If you are an entrepreneur or business owner, you know that many things need to be in place for your venture to be a success. You should be dedicated, persistent, and willing to take risks. Of course, you cannot begin without commercial finance. You require capital, which will allow you to move on to the next level. Without funds, you cannot start any projects, no matter how skilled and knowledgeable you may be. Often, it is what determines the success (or failure) of your business.
Therefore, it is not surprising that commercial finance & funding is essential, regardless of how small or huge the firm is. Even more important is finding the correct type of loan that can help finance your business, including its operations and assets. This blog will help you understand more about commercial finance and its types.
How Commercial Finance Works
Businesses can typically choose between a lump sum payment or revolving credit line to fund their operations after getting approved of a loan. Some lenders only allow lump sums, while others offer more options that can be repaid with interest over time.
Commercial finance can either be secured or unsecured. If you opt for a secured loan, you can borrow a higher amount than an unsecured loan. Also, the interest rates are much lower for a secured loan. The amount you can borrow will mostly depend on the value of the asset that serves as collateral.
Meanwhile, an unsecured business loan has a higher interest rate. However, many business owners prefer this option because they do not have a property to use as collateral. Others simply do not want to risk their company or personal property.
All these facts resemble what you may be used to, such as a car loan. Although there are similarities, commercial finance does not work the same way. Before you attempt to apply for a loan, you should already have a clear idea of why you need extra funding.
Ask yourself, “Do I need a business loan?” Here are some of the main reasons why businesses take out a loan:
- To make big purchases, such as vehicles for deliveries or expensive equipment
- Pay employee wages
- Expand operations
- Hire new staff
- Move to a different building or city
- Pay for supplies or increase inventory
- Manage cash flow
Do any of the situations above mirror your own? If your answer is a resounding “yes,” then you will undoubtedly benefit from commercial finance. Additionally, knowing why you need extra funds will help you choose the type of finance you need. It could also come in handy when it is time for the application process.
Types of Commercial Finance Options
There are various types of commercial finance. One of the most popular is to go to a bank or a major financial organisation and apply your loan application. The problem with banks is that there are numerous documents and requirements to submit. Approval can also take months. For new business owners, there is a high likelihood that the application will get rejected. One reason is that their firm is not established yet. Unfortunately, banks are not willing to take risks on new businesses.
But don’t worry. There are other sources of commercial finance that accept even beginners in the business world. These lenders provide faster applications and approvals, along with many loan choices, not just a secured loan.
Before you choose which option to go for, answer these critical questions first:
- How much do you need for your business?
- Do you require a lump sum payment or just a small cash injection?
- What is your company’s nature or structure?
- What do you usually buy or spend money on for your business?
- How much is your current revenue?
- Do you have any personal financial issues? What about the other owners or directors (if there are)?
Every business is different so your own requirements will not be the same as other companies out there – even if you are in the same industry. But the good news is that no one understands your business better than you do.
What you need to do now is to understand what your options are, which we have listed for you below:
Low Doc Car Finance
Mainstream lenders always have strict requirements that you need to provide before you can get approved. The process can be exhausting, and the wait is too long. Worse, the chance of scoring that loan is low. You will find yourself strapped for cash, hoping for a miracle.
If banks turn your application down because you cannot prove you have a stable income for the past couple of years, you can opt for a low doc car finance to buy a vehicle. If you are an entrepreneur with no regular income, a freelancer, or a worker who gets paid in cash, you can go for this type of loan. Often, lenders who offer this product will allow you to use the car for business or personal purposes, which is a big plus.
Please note that “low doc” does not mean “no-doc.” You still have to provide certain documents, although the requirements are minimal and can be obtained fast. Most of the time, you will need to provide the following:
- The value of the car you would like to purchase
- Your personal information, including name and proof of identity
- Business details
- Proof of insurance
If you often get turned down because you cannot prove your income and you need a vehicle for your small business, this type of loan is for you.
Aside from low doc loans, you can also consider a chattel mortgage if you plan to buy a car for your business. A chattel mortgage is a commercial finance product where the lender will allow you to borrow money, which you will use to purchase the car you need. You are then required to make a regular payment.
It works the same way as a low doc loan. As the business owner who applied for the loan, you will instantly assume ownership of the vehicle. However, the financier will have “mortgage” over the car until your loan is fully paid. The repayment also includes all balloon payments, if there are any. A balloon payment helps reduce the amounts that need to be repaid. It also allowed scheduling of repayments so that you can pay off the entire cost over a certain period.
Note that GST applies when purchasing the vehicle, which is applied to the price. If your business accounts for GST on a cash basis, you can claim it as an Input Tax Credit on your Business Activity Statement.
Commercial Hire Purchase
In this arrangement, the lender or financier will purchase the car on your behalf. Then, you will hire or borrow the vehicle over a set period. As the customer, you are allowed to utilise the car for the duration of the contract. However, you will not be deemed the owner of the car.
When you reach the contract term, and you have paid the total price of the vehicle, along with the interest and other extras, you take ownership of the car.
The benefits of the commercial hire purchase option will depend on many things, including the lender’s requirements. However, you will typically enjoy certain gains, such as:
- Flexible repayments and long contract terms, usually starting from 12 months
- With fixed interest rates (although this may vary)
- With easy to pay monthly repayments
- Tax deduction if the car will be used for your business
- GST-free on the monthly rental, which may also be called the residual payment
If you are eligible, you can claim the GST in the price, interest, and fees of the vehicle.
Asset costs can be difficult to manage if you have a small to medium business. It’s a huge problem, especially when seeking to buy equipment or vehicles. But these purchases are beneficial when you try to compete with larger competitors. You do not want to go into debt or be short on working capital. Here’s when an operating lease is useful.
Upon entering the agreement, you sign up for an asset rental, which will go on for the long-term. Read the contract properly and ensure that you obtain the exclusive rights to operate or use the asset you need during the lease term. Remember, though, that ownership will not be given to you or your business.
This type of commercial finance is often compared with commercial hire purchase. But the difference is that you pay off the asset and retain ownership once you reach the end of the lease term with commercial hire purchase.
In the case of an operating lease agreement, you return the assets to the lender. It’s a good solution if you do not want to pay for the huge amount of the car or any equipment. It also makes sense if you wish to keep the asset off your balance sheets, which provides some taxation benefits. If you like updating your vehicles to the latest model, you do not have to worry about residual risk with the help of this loan.
If you are a business owner, a novated lease is for your employee to purchase a new car. It is an agreement between you and this member of your staff, as well as the finance company or lender. You will pay the monthly lease payments to the lender, and the employee can utilise the vehicle, which can be treated as a part of a salary package arrangement.
With a novated lease agreement, you deduct the fringe benefits tax (FBT) and running costs of the car from the pre-tax salary of the employee.
Line of Credit
On many occasions, you will find that a line of credit is ideal for your business. It is especially true if your business finance requirements often fluctuate. If you can settle the loan balance quickly, you can get the best loan rates. When you gain access to a business line of credit, it can help save your firm in tight situations.
You can benefit from this type of commercial finance if your loan amounts are not always the same. If you need fast cash to fund your business, you may want to consider this option.
With all these options, how do you know which one is right for you? First, you need to figure out if you meet the eligibility criteria. Most of the loan types above are easy to apply for, and you can get approved fast, as well. Next is that you should check how much the loan costs, including its interest and other fees. If the repayment terms are suitable for the needs of your operations, then it could be right for you.
If you are still unsure, you can give Loans Unlimited a call, and we can help you find the best commercial finance option for your business.