How do small business loans work?

Running a small business is hard work in the best of times, and even more so when there is a global pandemic. To keep your head above water in the current economic climate you might consider taking out a loan to assist your business. But how do they work and how are they different to a personal loan?

How does a Small Business Loan work?

A small business loan includes all of the normal elements of a loan, including:

• Loan Amount: this is the amount that you are borrowing.
• Term: this is how long the loan is for.
• Interest: this may be fixed interest, variable interest, or structured more creatively to allow for balloon payments at the start or end of the term.

However, because small businesses do not have the same level of financial security as large corporations, a lender may also ask for ‘security’ to guarantee your performance of the loan.

Security Interest

• The lender may require you to grant it a security interest over the other property of the business, or in some circumstances over your personal property.
• The property over which the security interest is granted is called ‘collateral’.
• This usually means that, if the business defaults in its loan repayments, the lender can sell the collateral to repay the loan or recoup its losses.

Personal Guarantee and Indemnity

• The lender may also require someone to grant a personal guarantee and indemnity for the amount of the loan.
• This person could be you, or it could be a family member.
• The person granting the personal guarantee and indemnity is called a ‘guarantor’.
• This usually means that, if the business defaults in its loan repayments, you will be personally liable for repaying the loan.

Key Takeaway

While a Small Business Loan shares many of the elements of a personal loan, there are a few key differences that are crucial to understand before signing on the dotted line.

If you have further questions please contact us at frank@franklaw.com.au.

This is not legal advice.