A business loan can be very useful indeed for your organisation, but there are certain terms and conditions attached to this. For example, it’s likely that you will need to put down a deposit before you receive your loan funds. Learn more about this below.
Identifying deposit requirements
There is no hard and fast answer when it comes to acquiring a business finance or commercial loan product. Generally speaking, the lender will require a deposit of between 10% and 30% of the full value of the loan, so this gives you a general figure to work with.
[CITATION: https://commercialexperts.com.au/do-you-need-a-deposit-for-a-business-loan/%5D
However, this is still a 20% disparity — there is a great deal of difference between putting up 10% and putting up 30% of the loan value as a deposit. This is why it is helpful for consumers to understand the different factors that influence deposits.
Unsecured vs secured business loans
If you can secure your commercial loan against a valuable asset, such as property, this reduces the risk to the lender. As a result, you may be able to acquire the loan with a smaller deposit, or you may not need to put down a deposit at all. If you do not have an asset that can be used to secure the loan, you can go for the unsecured business loan option, but this will need to be protected with a greater deposit.
The total loan amount
Applying for a smaller loan also reduces the risk to the lender. Assess your needs carefully as you look at your loan options. For example, you may opt for a short-term line of credit that is capped at a certain level — you will only need to take responsibility for the amount of credit you use. On the other hand, you may wish to receive a lump sum loan up front, but this may require a larger deposit.
The purpose of the business loan
What do you need the business loan for? You will need to demonstrate your plan of action to the lender before you can access funding or another financial product. Bear in mind that different forms of investment carry different risk profiles. For instance, if you want to take out a loan to purchase a commercial property — in particular, a highly specific commercial property like an auto garage or a tattoo studio — this may be viewed as carrying a relatively high risk.
On the other hand, if your business plans to invest in a residential property, this would be seen as relatively low risk. The demand for residential properties is far greater than the demand for commercial properties. Therefore, this is less perceived risk.
The credit history of the business
Loan applications usually require a credit check, and commercial loans are no different. Depending on the type of business, you may need to demonstrate a number of years of good credit, as well as a positive cash flow that will help you repay the commercial loan.
Your own personal credit history
For small business loans or funding for startups and other recently established enterprises, it can be difficult to provide extensive proof of credit history. When applying for a business loan for this type of organisation, you may need to draw upon your own credit history, proving that your own financial situation is strong enough to service the commercial loan over the full loan term.
As a general rule of thumb, if you have a strong personal credit history, you represent a more attractive candidate for lenders.
Guaranteed ability to repay the loan
It’s useful to remember why a deposit is needed in the first place. The deposit provides an element of security to the lender, helping to demonstrate that the borrower is able to repay the loan amount. In the case of a secured loan, the lender has additional protection and can possess the collateral asset in the event of a default.
Why is this important? Because the terms and conditions of the loan are dictated by the amount of risk to the lender. If you, the borrower, can take steps to reduce the risk you represent to your lender — for example, by taking out a secured business loan or by lowering the loan amount you require — this will decrease the amount of deposit you need to put forward.
Learn more about your commercial loan options
Sydney Brokers can help you find the commercial loan your business needs to grow and thrive. Reach out to our team to learn more, or schedule a consultation in which we can discuss your options in greater detail. Give us a call on 02 9160 7654
Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.