Raising capital if you are trying to start up your dream business or an existing business owner trying to finance commercial loans can give you the funds to kick-start or keep growing your venture.
More SME business owners opt to work for themselves or start their ventures, the demand for business loans and commercial property loans is rising. Established businesses and start-ups alike often need funds for working capital, equipment, leases, acquisitions, advertising, company vehicles, and commercial property mortgages.
The business owners have access to several solution-based loan types In the current commercial finance offerings to fit their specific needs. If the business needs a few thousand dollars, a few hundred thousand dollars or even a few million dollars, applying for the right commercial loan can keep your business growing without disrupting your operations.
How do I get a business loan?
When you are seeking a business loan, your first step is to find an experienced commercial finance broker. They will have access to a broad range of lenders and know which ones have an appetite for your type of business. Approaching a commercial broker can save you time and money, rather than comparing different lenders and their products on your own.
And it is vital to understand your terminology. Often, people interchange the terms “business loan” and “commercial loan”, somehow there are some slight differences between them. When brokers talk about a commercial loan, it is usually referring to a mortgage on commercial real estate with a longer loan term. Borrowers may seek a commercial mortgage for premises in which to run their business or from professional investors seeking commercial property to provide rental income and capital gain over time.
In contrast, business loans, do not always need commercial property security and can be used to cover the actual expenses of running a business. The business owners may take out a business loan to cover employee wages, leases on offices or equipment, business overhead expenses, advertising, acquisitions, business vehicles, and all manner of other expenses i.e. cash flow.
Business owners may need a commercial property loan, a business loan, or both. When you work with a commercial finance broker, they can assess your situation and go over all your options with you.
What is an unsecured business loan?
An unsecured business loan is a loan that does not require real estate collateral as a security for loan approval. An unsecured loan is made solely on the strength of the borrower’s credit and financial standing. With an unsecured loan, the risk to the lender is higher, because they cannot rely on an owned asset to make up for any losses if the borrower fails to repay. For this reason, interest rates on unsecured business loans tend to be higher.
Even if a borrower can get an unsecured business loan, they will still likely have to sign a personal guarantee, also known as the company director's guarantee. The personal guarantee allows the lender to pursue repayment from the borrower’s assets if there is a loan default. Unsecured business loans are usually for lower amounts and made to borrowers with a consistent earnings history and good cash flow. Usually, the company balance sheet and profit and loss depict a good picture of the business to the lender when considering a business loan.
What is a secured business loan?
A secured business loan or a commercial property loan uses collateral – usually in the form of residential or commercial real estate as security to back the loan. Secured business or commercial loans involve less risk to the lender because if the borrower does not make repayments, the lender can rely on the security property. This means that secured business or commercial loans usually offer higher loan amounts and lower interest rates.
Many secured business loans have commercial real estate security. For instance, if a dentist owns the building that the dental practice operates from, they might leverage the equity on the commercial property as security for a loan to update their medical equipment.
Some business owners do not operate their businesses on the same storefront or office locations, and they rent or lease their commercial space. This does not necessarily mean they cannot get a business loan for operating expenses or growth opportunities. As business owners, you can put up your residential homes as collateral for a secured business loan. Business owners do not own any commercial or residential real estate but have strong enough business financials and liquid assets to get an unsecured loan with a personal guarantee.
What is a low doc business loan?
Low doc business loans are for qualifying business owners who do not have up to date all the financial documentation typically required to get a business loan. Many entrepreneurs and independent contractors need funds for start-up expenses. So, they do not have several years of business tax returns or proof of consistent cash flow on Business Activity Statements. But this does not necessarily mean these types of applicants cannot get a business or commercial property loan.
Traditional banks and credit unions may be less willing to lend to low-doc applicants. However, there are plenty of speciality lenders who have the expertise and resources to assess a borrower’s financial strength using alternative means and provide solutions based finance to the business. When applying for a low doc business loan or a low doc commercial loan, the lender will likely require real estate as security. Because low doc loans are a higher risk to the lender, they will want to ensure they have sufficient security to recover any losses if the borrower is unable to meet future loan repayments.
If you need a business loan for a start-up, it always helps if you have a strong and lengthy earnings history of working somewhere else in the same field. If you already own a business and need a loan for working capital or an acquisition, you may still be eligible, even if you do not have recent tax returns.
Lenders specialising in business loans understand that owners have unique tax considerations. Their income may not be as easy to verify as someone who gets regular payslips. As long as your Business Activity Statements and personal bank accounts show strong cash flow and no major credit issues, you may be able to get a business loan without the traditional documentation. An accountant's letter confirming the income is also acceptable under the lo doc loan option.
Can I get a business loan to buy a car?
Yes, you can get a business loan to buy a car. More and more modern businesses offer home delivery or involve services that require employees to travel as part of their job. Business car loans allow business owners to finance work vehicles under the umbrella of the business. This spares them the potential credit and personal liability risk of taking out a business car loan in their name. Business loans for work vehicles can also be advantageous for tax purposes, since depreciation, loan interest, and insurance premium deductions can offset tax liability. The rates are also competitive under commercial motor vehicle purchasing as well.
Can I get a commercial loan with my SMSF?
If you have a self-managed super fund, you may be able to use it to take out a mortgage on commercial property. Some SMSF members buy residential or commercial properties to help diversify their investment portfolio. Buying residential or commercial real estate with SMSF funds allows members to collect rental income, build equity, and capture capital gains if they sell the property. If you are not buying a home for you or a family member to live in, you can use your SMSF to take out a mortgage the usual way. It is highly recommended to do your due diligence and engage with a financial planner to get professional advice before making any commitments to purchase.
For commercial property purchased with an SMSF, buyers are generally also allowed to use the property – provided it is being used exclusively for business purposes. Whether held personally or in an SMSF, mortgages on commercial property tend to have slightly higher interest rates than those on residential property. And while the mortgage’s term is usually shorter, some lenders will go up to 30 years.
Can I get a business loan if I have bad credit?
You can still get a business loan if you have bad credit. However, these borrowers will usually be subject to higher interest rates and will need collateral to secure the loan. Unsecured business loans are hard to get unless you have an above-average credit history. If you are seeking a business loan and your credit score is on the low side, you will need to present a good case to your lender. There are other options available such as rental finance which let you own the asset at the end of the term.
Speciality lenders may still approve you if you can show that your financial situation has improved and service the loan. You will need to show a solid record of consistent business revenue or starting your own business, a similarly solid history of earnings in the same industry.
The bottom line is that you want to show the lender that you are a risk worth taking and that repayment problems are unlikely to recur. Mainstream banks and credit unions are less likely to approve business loans to applicants with low credit scores. But a commercial finance broker will know which lenders may still consider you and tell you what documentation will help your chances.
How do I apply for a business loan?
Applying for a business loan does not need to be daunting. A good starting point is to seek out the services of an experienced commercial finance broker. You want someone who understands what you are trying to achieve and can identify lenders that have an appetite to back your situation.
A good commercial finance broker will guide you through the application process and help ensure your loan application is approved. It is important to remember that each time you apply for credit, credit enquiries will be made on your credit file and this impacts your credit score. Because of this reason, whoever you decide to formally apply with must have an appetite for your loan and circumstances.
A commercial broker should be able to guide you and help you through a streamlined process to get your loan approved. ASS Mortgage Brokers can help you as the independent local commercial broker that can help find a finance solution that suits your business needs.
This article is prepared based on general information. It does not take into account individual financial objectives or needs and is not financial product advice. The original content was first published on the Liberty blog website.