Before applying for a business loan, it’s important to understand which type best aligns with your goals. From short-term financing to long-term growth capital, the right loan can make a big difference.
What is a business loan?
A business loan enables you to borrow money from a bank or financial lender to cover the startup costs of running a business. This includes covering the costs of:
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Start-up and investment
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The lease
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New equipment and inventory
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Staff wages
But before you make any final decisions about which type of business loan you want to apply for, consider how each loan type will impact you and your business.
There are a number of options available to Australian small businesses and business owners, but it all boils down to whether the loan is secured or unsecured.
1. Line of credit
A business line of credit is a flexible financing option that allows you to access funds up to a pre-approved limit whenever you need them. Typically offered with terms ranging from 3 to 12 months, it works much like a credit card, wherein you only pay interest on the amount you use.
Lines of credit can be either secured (backed by inventory, receivables, or other assets) or unsecured, depending on your business’s financial health. This type of financing is best suited for established businesses with steady monthly revenue and strong credit. If your business needs ongoing access to cash for working capital, seasonal expenses, or short-term gaps, a line of credit can be an ideal solution.
Key features to consider:
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Flexible option as you only draw and repay funds as needed
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There is no minimum amount, and interest is usually calculated daily on amounts borrowed
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Quick and simple application process, typically of 1-2 days
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It can be cancelled at any time by the lender and is repayable
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Strong likelihood to incur fees even if not used
2. Unsecured line of credit
An unsecured line of credit is a type of revolving business loan that provides flexible access to funds without requiring collateral. Unlike traditional term loans, it allows you to borrow up to a set limit, repay what you've used, and borrow again as needed.
Because it’s unsecured, approval typically depends on your business’s credit history, cash flow, and overall financial health rather than physical assets. This makes it an attractive option for businesses that don’t want to risk property or inventory as collateral. But keep in mind that because of the increased risk to the lender, interest rates may be higher compared to secured options.
Key features to consider:
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Revolving term of 12 months
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Might be useful as a cash flow option
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Could suit a business with irregular cash flow
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Only incurs fees on the amount drawn upon – no line fees
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Big drawback is likely higher interest rates
3. Debtor finance
Debtor finance, also referred to as invoice finance or factoring, is a funding solution where you sell your unpaid invoices to a lender. The lender typically advances up to 80% of the invoice value upfront and takes over the responsibility of collecting payment directly from your customers. This allows you to access working capital quickly, without waiting for customers to pay their invoices.
Key features to consider:
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Can be used for any business purchase, like new machinery or paying a tax debt
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It is an immediate cash injection without waiting for payment of invoices
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Takes away the risk of late or non-payment of invoices
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Can cover short-term finance issues
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On the downside, it’s usually more expensive than loan finance
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You end up receiving less than the total value of the initial invoice
4. Equipment finance
Equipment finance is a business loan used to purchase a piece of equipment. That piece of equipment, whether it’s a vehicle or piece of machinery, is then used as security for the loan.
Some equipment finance options are structured as leases or rentals, where the lender retains ownership of the equipment for the duration of the agreement. In these cases, you’re essentially hiring the equipment for a set period.
Other types involve borrowing funds to purchase the equipment outright, usually through a short-term loan. Here, the lender holds the equipment as collateral until the loan is fully repaid. During this time, you can use the equipment but cannot sell or transfer ownership until the loan is settled.
Key features to consider:
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Equipment finance can also refer to a business loan used to lease a particular piece of equipment.
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Offers flexibility to set up a repayment plan that fits in with your cash flow
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Simpler than loan financing, and you may be able to claim GST credits for any GST included in the lease charges
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No equity in the asset for the duration of the loan
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It’s also important to be aware of any early-termination fees as they can be substantial
Let’s break down the different types of equipment finance available. Many start from $5,000 with a 1-year term.
Chattel Mortgage
A fixed-term loan secured against an asset you're buying for your business. You own the asset from day one, but it acts as collateral and can’t be sold without lender approval until the loan is fully repaid, potentially with early termination fees. Loans can be tailored to match cash flow. A chattel mortgage suits high-value, long-life assets like retail fit-outs or agricultural vehicles.
Commercial Hire Purchase
A three-party agreement where the lender buys equipment from the seller, and you pay it off in instalments. Ownership transfers to you after the final payment, but the lender remains the legal owner during the loan. Typically requiring a deposit, this is suited for medium-value assets like vehicles or power tools.
Finance Lease
Also called a capital lease, this option lets the lender buy the asset and lease it to you. You don’t own it during the lease but take on all risks, costs, and benefits. At the end of the lease, you can return, buy, or continue leasing (often at a nominal rent). This equipment lease is more suited to high-value, long-term assets.
Operating Lease
A flexible rental agreement for 12–60 months, where the lender owns the asset and you return it at the end; there’s no ownership option. The lender handles maintenance, and you may upgrade your equipment during the lease term. This more suited to lower-value or fast-depreciating tech and assets.
When should I use equipment finance?
Many small businesses turn to equipment finance to manage cash flow. Regular, fixed monthly repayments provide greater control over budgeting.
It's a practical option if you need to:
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Get your premises ready for use
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Purchase major equipment
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Spread equipment costs over time
Keep in mind that equipment finance is often more expensive than a standard small business loan, especially secured loans.
5. Bad credit loans
A bad credit business loan is a loan for entrepreneurs or businesses with a limited or troubled borrowing history. These loans must be used strictly for commercial purposes.
While there are no automatic approvals in Australia, lenders may be willing to overlook your credit history if your business is currently performing well. That said, interest rates are typically higher, reflecting the added risk for the lender. It's crucial to research lenders thoroughly and compare terms carefully.
Who offers bad credit business loans?
Bad credit business loans are typically offered by specialised, small, non-bank lenders.
Why are interest rates higher for a bad credit business loan?
Lenders charge higher interest rates to compensate for the increased risk. If you’ve defaulted in the past, traditional lenders may refuse to work with you. Non-bank lenders who do take on that risk expect higher returns to justify it.
How do you apply?
There are two options available: Directly with a lender or through a finance broker. It’s important to note, however, that alternative lenders in Australia aren’t regulated the same as banks and may impose terms that could interfere with your business.
As with any loan, you should prepare:
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A clear business case
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All necessary documentation
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A plan to find the right lender for your circumstances
Is a bad credit business loan the only option?
If only high-interest or unregulated lenders are the only ones available, it’s important to weigh the long-term impact. If the high rates are likely to lead to more defaults and black marks against your credit rating, then it may be worth taking the time to work towards rebuilding your rating.
What to look for in a bad credit loan
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Compare interest rates and try to secure the lowest possible.
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Watch for hidden fees or unfavourable terms.
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Avoid predatory ‘payday loans’ i.e. small-amount credit contracts with short terms and high interest rates.
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Check for early repayment penalties. Ideally, you should be free to pay off the loan early without extra costs.
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Only borrow to meet genuine business needs, not as a short-term fix for deeper financial issues.
6. Short-term loans
A short-term loan is what the name implies—a loan that is paid off over a short period. This business loan will typically have a repayment period of 12 months, but can be up to 36 months.
Key features to consider:
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Approval is usually within 24 hours, and some can even give pre-approval in minutes
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Businesses with poor credit history may still be eligible for a short-term business loan
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A short-term period can mean higher interest rates compared to longer-term business loans
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Some short-term business loans can have inflexible repayment options
Short-term loans could be appealing to someone whose business is starting up, is fast-growing, has cash flow problems, or is in an emergency situation.
7. Car finance
Whether you need a single vehicle or an entire fleet, business car finance can help you get on the road. From truck finance to leased company cars, there are flexible options to suit your business needs.
Key features to consider:
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Highly competitive market, making it pretty easy to access
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Choice of repayment schedules and loan types to suit your business’s cash flow
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Can claim tax deductions for interest payments, GST, and depreciation
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Car must be used primarily for business purposes
We’ve already touched on options like chattel mortgages and lines of credit above, but let’s explore a few other car finance types in more detail.
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Hire Purchase: A finance company buys the vehicle and sells it back to your business over time. Repay in instalments or with a balloon payment. Requires an upfront deposit.
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Operating Lease: A rental agreement where a finance company owns the vehicle and leases it to your business, with no ownership at the end.
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Finance Lease: Lease with the option to buy the vehicle at the end for a set residual value - useful for high-value vehicles like trucks. Lease payments are tax-deductible.
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Novated Lease: Employees lease a vehicle via salary sacrifice, saving on tax. Fringe Benefits Tax applies, but the business manages it.
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Fleet Purchasing: Best for buying 15+ vehicles, often with bulk discounts. Can be financed via chattel mortgage, hire purchase, or business loans.
8. Merchant cash advance
A merchant cash advance could be a good option for small business owners who don’t have a great deal of cash flow. The benefits of a merchant cash advance include getting a lump sum upfront.
Key features to consider:
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Usually free choice to use the borrowed amount however you choose
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Lenders will collect repayments from your daily cash sales
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Will get an agreement with the lender for a percentage of daily credit card sales as repayments
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Can be a good option for businesses with a good history or daily sales for 12+ months
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It may only be available to businesses with daily credit card sales
9. Business overdraft
A business overdraft is used to help cover cash flow shortfalls or make purchases. The funds from a business overdraft can help give your business access to the assets required to stay afloat in the meantime.
10. Low or no-doc loans
Like its namesake, a low-doc business loan does not require you to produce full documentation as per a standard business loan. However, any business loan, even a low-doc business loan, may still require the last 6 months of bank statements to get approved.
Low-doc business loans work the same as a regular business loan. The only key difference is that they do not require the same amount of paperwork or documentation to apply. Low-doc business loans can be used for a multitude of business purposes to help small business owners, particularly newer ones hoping to get up and running.
Understandably, this type of low-doc business loan also comes with higher interest rates due to the increased risk faced by the lender.
First published on April 3, 2019
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