Commercial and business loans are a little different from residential lending. These types of loans are decided more on a case-by-case basis.

So here are some of your most asked questions answered!

What do banks actually look for?

It can be hard to understand how to put your best foot forward when doing a loan application. Have no fear! We have a simple way for you to remember… The Five C’s. Character, Collateral, Capital, and the Conditions (The Five C’s) are easy to remember but can be harder to understand so we’re here to talk you through them!

1. Character

The bank wants to know about you! Your business plans, your goals, and your street operations are all things the bank wants to see. For example, if you’re about to embark on a large property development the bank will want to see any experience you have done exactly that. Your capacity to run your business is what they’re looking for here. That can also include things like how you conduct your accounts, finances, and cash flow. Proving you’re prepared will go a long way to showing your great character in your application!

2. Capacity

When you’re looking to take out a business loan you want your business to be successful! The bank wants to see the same thing. In your application, they will look at the purpose of the funds. This is to make sure any new development will increase cash flow and make your business better. Basically, they want to know that the money will solve a problem and you can reach your goals.

3. Collateral

Here the bank wants to be provided with security. Luckily, there are lots of different options in the commercial world! A few options might be using property, you could use the actual equipment you’re purchasing, or unsecured lending. If you’re looking at unsecured lending the bank will take a fixed or floating charge over the business. They could even take a director’s guarantee. Whichever way you choose to go just remember that there are different levels of risk attached to each type of security. So if you have the safest security you will probably get a better interest rate!

4. Conditions

Now you’ve provided the bank with all the information on your business they want to know about your competition. Conditions are the bank looking to understand the environment your business operates in. They can look at your competitors within the market and other factors that may impact your business.

What are the different types of loans for a business?

When you’re applying for a loan you might be overwhelmed by your options. So here are some of the most common types of loans you might want to consider!

Term loan

Term loans go by many different names. In the residential space, they might be a home loan or investment property loan. In the commercial space, you might hear it called a commercial property loan or something similar. A term loan works like a residential mortgage. You have set repayments, the term will depend on the asset you’re purchasing, but usually up to about 20 years. If you’re looking to upgrade an office space or purchase a property this loan could be for you!

Unsecured business loan

Finance for business can be higher risk than other loan options. If you’re not looking to purchase a property you may consider an unsecured business loan. This basically means the loan isn’t secured by property. In this scenario, the bank will take a fixed and floating charge from the business or maybe that director’s guarantee we mentioned before. If you don’t know what a fixed and floating charge is, don’t worry, you’re not alone. It’s an all-encompassing charge over the business. This means the bank can take ownership of the assets and cash flow attached to your business if something goes wrong.

This is a little scary. There are some risks associated with it, but it will be for a much shorter term. This one isn’t for the faint-hearted, it’s a good option if you’re looking to purchase a business that is already profitable. That way you can prove to the bank that you have a way of repaying the loan. It might also be a good option if you’re looking to grow an area of your business. Either way, make sure you consider your options carefully and look for advice if you’re not sure what you’re prepared for.

Overdraft

This is one of the most common loan forms for many businesses! If your business is more seasonal and you need help with the day-to-day, this might be the loan for you. You usually only pay interest on the facility. So instead of having separate payments, you’re just repaying interest on the amount you use. A lot of businesses might use their overdraft to stay in debt and it doesn’t fluctuate between credit and debit. But consider letting your overdraft fluctuate! If your overdraft gets stuck in debt there are things you can do to make sure that debt is reduced. If this is something you are interested in contact us here and we can help you!

Invoice data finance

A loan with a difference… this is a little more interesting! Watch out for this one, it has a few different names depending on the bank you go to. This type of finance tends to be for businesses that supply products or services to other businesses. So they’re sending out invoices for their goods with a term of 30 to 60 days. Long terms can make it difficult to manage cash flow. This is where your loan steps in. The bank will fund those invoices, or a portion, really quickly. The money will come within 24 hours to help your cash flow. In 30 days when the invoice is due the money goes straight back to the bank.

This can be cheaper than an overdrive because it has tangible security attached, which is the invoices. This one helps bridge the gap in time between invoice sent and payment received. See, interesting right!

Equipment finance

If you’re looking to purchase more equipment for your business this might be the best loan option for you! This type of financing is secured by the equipment. Sometimes the bank will also require a directors guarantee. These loans usually match the life expectancy of the equipment. With this type of business finance, comes balloon payments.

It can be confusing to know what that payment can look like so here’s an example. So say you buy a car and you have a 5-year financing term. The balloon will be a payment at the end that’s basically in line with the value of the car is after 5 years. That balloon payment amount could change depending on if you’re looking to trade that vehicle in or sell on. If you’re looking to trade in you need to make sure that trade-in value will be more than what the balloon is. Otherwise, you might be left with debt.

Insurance premium funding

This one is going to be a bit less common. But it is still something that’s available so we want you to know about it. This is a really convenient and flexible alternative to paying insurance premiums upfront. Does your business have large annual insurance premiums or something that has to be made in lump-sum payments? A bank can help. They can have a fixed rate attached to the facility and break it down to 12 monthly repayments. This can help manage your business’s cash flow!

There is a lot of different information to consider when you’re looking into business finance. Click here to read more about corporate finance on our website!

Our skilled professionals are here to help you find the best solution for your business. If you would like to contact our team, use the form below!