What is a business Loan?

BUSINESS LOAN

A bank or financial institution issues a business loan, either in the form of a fully drawn amount or an overdraft.

There are hundreds of different business loan products on the market, all with different rates, terms and fees.

Finding the best deal does require some research and shopping around.

The minimum business loan amount is on average $10,000 to $20,000, with some banks offering loans of up to $1 million to small businesses. Loans provided upfront will need a portion of the loan, plus interest

paid back at regular intervals.

The repayment amount will depend on the term or length of the loan. The longer the loan term, the more  total interest you will pay. Most business loans require security in the form of residential or commercial

property or a guarantor.

Using the equity in your home to guarantee a business loan can be a risky strategy.

If the business is not profitable enough to repay the loan, you can end up losing your home.

Putting your house on the line

As a small business owner needing finance, it may be tempting to take out a home equity loan. While these are quick and easy to apply for, the risk is significant.

In the case of default you can lose your home.

Adding debt to your existing home mortgage can also backfire if interest rates rise or house prices fall, leaving you with a mortgage more than your house’s value.

There are tax advantages to a business loan, as interest fees and charges on a business loan are tax deductible.

Another potential advantage is the lump sum amount, which you are free to spend on anything, for example new equipment, paying employees or buying stock.

Bear in mind that banks are very conservative when lending money and typically a business will need over two years trading history to secure a loan.

EXAMPLE 1

Business loan

Carl owns a construction company and needs a new skid steer to manage business demands.

Carl gets a $33,000 business loan from a bank to purchase his new equipment.

He pays a 9% interest rate on the loan for four years while making monthly repayments of $821.

At the end of the four years Carl has paid $6,418 in interest making the total cost of the skid steer $39,418 excluding GST.

Under Australian tax law, Carl has the option to claim capital expenses on his skid steer.

Therefore, he can claim 28.5% of the assets written down value each year.

However, Carl can also claim a tax deduction on the interest he pays on his loan during each taxing period.

For more information please refer to the Australian Tax Office website.