Choosing the Right Loan for Your Business

The changing outlook for business loans to SMEs in Australia, and what you need to know before making a decision.

Published: 23/07/2018

Invoice Financing or Bank Loan?

As your business grows, often the costs involved with expansion do as well, leading to the need for extra financing in order to keep up with everyday costs such as payroll, suppliers, or marketing. When looking at financing options to help free up cashflow for your business, it pays to compare the pros and cons of bank loans and invoice financing.

Bank Loans

There are two basic categories that traditional bank business loans fall into; secured and unsecured.

Secured loans:

Secured loans are protected by an asset or collateral. Banks will generally lend businesses a large sum of money if they are able to provide this type of security. Normally, secured loans will have a lower interest rate than unsecured loans as they are less risky to the bank. In the case of SMEs, the assets put up for collateral can include their personal property, which can be taken by the bank if the loan is unpaid. For this reason, these types of loans are generally more readily available to large companies who have a proven track record and valuable business assets they can provide as collateral.

Unsecured loans:

Unsecured loans are made without collateral and are based on the expected cash flow of the business. Similar to a credit card, however, the interest rates tend to be much higher for this type of loan as there is more risk assumed by the bank. For an unsecured loan, the bank’s credit assessment would generally be more involved, as they have to be comfortable that the business will continue to trade and have cash available to make repayments. New businesses without a long track record may find it difficult to pass the credit assessment necessary for an unsecured bank loan.

Bank loans have long been regarded as the cheapest type of loan for a business. But in fact, from about 2009, largely due to the Global Financial Crisis, interest rates on loans to SMEs have increased in line with other loan types, reflecting the generally higher risk of borrowing in general. In addition, the inflexibility of a bank loan means the business will have to make careful calculations on exactly how much they’ll need to borrow for the length of the loan term, the interest that will be paid on top of that and then take into account any penalties for late payments or changes in the terms.

Invoice Financing

Invoice financing is a lending system which allows a business to release cash from outstanding invoices. This allows for much more flexibility in terms of how much the business is “borrowing” and comes with less cost than a bank loan. There is a reason why Morgan Stanley predicted a 50% compounded annual growth rate in alternative lending for the 6 years to 2020. The competitive interest rates, convenience and speed with which SMEs can get access to funds through invoice financing, with no risk to their assets, is rapidly changing the outlook for small businesses in Australia.

Grapple takes the flexibility of invoice financing one step further, by creating a peer-to-peer structure, where businesses can fund single invoices, multiple invoices, or even a portion of one invoice without a o‘lock-in contract. This allows for even greater control over business funding and comes with completely transparent fees. Instead of entering into a contract for a defined period, with Grapple, SMEs can apply to finance their invoices for as little as 1% of the funded amount, as and when they need it. Businesses can choose to pre-pay the loan at any time, and they are not subjected to onerous credit checks and security requirements, which are often mandatory with the banks. The application process is quick and after the invoice is verified with the client, ensuring that the goods or services have been received, the funds can be released in as little as 1 day. This setup makes invoice financing through Grapple a more flexible, highly competitive option that puts small businesses in control of their funding needs.