What funding arrangement do you need?

The type of loan you need will depend on whether you need access to money all at once or over a period of time.

At call loans

'At call' loans include overdrafts or lines of credit. These are available if you need to:

• access the funds on a semi-regular basis to help with cash flow
• keep the business operating while waiting for your customers to pay for goods

Upfront loans

Upfront loans provides the entire loan amount all at once. These loans are available if you need funds to:

• buy a new business
• buy equipment to expand your existing business

An upfront loan is sometimes called a 'fully drawn advance'.

What loan terms are right for your business?

The loan term refers to the length of the loan. The longer the loan term the more total interest you'll pay:

• Loans that are 'at call' have no fixed terms.
• Loans provided upfront will need a portion of the loan plus interest paid back at regular intervals.

To work out what loan term is suitable for your business, you'll need to calculate how much you can afford to service the loan.

What level of ongoing funding do you need?

The level of ongoing funding is the average amount of an overdraft or line of credit that's used at any one time.

For example, you might want to have an overdraft limit of $20,000 to provide money for the occasional big expense. But usually you won't use more than $5000 of that credit limit on average. So in this instance, the level of ongoing funding that you'll need is $5000.

When applying for an overdraft limit, be mindful that:

• the higher the overdraft amount, the higher the fees
• there could be clauses in the contract where the lender can demand repayment of the whole loan at any time

Is a fixed or variable interest rate better?

With a fixed rate loan, the lender bears the risk of interest rate moves. With a variable rate, you'll bear the risk of interest rate moves. So if your business has a low profit level, a variable rate loan repayment may rise beyond your ability to pay.

The choice of rate will affect:

• the stability of repayments
• overall cost of the loan
• the loan features available

Ultimately, the choice of variable or fixed rates will depend on how much free cash flow your business generates after you've paid all your expenses – including loan repayments.

Can you offer loan security?

Loans can be secured or unsecured by various types of assets, including:

• residential
• commercial
• rural property
• business

Alternatively, some loans are unsecured by any asset.

Providing security will usually lower the interest rate on the loan because it decreases the risk for the lender. But if you can't repay a loan on time, the lender has the legal right to seize any property or asset that you offer as security.

Are there extra fees?

Look out for any extra fees, like:

• one-off fees such as establishment or application fees
• regular fees such as service fees or credit advance fees
• exit or discharge fees
• early termination fees

Use the Infochoice small business loans tool to work out the cost of set-up and ongoing fees in the average monthly repayment. This will give you a better idea of the true cost of the loan.

Approach lenders with your business plan

When you're ready to apply, lenders will ask for a lot of in-depth information about the financial history of the business.

It's important that you have a convincing and detailed business plan so you can fully inform the lender about your proposed venture. Your business plan should include a profit and loss budget and cash flow forecast. Providing this type of information will help the lender advise the right finance for you.