9 step guide to comparing business loans

 

So, you’ve decided you need a business loan, but do you know which lender are you going to get it from? You’ve got multiple business loan options, and the right choice for you will depend on your unique circumstances.

Keep reading for our guide on how to compare business loans.

How to compare business loans

1. Find the loan size you need

First off, you’ll be looking for a business loan that can provide you with the total amount of money you need. Different business loan providers have different minimum and maximum loan amounts, so you should find one that can provide you with an adequate level of finance.

For example, suppose you’re thinking about renovating your business, and it’ll cost $50,000. In that case, you’ll only want to consider business loans that allow you to borrow $50,000 or more.

 

2. Check the loan term

Once you’ve worked out what amount of money is needed, you should look at the maximum loan terms available. Generally speaking, the longer the term, the lower your monthly repayments will be.

However, don’t forget that you’ll need to pay back all of the money within this time. This means if you take out a business loan with a 24-month term, you’ll have to pay it back over 2 years.

 

3. See if it has a fixed or variable interest rate

After considering the loan amount and term, you should look more closely at whether your business loan will have a fixed or variable interest rate.

With a fixed interest rate, you’ll know exactly how much your repayments will cost you at all times during the loan. However, if the Reserve Bank of Australia changes our official cash rate, you could find yourself paying more than what you initially budgeted for.

Variable interest rates are a bit riskier, as repayments can change if the Reserve Bank increases or decreases our cash rate. Of course, the trade-off with a variable rate business loan is that you can benefit from lower repayments when the cash rate is reduced.

Let’s break down the pros and cons of both types of business loan interest rates:

 

Fixed-rate loan

Pros:

• Easier budgeting since you know exactly what your repayments will be.
• Peace of mind that your loan won’t become more expensive if the cash rate increases.

Cons:

• If the cash rate is reduced, you’ll be stuck paying a higher interest rate.
• Typically not as much flexibility in making extra repayments.

 

Variable-rate loan

Pros:

• If the cash rate is reduced, your repayments will be cheaper.
• More flexibility in making extra repayments.

Cons:

• If interest rates increase, your repayments will become more expensive.
• Harder to budget since you won’t have certainty over your what your repayments will be over the life of the loan.

 

Tip: The best time to get a fixed-rate business loan is when the Reserve Bank has just announced a cash rate drop since you can lock in a lower interest rate.

 

4. Check whether the loan is secured or unsecured

A secured loan is where you use something (equipment, residential or commercial property, business assets) as collateral. This means if you can’t make your repayments, the lender will be able to seize this asset and sell it to recover its losses.

On the other hand, an unsecured business loan is where you don’t use any collateral. Since you won’t be risking any of your assets, an unsecured business loan will typically have a higher interest rate than a secured one but is more accessible if your business credit score isn’t super high or your owned assets are limited.

 

5. Confirm if you can make extra loan repayments

The option to make extra loan repayments can help reduce the amount of time it takes to pay off your business loan.

If you can make extra repayments, you’ll be able to chip away at the principal value of the loan each month. This means less interest needs to be paid overall, and this will reduce how long it takes to pay off what you owe.

 

6. Consider loans with split, switch, and redraw facilities

If having a great deal of flexibility with your business loan is important to you, then additional features like split, switch and redraw facilities might be worth considering.

A split loan facility gives you the option to pay part of the loan on a fixed interest rate and part on a variable interest rate. This could be useful if your business is doing well and you want to pay as much off as quickly as possible.

A switch facility lets you change how your repayments are structured during an agreed period without penalty. So, if interest rates go up or down (or you need more or less money), this could be useful.

Finally, a redraw facility lets you withdraw any additional repayments that you’ve made if you need those extra funds within the same year. This can be useful if you have a large business tax bill due at the end of the financial year, but your business needs cash flow.

Tip: A redraw facility can be a great option to pay off existing debt without the accrued interest and attack new debt at a lower rate.

 

7. Evaluate fees and charges

When comparing business loans, make sure you also look beyond the interest rate and compare what fees and charges will be included.

For example, a lender who doesn’t charge establishment fees will appear a lot more attractive if another lender has a loan with an establishment fee of $2,000. Consider lenders who offer low or no application fees.

 

8. Don’t forget about early repayment fees

Once you’ve decided on what lender to go for, don’t forget that once it comes time to pay off your business loan early, they may charge an early repayment fee. You’ll want to take this into account when working out what you can afford.

 

9. Look for an easy application process

If you compare business loans and find a few that are similar, then one additional factor to consider is the ease of applying. Getting a business loan from a bank can sometimes be cumbersome because of the many checks and balances they perform. At the same time, non-bank lenders can generally offer a streamlined application process.

Every lender will have its own lending criteria. You can expect any provider you go with to check your credit history and ask for business financial statements to determine your eligibility for a business loan.

How straightforward providing and verifying this information is could influence your final choice. You may find some loan features simply aren’t worth the hassle of dealing with a slow and stressful application process.

 

OnDeck’s business loans

Now that you have a better idea of how to compare business loans – consider the benefits of applying for a business loan with OnDeck:

• Access between $10,000 and $250,000 to use for any business purpose, from supporting your business’ cash flow to buying new equipment and more.
• 6-24 month terms.
• Low loan set-up fees of 3% of the entire loan amount.
• Loyalty discounts – renew your loan, and your set-up fee will be halved to 1.5%.
• Fast and simple application process – apply in minutes and get an approval decision in hours.

 

Frequently Asked Questions

What should I look for in a business loan?

When you apply for a business loan, you should make sure:

 

• It covers the amount of money you require.
• The interest rate and loan fees are affordable for you.
• The loan has additional products and features that you’ll benefit from (such as a redraw facility).

 

What is a good loan amount for a business?

A good loan amount for a business depends on what the business needs and its current financial circumstances. If your business needs to expand or upgrade its equipment, it will generally require a higher loan amount than if it just needed to cover a shortfall in cash flow.

 

Prepared by OnDeck Capital Australia Pty Ltd ABN 28 603 753 215 (“OnDeck”) for general information purposes only. Content may belong to or have originated from third parties and OnDeck takes no responsibility for the accuracy, validity, reliability or completeness of any information. Information current as at November 2021. You should not rely upon the material or information as a basis for making any business, financial or any other decisions. Loans issued in Australia are subject to the terms of a loan agreement issued by OnDeck. Loans are subject to lender approval. OnDeck® is a Registered Trademark. All rights reserved.