How to Save Money on a Business Loan

Business loans are a popular financing option for businesses of all sizes, providing access to capital for a variety of purposes. However, like any other loan, business loans come with costs, including interest, fees, and charges. While these costs are unavoidable, there are ways to minimise them, helping businesses save money and improve their financial health.

This guide explores the top 10 ways to save money on a business loan, including tips on choosing the right loan, managing repayments, and reducing interest costs.

1. Talk to an Expert

Business loans, with their myriad of rates, terms, and conditions, can be daunting for even the most astute business owners. Particularly those who are time poor, and can't spend hours digging through different lender's terms and conditions.

A Finance Broker, equipped with a deep understanding of the financial market and a keen eye for detail, can offer personalised advice tailored to your specific business needs and financial situation. They possess the acumen to compare various loan options, identify hidden fees, and negotiate better terms, potentially leading to significant cost savings.

Their expertise in understanding your business's unique financial health can guide you in choosing a loan that not only meets your immediate needs but also aligns with your long-term financial goals.

If you want to save time and money, chat to one of our Emu Money Brokers, who can help you compare over 100+ products from over 50+ lenders in just a few minutes. Simply complete the get started form, and someone will be in contact with you shortly.

2. Consider the Right Product for Your Needs

There are several types of loans in Australia that can benefit businesses in almost any situation, whether it is for growth, overheads, debt consolidation or working capital. Each of these loan types has its unique features, advantages, and potential disadvantages. Selecting the wrong product may result in higher costs, so it's essential to understand the nuances of each option to choose the most suitable one for your business.

3. Find a Lender That Backs Your Industry

The simple fact is, some industries are perceived as riskier than others by lenders, influencing their willingness to provide loans. This risk assessment is rooted in the inherent volatility and unpredictability associated with certain sectors.

For example, the agriculture industry faces unique challenges such as dependency on weather conditions, fluctuating market prices, and environmental factors, all of which can significantly impact revenue and stability. As a result, some lenders might be hesitant to offer financing to agricultural businesses, fearing the unpredictability could lead to loan defaults.

In order to hedge against these risks, lenders may offer you a loan, but with higher interest rates or more complex terms, while other lenders may prioritise these sectors because they have a deeper understanding of the risks and challenges, and are more confident in taking the risk.

This industry-specific risk assessment underscores the importance of finding a lender that understands and supports your business sector, acknowledging the unique challenges and potential it holds.

4. Use Security If Possible

Utilising security or collateral can be a strategic move to save money when acquiring a business loan. Offering assets as security to the lender significantly reduces the risk they undertake, which often translates into more favourable loan terms for you, the borrower. This risk mitigation allows lenders to offer lower interest rates compared to unsecured loans, where the absence of collateral typically results in higher rates to compensate for the increased risk.

Common forms of security include real estate, equipment, inventory, or even future receivables. By securing the loan with tangible assets, you can unlock lower interest rates, resulting in substantial cost savings over the life of the loan. Moreover, providing security can also increase the likelihood of loan approval for businesses that might not have a strong credit history or substantial cash flow, thereby expanding their financing options.

However, it's crucial to approach secured loans with a clear understanding of the implications. While using security can lower costs and improve access to capital, it also means that the assets pledged are at risk if the loan cannot be repaid. This necessitates a careful assessment of the business's financial stability and the ability to meet loan obligations.

For businesses confident in their cash flow and repayment capabilities, secured loans can be a cost-effective financing solution. It allows them to leverage their assets to not only obtain necessary capital but do so in a manner that is financially advantageous. Ultimately, the decision to use security should be balanced with a thorough evaluation of the business's financial health and growth projections, ensuring that the benefits of lower costs align with the company's long-term financial strategy.

5. Manage Your Credit Score

A strong credit score is a pivotal factor in the business loan application process, acting as a testament to your financial responsibility and creditworthiness. Lenders heavily rely on this score to assess the risk involved in lending to your business. A higher credit score not only increases your chances of loan approval but also positions you to secure more favourable loan terms, such as lower interest rates and better repayment schedules.

Essentially, a good credit score reflects a history of timely payments and responsible credit management, which reassures lenders that the risk of default is minimal. In contrast, a lower score can result from late payments, high credit utilisation, or a lack of credit history, making lenders wary and potentially leading to higher interest rates or outright loan denial.

Improving your credit score before applying for a business loan can be a good move, especially if you are planning ahead. Start by regularly reviewing your credit reports to ensure accuracy and promptly address any errors or discrepancies. Consistently paying your bills on time is crucial, as payment history is a significant component of your credit score.

If possible, reduce your credit utilisation ratio, which is the amount of credit you're using compared to your available credit limit. Building a strong credit history takes time, so it's advisable to start these practices well in advance of applying for a loan. By proactively managing your credit score, you enhance your financial profile, paving the way for more favourable loan terms and a smoother financing process.

6. Manage Your Cash Flow

Effective cash flow management is a critical aspect that lenders scrutinise when evaluating a business loan application, particularly for unsecured loans where the lender is solely reliant on the businesses cash flow. Lenders delve into your business's cash flow trends to gauge its financial health and sustainability. Steady or growing cash flow is often seen as a sign of a robust, well-managed business, indicating a consistent ability to generate revenue and meet financial obligations. This positive trend can significantly bolster your loan application, as it suggests a lower risk of default from the lender's perspective.

On the other hand, if your cash flow records exhibit sudden gaps, erratic patterns, or downward trends, it can raise red flags for lenders. These patterns may be interpreted as signs of financial instability or poor financial management, potentially leading to concerns about your business's ability to repay the loan. Therefore, demonstrating a stable or upward trend in cash flow can be a key factor in not only securing a loan but also obtaining favourable terms.

To manage your cash flow effectively, it's essential to implement robust financial planning and monitoring. Regularly analyse your business's cash flow statements to identify trends, potential shortfalls, or areas for improvement. Strategies such as optimising your accounts receivables, managing inventory efficiently, and controlling overhead costs can help maintain a healthy cash flow.

Additionally, preparing for seasonal fluctuations or unexpected expenses by setting aside reserves can demonstrate financial prudence to lenders. Prior to applying for a loan, consider presenting a clear, well-documented cash flow forecast that showcases your business's financial trajectory and stability. This proactive approach not only aids in securing financing but also plays a vital role in the overall financial health and growth potential of your business.

7. Reduce Your Loan Term

One key factor to consider when trying to minimise costs is the loan term. Typically, a shorter loan term means higher repayment instalments but less interest paid over the life of the loan. For businesses with consistent cash flow that can handle larger repayments, opting for a shorter term can lead to significant savings in interest costs.

Conversely, a longer loan term often results in smaller, more manageable repayment instalments, which might be preferable for businesses wanting to maintain liquidity. However, it's essential to note that, over time, the total interest accrued on a longer-term loan can be considerably higher. Thus, while longer terms provide immediate relief in terms of cash flow, they might lead to higher overall costs in the long run.

Here's an example of how you could save $8,624 by picking a 12 month term over a 60 month term, on a $50,000 loan with a 7.99% interest rate:

Term	Repayment Amount	Total Amount to Repay
12 months	$4,349	$52,190
24 months	$2,261	$54,267
36 months	$1,566	$56,397
48 months	$1,220	$58,579
60 months	$1,013	$60,814

8. Alter Payment Frequency

Choosing the right payment frequency for your business loan — be it weekly, fortnightly, or monthly — can impact the total amount repaid over the loan's term. Opting for more frequent repayments, such as weekly or fortnightly, can lead to interest savings, as the principal amount reduces faster, thereby decreasing the interest accrued over time. This strategy can be particularly effective for businesses with consistent cash flow, allowing them to manage repayments efficiently without straining their financial resources.

However, it's crucial for businesses to balance these potential savings with their cash flow realities. Frequent repayments might not be feasible for businesses with irregular income streams or those that operate seasonally. In such cases, less frequent repayment options, like monthly payments, might align better with their cash flow patterns, ensuring that loan obligations do not disrupt their operational stability. Therefore, while altering payment frequency can be a smart move to reduce overall costs, it should be carefully considered in the context of the business's financial rhythm and capacity to sustain regular payments.

9. Be Mindful of Fees

It's important to be vigilant about the various fees that can accompany the principal and interest rates, as these can significantly affect the overall cost of the loan. Monthly service fees, for instance, can add a considerable amount over the loan's lifespan. Direct debit fees, charged for processing each payment, may seem small individually but can accumulate to a substantial sum, especially with more frequent repayments. Additionally, early termination fees are particularly important to consider if you plan to pay off the loan ahead of schedule; these fees can negate some of the interest savings gained from early repayment.

Not all lenders charge these fees always, so it's essential to thoroughly review and understand all the associated fees, not just the interest rate, when comparing loan options. This comprehensive approach ensures you have a clear picture of the total cost of the loan, enabling you to make a more informed financial decision that aligns with your business's needs and capabilities.

10. Consider Refinancing

Considering refinancing an existing business loan can be a solid move to capitalise on better loan terms and rates available in the market. Your business may have changed since you last applied for a loan, so you may now be able to get a better deal.

Refinancing involves replacing your current loan with a new one, typically with more favourable conditions, such as a lower interest rate, different loan term, or more suitable repayment structure. This can lead to significant cost savings over time, reduce monthly payments, or align the loan more closely with your business's evolving financial situation.

However, it's not just about finding a lower interest rate; refinancing can also offer the flexibility to adjust the loan structure to better suit your current business needs, such as extending the loan term to lower payments or consolidating multiple debts for easier management.

The decision to refinance should be approached with caution and thorough analysis. One critical factor to consider is the potential cost of early termination fees associated with your existing loan. These fees can sometimes be substantial, and it's essential to calculate whether the savings from refinancing outweigh these costs. Additionally, the refinancing process itself might involve application fees, legal costs, and other charges, which need to be factored into your decision.

Seeking professional financial advice can be invaluable in this process. An Emu Money Broker can help you navigate the complexities of refinancing, compare different loan products, and calculate the overall financial impact, ensuring that you make an informed decision. They can also assist in understanding the fine print and long-term implications of the new loan agreement, ensuring that your decision to refinance is aligned with both your immediate financial goals and long-term business strategy.