You have a lot of options open to you when searching for small business loans. Make sure you run a full comparison before you make your choice.
Your company needs a business loan and you’re preparing yourself for the application process
But are you sure that you’ve found the right loan? What happens if you’ve applied for a business loan, only to find that it isn’t fit for your needs?
One restaurant owner found out…
The owner of a restaurant decided to take out a business loan with a major bank. The loan terms seemed fair, though the business owner didn’t pay much attention to the terms and conditions
They went ahead with the loan with confidence. After all, the restaurant recorded solid new profits and had several assets to its name.
And all went well…for a while. The problem came when the business owner wanted to renew the loan. The bank refused, leaving the business owner in a position where they had to repay the remainder of the loan in one go.
Thankfully, that restaurant owner managed to find another, more suitable business loan. However, their story highlights the importance of understanding what you’re signing up for. And to do that, you need to know how to compare business loans. Lenders generally require certain criteria to be met, such as strong business performance and a healthy assessment of your business’s financial health, before offering loans.
These are the four tips that will help.
When you compare business loans, consider not only the type of loan, but also the approval process, as lenders may have different requirements and timelines for reviewing applications. It’s also important to understand how lender’s policies can affect your application and the terms you receive. Not knowing what you’re getting into can lead to unexpected costs, risks, and even the loss of your business.
Types of Business Loans
When exploring business loans, it’s important to understand the different types available and how each can support your business’s financial health and growth. The two most common categories are secured business loans and unsecured business loans, each offering unique advantages depending on your business’s needs and circumstances.
Secured business loans require you to provide collateral—such as business assets, equipment, or even other valuable assets—to secure the loan. This reduces the lender’s risk, often resulting in lower interest rates and higher loan amounts. Secured business loans are ideal for businesses with substantial assets and a strong balance sheet, and they can be particularly useful for large-scale business expansion or significant investments.
Unsecured business loans, on the other hand, do not require collateral. Instead, lenders assess your business’s credit history, cash flow, and overall financial situation to determine eligibility. Unsecured business loans are a popular choice for small businesses or those without significant assets, as they allow you to access funds quickly without risking your property. These loans are often used for working capital, managing cash flow, or funding business growth initiatives. However, because they present a higher risk to lenders, unsecured business loans may come with higher interest rates and lower borrowing limits compared to secured options.
Beyond traditional loans, alternative funding options like peer-to-peer lending and crowdfunding are becoming increasingly popular among New Zealand businesses. These alternatives can provide flexible repayment options and may have different lending criteria compared to banks and online lenders.
When you compare business loans, consider not only the type of loan but also the lender’s policies, interest rates, and repayment terms. Assess your business’s financial health, cash flow, and credit history to determine which loan product aligns best with your goals. Whether you choose a secured or unsecured business loan, make sure the terms support your business’s long-term success and financial stability.
Tip #1 – Consider Future Interest Rates
Let’s say that you have two loan options available to you. One of them carries a slightly higher interest rate than the other. The loan term can affect both the interest rate and the overall cost of the loan, so it’s important to consider how long you’ll be repaying the loan.
That seems to make the choice obvious. You’ll go for the one with the lowest rate to reduce your monthly repayments.
However, that could set you up for a fall later on. For example, the loan with a higher rate may also have that rate fixed for five years (fixed-rate periods can last up to five years, depending on the lender). The loan with the lower rate may only have a fixed-rate period of two years before moving to a variable interest rate.
It’s possible for the variable rate to end up being higher than the fixed rate on the other loan. As a result, you actually end up paying more on the loan that started with the lower rate.
The point is that you have to look beyond the initial offer when comparing interest rates. Look beyond higher interest rates to see if the loan works out better for you in the long run. Comparing low interest rates and loan terms is essential to finding the best deal, as loans with low interest rates and suitable terms can help you save money over time.
Tip #2 – Look at the Entire Package
Not every loan offer will provide you with the same features.
For example, you may have a loan that offers a line of credit. Or, the lender may offer a business overdraft on your account to sweeten the pot for your loan.
These added features sound great. However, they typically come at the cost of a higher interest rate. Plus, they may have fees attached to them that make them difficult to use. Late payment fees are another potential cost to consider when comparing loan offers.
This isn’t to say that you should avoid additional features when looking for a loan. The key is that you consider what you need instead of accepting features just because they sound good.
Examine the entire package when looking at a loan so you understand what you’re getting and what it may cost you. You should also consider whether the loan features align with your intended business purposes.
Tip #3 – Research the Lending Criteria Beforehand
Every lender has its own criteria in place that determines whether or not they accept your loan application.
The problem comes if you try to apply for too many loans or lines of credit in a short space of time. This could have a negative impact on your company’s credit score.
The reason is that lenders will see multiple applications and assume that you’re finding it hard to get a loan or line of credit. They may make inquiries of their own, which could lower your credit score even further. Lenders often review bank statements and assess the business’s cash flow as part of their evaluation. Ultimately, your multiple applications end up making it even harder for you to get a loan.
This is why it’s so important to research a lender’s criteria before lodging an application. You want to feel as sure as possible that your application will get accepted so you don’t have to apply elsewhere. Lenders may take everything from your financial status to the type of business into account. Some lenders assess applications on a case by case basis, which can be helpful for businesses with bad credit.
When comparing business loans, examine the criteria as well as the offer. You may find that a large money offer comes with criteria that you’re not confident of meeting. In such cases, it may be better to go with a lower offer for the more favourable criteria.
Tip #4 – Unsecured Business Loans vs. Secured Business Loans
The choice between a secured or unsecured loan is one of the most important that you’ll make.
To make the right choice, you need to know what you’re getting with each loan type.
Secured loans are the most familiar and they’re what the major lenders will offer. Typically, they involve you placing an asset that you own up as security on the loan. This could include residential property, other residential property, or business assets, and the lender may register a security interest on the Personal Property Securities Register. For example, you may use your business premises as security for a small business loan.
Of course, this means the asset gets placed at risk if you default on the loan. A secured loan or secured business loan may also require a personal guarantee, which puts your personal assets at risk if the business cannot repay. However, that added security also increases the lender’s confidence. As a result, you may find that this type of business loan comes with a lower interest rate and more favourable terms.
With an unsecured loan, you don’t have to place an asset up as security on the loan. Unsecured loans and unsecured business finance do not require collateral, but lenders may still require personal guarantees, which means you could be personally liable for the debt. This makes the loan ideal for new businesses or those that don’t want to risk losing valuable assets.
Of course, not having an asset as security increases your risk as a borrower. This typically manifests in higher interest rates and restrictions on the amount you can borrow. However, these issues often depend on the strength of the business. Lenders assess business finance applications based on business performance, borrowed funds, loan amount, and market conditions, and the lender’s risk is higher without collateral.
It’s crucial that you consider your business’ circumstances before choosing which of these loan types to go for. Each has its own pros and cons and you’ll usually find that one’s more suitable for your business than the other. Lenders offer loans based on their assessment of your business’s financial health, and loan terms and approval may vary depending on the lender’s risk appetite and market conditions.
Managing Business Debt
Effectively managing business debt is essential for maintaining a strong financial position and unlocking your business potential. One of the most effective strategies is debt consolidation, which allows you to combine multiple debts into a single business loan with a lower interest rate and more manageable monthly repayments. This approach can simplify your finances, improve cash flow, and reduce the overall cost of borrowing.
Another key aspect of managing business debt is prioritizing repayments. Focus on paying off loans with the highest interest rates first, as this can save your business money over time. If you’re struggling with repayments, consider negotiating with your lender to secure a lower interest rate or extend your repayment terms. Always review your loan agreement carefully to understand your obligations and avoid unexpected fees.
Maintaining healthy cash flow is also crucial. Monitor your expenses, ensure timely invoicing and payments from customers, and use tools like a business credit card to manage short-term cash flow needs. Regularly reviewing your financial situation will help you identify areas where you can cut costs or increase revenue, reducing your reliance on debt.
It’s important to consider the impact of interest rates on your business loans. A fixed interest rate offers predictability and stability, making it easier to plan your finances, while a floating interest rate may provide flexibility but can expose your business to market fluctuations. Choose the option that best matches your financial capabilities and cash flow requirements.
New Zealand businesses have access to a wide range of funding options, from unsecured business loans to secured business loans, offered by both traditional banks and online lenders. Each lender has its own policies, lending criteria, and repayment terms, so it’s vital to compare business loans carefully before making a decision.
Ultimately, proactive debt management—through strategies like debt consolidation, prioritizing repayments, and maintaining strong cash flow—will help your business stay financially healthy and ready for future growth. By understanding your options and making informed choices, you can ensure your business remains on track to achieve its goals.
Choose Your Business Loan
With these tips, you now have a better idea of how to compare business loans.
The key is that you always consider your company’s circumstances before making your choice. A loan product that works for one business may not work for yours.
Perhaps you’ve decided that an unsecured business loan is right for your company. That’s where we can help you.
With Unsecured Finance New Zealand, you can access loans of up to $300,000. We also offer flexible repayment periods and can provide approval within 24 hours.
Are you ready to get started?
Apply online today to find out if you’re eligible for one of our unsecured business loans.
