common ways for a business to access capital. This may be to help purchase equipment or aid in cash flow and is commonly used by small businesses that don’t have easy access to growth capital. This article runs through the different types of business loans in NZ and the ways to access these options.
What types of business loans are there?
There are two main types of business loans in NZ, but the details of each can vary depending on the lender. These are term loans or line of credit.
Term loans
A term loan is a type of loan that provides a lump sum of money to a borrower and is repaid over a set period of time, typically with fixed interest rates or variable interest rates. Term loans are often used by businesses to finance capital expenditures, such as the purchase of equipment or real estate, or to support working capital needs. The loan is paid back in regular instalments, usually monthly, over the agreed upon loan term, which can range from a few months to several years. The interest rate and the repayment schedule are determined at the time the loan is taken out and are typically based on the creditworthiness of the borrower and the purpose of the loan.
Line of credit
A line of credit is a type of loan that allows a borrower to access a set amount of funds as needed, up to a specified limit. Unlike a term loan, a line of credit provides flexible access to funds and requires only the interest to be paid on the amount actually used. This can make it an attractive option for businesses that need to manage their cash flow or have unexpected expenses. The borrower can draw on the line of credit as needed and only pay interest on the funds they have used, making it a convenient and cost-effective way to access financing. These tend to come with higher interest rates than term loans though and are designed more for managing short term cashflow and working capital requirements.
Steps for applying for a business loan
- Have a business plan outlining how your business plans to repay the loan.
- Include historical financials or cash flow forecast that shows expected income and expenses.
- Review your credit score as lenders are more likely to approve a client with a good credit rating. This applies to your personal credit score as a business owner also.
- Assess the type of loan that is most suited to your business.
- Choose your lender or use a broker who has access to a range of lenders (like Commercial Lending Partners does).
Types of lenders – pros & cons
Traditional Banks
Traditional banks often offer the lowest interest rates, however, the process of applying for a business loan through a traditional bank does take longer and there is tougher criteria to meet compared to other business lending options.
Non-Bank Business Lenders
Non-Bank Business Lenders provide an alternative source of funding for businesses that may not be able to secure a loan from a traditional bank. Non-bank lenders typically offer faster loan processing times and more flexible repayment terms compared to traditional banks.
Peer-to Peer lenders
Peer-to-peer lending is a service that matches people or businesses that need a loan with people willing to fund them. They are useful for immediate loans but may not be as secure as other platforms, and often come with higher interest rates.
How can Commercial Lending Partners help
We specialise in asset finance, working capital and cash flow lending, offering custom-fit lending solutions to meet the unique needs of each business. With a wealth of expertise in the business lending sector, we work closely with quality lenders to deliver a personalised lending experience. If you’re looking to support your business with flexible and efficient financial options, don’t hesitate to get in touch with us today!