Kia ora! Are you a small business owner in Aotearoa looking for financing to help grow your business? With so many different types of loans available, it can be overwhelming to determine which option is best suited for your specific needs. Some loans can be a trap, others can help you leverage green pastures.
In this blog post, we’re going to provide you with five tips to help you choose the right type of loan for your business needs. We know that when it comes to financing your business, it can be difficult to know where to start. But don’t worry, we’ve got you covered.
We’ll take you through the process step-by-step, from identifying your business needs and exploring loan options to considering your credit score and getting expert advice. By the end of this post, you’ll have a clear understanding of the different loan options available, how to compare interest rates and terms, and how to assess the impact of your credit score on loan approval and interest rates.
So, if you’re ready to take control of your business financing, keep reading for our five tips on choosing the right type of loan for your business needs. By the end of this post, you’ll have the knowledge and confidence to make an informed decision and take the next step towards securing the financing you need to grow your business.
Identify Your Business Needs
Firstly, it’s important to determine the purpose of the loan. Are you looking for working capital to cover day-to-day expenses such as stock? Or is invoice financing more appropriate, which allows businesses to borrow against the value of their outstanding invoices? This can be particularly useful for businesses that experience long payment terms, as it provides a way to access cash flow when needed. Maybe you’re looking to expand your business, but all-in-all, understanding the types of financing available will help you choose the right type of loan to meet your needs.
Secondly, assess the amount of funds required. Consider your budget and cash flow projections to determine how much you need to borrow. Remember that borrowing too much could put unnecessary financial strain on your business, while borrowing too little may not meet your needs. It’s ok to apply for more, with the intention of not using it all.
Finally, evaluate the timeframe for repayment. Consider how long it will take for your business to generate the funds to repay the loan.
Explore Loan Options
As a business owner, you have a range of loan options available to you. Traditional bank loans are a popular choice, as they offer competitive interest rates and structured repayment plans. However, they can also be difficult to obtain, particularly for smaller businesses.
Fortunately, there are other loan options available.
- Government-backed loans, such as those offered by the Small Business Administration, can be easier to obtain and offer attractive terms. As NZTE notes, “government-backed loans often come with more favourable terms, such as lower interest rates and longer repayment periods.”
- Alternative financing options, such as peer-to-peer lending and crowdfunding, are becoming increasingly popular. These options offer more flexibility and can be easier to obtain than traditional bank loans. As Sorted.org.nz points out, “peer-to-peer lending and crowdfunding can be a good option for businesses that struggle to secure traditional financing.”
- Private Finance Partners can be a great option too. For example Admiral Finance can act as a sounding board for your expansion ideas, and if it all seems logical, there are funds available without the red tape to cut through that you might get from a bank.
It’s important to consider all of your loan options and choose the one that’s right for your business needs. As NZTE advises, “don’t be afraid to explore different options and ask for help when you need it.” By doing your research and seeking out the right financing options, you can take your business to the next level.
Compare Interest Rates and Terms
When it comes to interest rates, it’s important to understand the difference between fixed and variable rates. As New Zealand Trade and Enterprise explains, “fixed interest rates stay the same for the life of the loan, while variable interest rates can go up or down depending on market conditions.”
In addition to understanding the different types of interest rates, it’s important to assess the impact of interest rates on your monthly payments. By evaluating repayment term options, you can choose a loan with payments that fit within your budget. However, interest rates aren’t the only costs associated with loans. It’s important to determine any additional fees or charges, such as origination fees or prepayment penalties, before you sign on the dotted line. Be sure to read the fine print and understand all of the costs associated with the loan.
Here’s an example table comparing a variable interest rate loan with a fixed interest rate loan over a two-year period:
| Year | Variable Interest Rate (12% fluctuating from 9% to 14%) | Fixed Interest Rate (10%) |
|---|---|---|
| 1 | $10,000 + $1,200 (12%) = $11,200 | $10,000 + $1,000 (10%) = $11,000 |
| 2 | $11,200 x 0.09 = $1,008 (9% interest) | $11,000 x 0.10 = $1,100 (10% interest) |
| $11,200 x 0.14 = $1,568 (14% interest) | ||
| Average interest: ($1,008 + $1,568) / 2 = $1,288 | Total interest paid: $2,100 | |
| Total interest paid: $1,288 + $1,288 = $2,576 | ||
| Total amount paid: $10,000 + $2,576 = $12,576 | Total amount paid: $11,000 |
As you can see from the table, with a variable interest rate loan, the interest rate fluctuates over time, resulting in unpredictable monthly payments and a total interest cost of $2,576 over two years. On the other hand, with a fixed interest rate loan, the interest rate remains the same over the entire two-year period, resulting in predictable monthly payments and a total interest cost of $1,100 over two years. In this example, the fixed interest rate loan would be the better choice as it offers greater predictability and a lower total cost.
Consider Your Credit Score
Obtaining a loan for your business, your credit score plays a significant role. A credit score is a numerical representation of your creditworthiness, and it is used by lenders to determine your ability to pay back a loan. Understanding how credit scores are calculated is important when applying for a loan.
Before applying for a loan, it is essential to check your credit score and report. Centrix is a New Zealand credit bureau that provides credit reports and scores to businesses and individuals. Assessing the impact of your credit score on loan approval and interest rates is crucial. As NZTE notes, a good credit score can increase your chances of loan approval and lower your interest rates. It’s also essential to explore ways to improve your credit score. According to Sorted.org.nz, this can include paying bills on time, reducing credit card balances, and checking your credit report for errors. By taking steps to improve your credit score, you can increase your chances of obtaining a loan at a lower interest rate.
| Credit Score | Description |
|---|---|
| 0 – 200 | Very Poor – Highly likely to experience adverse credit events. This may lead to loan applications being declined or higher interest rates and fees being charged. |
| 201 – 400 | Poor – Likely to experience adverse credit events. This may lead to loan applications being declined or higher interest rates and fees being charged. |
| 401 – 600 | Average – Less likely to experience adverse credit events. This may lead to better loan options, such as lower interest rates and fees. |
| 601 – 800 | Good – Unlikely to experience adverse credit events. This may lead to more competitive loan options, such as lower interest rates and fees. |
| 801 – 1000 | Excellent – Highly unlikely to experience adverse credit events. This may lead to the best loan options, such as the lowest interest rates and fees available. |
Centrix provides credit reports and credit scores for individuals and businesses in New Zealand, which lenders use to assess creditworthiness.
Get Expert Advice
Navigating the various options and understanding the impact of your credit score can new territory for a lot of Kiwi business owners. So while you’re increasing your financial literacy, it’s essential to seek guidance and support from professionals who can help you make informed decisions.
Working with a loan specialist or lender directly can establish a healthy relationship and also arm you with tailored advice and custom solutions that match your business and financial situation. It’s always smart to create a healthy relationship with a lender. You’ll never know when you need to lean on them.
Consulting with a financial advisor or accountant can also be beneficial, as they can help you evaluate your options and assess the impact of your credit score on loan approval and interest rates. They will often act as a hand-break, so don’t be disheartened. It’s their job to always assume the worst-case scenario. Seeking guidance from a loan broker or aggregator can also simplify the process by connecting you with multiple lenders and options, but remember, their priority is to write another loan.
Remember, getting a loan is a significant financial decision, and it’s crucial to take the time to explore all your options, understand who you’re getting advice from and what their priority is, and make an informed decision.
Conclusion
In conclusion, choosing the right type of loan for your business needs can be a daunting task, but it doesn’t have to be. By following the tips outlined in this article, you can make an informed decision that meets your financial needs and goals.
It’s important to determine the purpose of the loan, assess the amount of funds required, evaluate the repayment term options, understand the impact of interest rates, and check your credit score before applying for a loan. Making an informed decision can help you save money and avoid financial pitfalls.
By taking the time to understand the loan options available to you and seeking expert advice if needed, you can make a decision that benefits your business in the long term. We encourage you to take action and put these tips into practice to make the best decision for your business. Remember, the right loan can help you achieve your financial goals and take your business to the next level.
Business.govt.nz – a government website that provides a wide range of information and resources for businesses, including advice on starting a business, managing finances, and compliance requirements.
- New Zealand Trade and Enterprise (NZTE): https://www.nzte.govt.nz/
- Sorted: https://sorted.org.nz/
- Inland Revenue: https://www.ird.govt.nz/
- Ministry of Business, Innovation and Employment (MBIE): https://www.business.govt.nz/
- Business.govt.nz: https://www.business.govt.nz/
NZTE – New Zealand Trade and Enterprise, a government agency that supports New Zealand businesses to grow internationally.
Inland Revenue – the government agency responsible for administering tax laws in New Zealand. They provide guidance and resources on tax obligations for businesses.
Sorted – a government-funded website that provides free financial guidance and resources to help New Zealanders manage their money, including tools to help businesses budget and manage cash flow.
Chamber of Commerce – there are a number of chambers of commerce across New Zealand that offer support and networking opportunities for businesses in their local area.