May 30, 2023 · Last update: 09/08/2024

• Advice
• Business Finance

7 Different Types of Business Loans: Which One Is Right for You?

As a business owner in New Zealand, accessing the right business loan can be the difference between cash flow restraints, or turning your entrepreneurial dreams into reality. But with so many financing options available, it’s hard to know what the best option is, and selecting the right type of business loan can take time and effort, not to mention the hoops you have to jump through if applying with a bank.

This article is designed to make sense of business lending. It gives an overview of the 7 main types of business loans New Zealand businesses can choose from, including factors to consider before settling on any business finance. We equip entrepreneurs with the right knowledge for making informed financial decisions for their businesses.

Government-Backed Loans

Government-backed loans are supported by New Zealand through partnerships with financial institutions to help businesses access funding. These loans have low-interest rates, extended repayment periods, and little security requirements. However, strict eligibility criteria and potential bureaucratic processes make them inaccessible to some businesses. The most notable government-backed loan program in New Zealand is the Business Finance Guarantee Scheme, which aims to support businesses affected by the COVID-19 pandemic.

Businesses that have utilised New Zealand government-backed loans highlight increased access to funds, improved business growth, and stability. Please note that eligibility requirements often focus on industry, business size, and financial viability to qualify for the loan. You can get support in navigating the application process through online portals, partner financial institutions, and government agencies,

Commercial Real Estate Loans

Commercial real estate loans are funding solutions used to purchase, renovate or refinance commercial properties. They are specifically designed for businesses and investors in the real estate industry. These loans offer high loan amounts, long-term financing, and potential tax advantages.

You’ll need a solid business plan, a strong credit score, and a downpayment to qualify for commercial real estate loans. Some factors to consider before applying for this type of loan include:

• Loan terms
• Property valuation
• Interest rates
• Borrower’s financial stability

Term Loans

Term loans offer businesses a lump sum of cash for a specific duration—usually one to ten years. They are commonly used to fund working capital, expand business, lead generation services or buy assets. These types of loans have fixed interest rates, defined repayment periods, and regular repayments. They also have low-interest rates and predictable repayment schedules that make them more manageable than many short-term loans. However, they require security, such as property or assets, and a strong credit history to qualify.

The interest rates depend on the borrower’s creditworthiness, and repayment periods range from one to ten years. Loan amounts vary but are typically NZD 50,000 to NZD 5 million. You’ll need financial statements, a business plan—for startups, and personal identification during application.

Term loans in New Zealand are suitable for many purposes and industries, including construction, manufacturing, and equipment purchases.

Business Line of Credit

Business line of credit is a highly flexible funding option for New Zealand entrepreneurs that offers a predetermined credit limit suitable for covering short-term expenses, seizing opportunities, and managing cash flow.

Pros: 

• Flexible borrowing and repayment
• Interest payment only on the amount utilised

Cons:

• High-interest rates and service fee
• Potential negative impact on credit ratings

Any financially stable business with a strong credit history and security for the loan can apply for a business line of credit through a bank or select financial institutions. Industries such as hospitality, retail, and seasonal businesses find business lines of credit particularly useful. To help you manage this type of credit, you should consider careful borrowing and timely loan payments.

Invoice Financing

Invoice financing allows business owners in New Zealand to use unpaid invoices as security to get cash from financial institutions.

Through this type of loan, businesses can narrow the gap between invoice issuance and customer repayment periods, thus improving cash flow. They also enjoy quick access to funds, improved liquidity, and non-dependency on customer repayment cycles. You should, however, note that invoice financing attracts high-interest rates and service fees and can negatively impact customer relationships if the lender changes payment terms.

You’ll need a stable sales ledger, credit-worthy customers, and a minimum invoice value to qualify for invoice financing.

Equipment Financing

Equipment financing is a funding solution that allows businesses to purchase assets, such as tools, machinery, or work vehicles. This enables them to preserve working capital, reduce upfront costs and access the latest technology more easily.

There are 2 main types of equipment financing; equipment loans or equipment leases. Equipment loans give finance for buying equipment, whereas equipment leases lend businesses equipment for specific periods with regular lease payments.

Carefully analyse repayment terms, interest rates, and tax implications when applying for this type of financing. You should also negotiate terms and compare offers from different manufacturers offering this type of loan.

In New Zealand, equipment financing is primarily offered by banks, equipment manufacturers, and specialised financing companies. Businesses with solid credit profiles have the upper hand in securing equipment financing.

Peer-to-Peer Lending

Peer-to-peer lending allows individuals and businesses in New Zealand to borrow or lend money directly without the involvement of traditional financial institutions. This type of financing has a streamlined application process and low-interest rates, making it a better alternative for businesses with difficulties acquiring bank loans. Some of the most popular peer-to-peer lending platforms in New Zealand include Squirrel Money and Harmony.

Eligibility requirements vary across platforms, but generally, financial stability verification and credit checks are the two key qualifiers.  Many industries and businesses across different sectors in New Zealand benefit from peer-to-peer lending as a hassle-free option to secure funding. However, it’s important to consider interest rates, platform credibility, and repayment terms before applying for this type of loan.

Conclusion

The seven main types of business loans in New Zealand include government-backed loans, commercial real estate loans, term loans, business line of credit, invoice financing, equipment financing, and peer-to-peer. Each financing option has its merits and drawbacks, so when selecting the right kind of loan for your business, determine the funding amount and carefully analyse interest rates, repayment terms, and eligibility requirements.