Loans can be strategic for businesses, no matter their size.
In fact, small and medium enterprise loans are specifically designed for businesses that are small to medium-sized!
These loans can cover inventory costs, expansion fees, operating expenses, and other demanding costs incurred by businesses.
Understandably, some businesses want specialised financial assistance – which can (thankfully) be addressed by the right SME loan.
As you read along in this article, we’ll discuss the current SME landscape and how financing plays a role in stabilising an SME.
Additionally, we’ll review the different types of SME loans while also breaking down what to consider when choosing the right loan for your business. Businesses at every stage may benefit from learning about SME loans.
Let’s begin!
The SME Landscape And The Role Of Financing
As small businesses account for 33% of Australia’s GDP (Gross Domestic Product), it is suggested that SME loans are good for the economy.
SME loans can lead to higher rates of employment and innovation, which has positively impacted the country’s GDP.
Interestingly, the majority of businesses that take out SME loans are small or micro businesses with less than 20 employees.
SME loans give businesses access to capital that they would not have had otherwise. This surge in cash can create a foundation for productivity, increased sales, operational wins, and more.
However, in order to pick the right SME loan type, it may be wise to assess business needs and goals against the different SME loans offered.
Understanding The Different Types Of SME Loans
There are a plethora of SME loan types that suit different scenarios. From equipment financing to microloans, there are many options available to businesses. Take a look at the list below:
Term Loans
Terms loans can assist with a specific business need. As the name suggests, term loans have a fixed repayment period and can be ideal for business expansion or long-term investments.
Working Capital Loans
Working capital loans are more suitable for daily expenses, such as operating costs and payroll.
These loans can support businesses with cash flow management and short-term financial deadlines.
Equipment Financing
SMEs can use equipment financing to cover large equipment purchases. These purchases are for multiple purposes such as commercial vehicles, lab equipment, construction appliances, new technology, and more.
Invoice Financing
Businesses that offer a service-based product may feel overwhelmed by the number of unpaid invoices piling up.
Invoice financing allows a business to borrow against outstanding invoices while also improving cash flow.
Business Lines of Credit
Business lines of credit always exist, as long as the amount used is paid by a certain date. This approach can carry businesses over a slower season where cash flow is limited.
Microloans
Microloans are small amounts of money that tend to be used when a business is getting off the ground and expanding.
Merchant Cash Advances
If your business takes in a considerable amount of credit card sales, merchant cash advances allow businesses to receive a lump sum of money that is offset by losing a percentage of their daily credit card sales.
Trade Finance
SME loans can also cover international trade transactions. Companies that export and import goods or handle currency exchange may be eligible.
Peer-to-Peer (P2P) Loans
P2P lending is a newer concept that allows businesses to borrow directly from individual investors. This route is advantageous for businesses that cannot go the traditional lending path.
Asset-Based Loans
Asset-based loans are made secure through business assets, such as equipment, inventory, or accounts receivable. Small business owners can use these assets as collateral in this loan type.
Inventory Financing
For businesses that need to keep a large inventory of products, inventory financing can enable a business to purchase their inventory and pay it at a later date.
Franchise Financing
Businesses that have franchised may benefit from franchise financing, which allows a new franchise owner to purchase or expand a franchise.
Export-Import Financing
Export-import financing loans are excellent for businesses that partake in substantial exporting and importing activities, such as a US company importing essential ingredients from Australia.
Trade can be risky, so these loans offer some protection to affected businesses.
Agricultural Loans
Lastly, agricultural loans cover farming or horticultural businesses to buy equipment or to acquire land for their business to operate.
How To Assess What SME Loan Is Best For Your Business?
Now that you’re aware of the different SME loan types, you may be considering which SME loan is best for your business.
While there is no cut-and-dry answer, here are some points to consider prior to narrowing down your options.
Analyse current financial health
Struggling businesses may feel tempted to go for an SME loan to help with bills.
However, loan payments may need to be paid back sooner rather than later as interest rates can seriously impact a business’s ability to pay the loan back!
Before considering a loan, assess your business’s current financial health and decide if a loan will help or hinder your goals.
Project future growth and expenses
Does your business expect to see an increase in expenses in the foreseeable future?
If so, it is possible that taking on an SME loan may have a negative impact. Ensure that the loan payments can be made every month, including all business growth activities and expenses.
Identify specific funding requirements
Having a solid business plan and an informed loan officer on your side can help with your application outcome.
In order to gain those two benefits while applying, ensure that you are as specific as possible about your business’s funding requirements – including justifications for all proposed expenses.
Going Through The Application Process For SME Loans
If you’ve decided to go through with the SME loan application process, the following list contains a list of steps that you may need to consider before and during submission.
Complete the loan application accurately
Taking a loan application slowly is a good idea, as there are usually countless prompts containing sensitive financial information pertaining to a business. This information has to be recorded correctly, as unsupported claims may be dismissed.
Attach necessary supporting documents
Supporting documentation for a loan application helps the loan officer understand the purpose of your business and the desired outcome of the loan.
It may be beneficial to attach a business plan, bank statements, credit reports, and other financial documents to give the loan officer a complete picture.
Review the terms and conditions of the loan offer
The terms and conditions of the loan offer outline items like repayment schedule and interest rates. Additionally, there are usually clauses that cover unmet deadlines and using the money for purposes other than the one(s) listed in the loan agreement itself.
Negotiate with the lender if possible
Businesses can negotiate with a lender on aspects of a loan such as interest rates, the loan term, the loan amount, repayment plan, personal guarantees, and more. Ideally, the loan agreement is mutually beneficial for both parties.
Accept the loan offer and fulfil any additional requirements
Once the loan offer is accepted, additional paperwork may need to be filed or more conversations may need to take place. Stay informed by contacting the lender and ensuring that all obligations are fulfilled.
Use the loan funds as intended for business growth
As opportunities arise to use the loan funds, it is important to keep track of how the money is being used. Specifically, use the loan funds only as intended through the SME loan agreement.
Key Takeaway
You’ve just spent some time learning about SME loans! These financial agreements are beneficial to small and medium businesses, as well as the economy.
When choosing an SME loan type, there is no exact right answer – although some loans may be better suited for the intended purchases or payments. Best of luck with your future business endeavours!
