There’s been plenty of media attention placed on Australia’s big banks lately, with the spotlight on loose lending practices that have seen some consumers lose big money. As a consequence, there’s talk about access to credit tightening up.
Chances are, if you’re a contractor with a plan to grow your business, at some point you’re going need access to credit – whether that’s for working capital or to purchase inventory, supplies, furniture, fixtures, machinery or equipment.
Along with the big banks, a number of smaller financial organisations are now providing funding in as little as 24 hours at highly competitive interest rates. However, business loans can differ dramatically from one lender to another and sometimes, it’s difficult to make a quick comparison, especially with hidden fees in the mix. So despite having access to credit at your fingertips, it’s important to seek advice about the different offers and calculate the total cost of your loan. Affordability is the key!
Five Components of Your Loan
As a guide, you need to be aware of the following five components of your loan:
Principal – The amount you’re able to borrow will depend on the lender, and will usually relate to the size of your business’ turnover as well as your credit record and debts, the industry you’re working in and the age of your business. As a general rule of thumb, the more your business earns, the more you’re likely to be able to borrow.
Interest – the interest you pay on your loan will be the interest rate charged multiplied by the principal. The rate will be calculated relative to the risk of the loan – the higher the risk of failing to repay, the higher the interest rate. It will also be subject to your industry and how the loan is structured – whether you’re securing your loan against an asset or not.
Term of your loan – Typically you’ll determine the duration of your loan according to your needs and your ability to make the repayments. A short-term loan comes with bigger repayments, while a longer term loan will require lesser repayments and more of them. A loan taken out over a longer period is likely to cost you more in interest.
Repayment frequency – Business loans are usually repaid in equal instalments with the principal and interest repayment amounts averaged across the total number of repayments. Check to find out whether making more frequent payments will reduce the total cost of your loan and whether there are any early loan discharge fees.
Fees/charges – Take care to find out about the fees that lenders charge. While some may offer an attractive interest rate, you could find they make up the difference with hidden fees for establishment and servicing, late payments, early withdrawal etc.
Ayers has been helping contractors maximise their wealth for over 20 years. Talk to an Ayers expert about how you can best finance your business growth.