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The Pros and Cons of Small Business Loans

Fixed overhead costs can be stressful for small business owners, but knowing that they have options for their business’ financial security can provide some peace of mind.

John de Bree on left during business interview

Applying for a small business loan is easier said than done, often it not only requires a lot of consideration for the advantages and disadvantages, but applications can also be time consuming.

Knowing exactly what you are venturing into will answer the question, “Is now the right time for a business loan?”


1. Plenty of options

There are a variety of small business loan options so working out which one is right for your business can be challenging on its own.

A capital loan helps the business support its monthly or cyclical capital costs, while a line of credit increases your working capital for inventory, equipment and general cash flow needs.

It is always best to visit multiple companies, talk to their lending officers and compare options based on the terms, loan security options and the reputation of the lender. One common mistake is that many SME owners only consider banks, but there are many financial institutions that offer competitive rates with variable loan terms that suit how your business operates on a daily basis within your industry.

2. Lower interest rates, flexible payment terms

Bank loans offer slightly lower interest rates compared to other funding agencies but are typically much harder to obtain and require much more effort. Most banks have the ability to offer a “no maximum loan” with up to 25 years payment option but it can often mean a higher interest rate.

Secured loans with a specific cap can offer as low as 5.85 per cent interest on variable interest loan offerings. It is also important to note that not all business loans use interest rates, with some financial institutions using the method of a total payback amount. In this case the borrower knows up front the total cost of the loan and is independent from any fluctuations in interest rates.

3. Fast approval and availability of funds

Lenders make it easier for borrowers to have an idea on their borrowing capacity with just a few clicks. Providing details such as purpose of the loan (i.e. inventory, equipment, operational), type of business (seasonal businesses such as a swimwear shop may be given a lower grant compared to a cafe), loan security (with or without a collateral) and bank account details, can quickly provide an estimated loan amount. 

Loan approval can come as quick as 24 hours to two weeks, so it is easier for a borrower to move on and apply with other lenders should their business credit rating not satisfy the first one.

4. Tax deductions

Government taxation offices are very transparent in informing the business owners that their assessable income can be reduced by knowing exactly what their tax deductions are. Loans are not income, but the actual loan proceeds (which become a part of the working capital), usually become part of taxable income by default. Any loan should be properly documented and declared for tax deductions in the future.


1. Most banks favour secured loans

Not all small business owners and start-ups have the means to buy and maintain real estate properties. This means they will not be eligible for small business loans, especially those offered by banks which are generally secured loans.

On the other hand, it is still possible to explore options for non-secured loans but the loan amount can be limited and/or required to be repaid in a shorter term.

2. Preference is given to existing and running businesses

Many lenders prefer current customers, existing and operational businesses, making it difficult for new customers to obtain a loan. Lenders may favour current clientele more to gauge credit history and profitability before granting a loan. By keeping accurate records of your business activity statements, trading history and invoices will allow you to be prepared for your first loan if you have just started up your business.

3. There is a big gap to be filled

There is commercial lending, but small business lending is an entirely different scenario. According to the World Bank, there is a great need to strengthen the institutional environment so SMEs can have better financial access through various financial institutions.

The major hurdle in successful small business loans from a bank are the strict requirements, such as flawless credit score, hard assets, tax statements with a minimum of 2-5 years and complicated paperwork.
Another option is an alternative finance institution which offer hassle-free loans pre-qualification online and are increasingly becoming more popular amongst SMEs.

4. Small business loans do not always guarantee business improvement

Most lenders only approve around 70-80 per cent of the loan amount that is being requested. Falling short on funds is a common dilemma. So, it is advisable for a borrower to reassess the need for a loan and make necessary adjustments on the business plan. If it is too risky, do not proceed with the loan.

Additional capital from your loan proceeds does not guarantee business improvement. Loans are negative assets and if not managed well, can lead to bigger problems such as accumulating interest. It would be worthwhile considering taking out a smaller loan at first and then renewing your loan to access more funds which alternative lenders make easily accessible.

John de Bree, Managing Director, Capify

Capify Australia (formerly AUSvance) launched in Australia in 2008 and are the pioneers in unsecured alternative business finance. The only alternative finance lender to have undergone the full credit cycle Capify continues to be the industry leader; it was the first company to introduce Merchant Cash Advance Loans in 2008, followed by the introduction of unsecured business loans in 2012. Earlier this year it introduced online applications with a loan decision provided in 60 seconds or less.

John joined Capify in 2010 as head of the Australian operation and pioneered the alternative lending market in Australia. John is a highly successful leader with a proven track record in achieving strong profitability, winning new business and developing and growing existing business at a senior level.

John has over 25 years’ experience in senior management roles with major financial service organisations including American Express, Mastercard Worldwide, St. George Bank and Diners Club.

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