How to prepare for a business loan

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Know your options

New forms of business funding and loans are appearing all the time so your first step is to work out what kind of loan would suit your business best. That’ll depend on things like what you need the funds for, how soon you need them, what your appetite for risk is, what kind of business you do, how well your business is already performing and how long you’ve been in business.

The most common forms of funding right now are:

• Bank loans. These generally have pretty good interest rates but applying is a long, difficult process and it can take a long time to get the money. There’s also often collateral requirements – guarantees the banks need in case you don’t repay the loan, like ownership of your inventory.

• Business credit cards. While convenient and often accompanied by reward points or cashback options, credit cards tend to generate much higher interest rates and fees. They’re also easy to misuse, causing bookkeeping problems down the track as you sort out the business expenses from personal ones.

• Lines of credit. Lines of credit operate in a similar fashion to credit cards but they don’t have the physical card so you’re less likely to get into trouble. Instead, you draw down to your bank account when you need funds, up to a pre-approved limit. They’re not quite as convenient as credit cards but they offer less risk and chance of misuse.

• Working capital loans. Working capital loans are provided by alternate lenders, like GrabFinance. They’re like bank loans, but they tend to be easier to apply for and are approved much faster so you can get the funds sooner. They’re also usually open to businesses that don’t meet the eligibility requirements of traditional bank loans.

• Balance sheet loans. Balance sheet lenders offer quick access to short-term funding requirements. Instead of looking at your credit scores, they care more about your business revenue and sales as you make repayments from each of your future sales. Because repayment is sale-dependent, these loans are generally kinder to your cashflow, but that benefit is offset by high fees.

• Peer-to-peer loans. Peer-to-peer lenders match you with people or companies looking to invest in small businesses. They’re common lending options for startups and are growing in demand. Fees and interest rates are usually tailored to the risk to the lender and, because they’re managed by a middleman lender, there’s a commission involved.

• Invoice financing. Invoice financing is a form of peer-to-peer loans where an invoice you issue is bought from you at a discount. It lets you skip the wait for your client to pay you and access the money you’ve earned right away. In most cases, you’ll receive between 80-90% of your invoice right away, then the balance, minus the lender’s fees, when the invoice is paid by the client. Fees are typically determined by your invoice payment terms – the invoice due date.