The Definitive InfoChoice Guide to Business Loans

ALL small business owners are on the hunt for a business loan, whether that is actively looking and applying, keeping an eye on the market or dreaming of the future.

Wherever you’re at on your business development ‘curve,’ this quick, 5-minute guide to business loans will help you know more about what you’re doing and whether the loans you’re comparing are right for you.

Is it the right time for a business loan?

It doesn’t matter if you’ve been operating for over a decade or less than a year; there will probably come a time when you’ll need a financial leg-up in order to expand or to weather a time of tight cashflow.

You might want to buy new IT, software, machinery or inventory, hire more staff, relocate to bigger premises or embark on a big marketing campaign.

These are all good reasons for a business loan and legitimate “loan purposes” on your business loan application form.

The types of business loans available in Australia

There are several different types of business loan available in Australia, including:

  • Traditional term loans from your bank
  • Business overdrafts
  • Business lines of credit
  • Unsecured business loans and
  • Low or no-document business loans, for those “business loan for my business idea” moments.

Secured or unsecured?

It’s important to understand the distinctions between secured and unsecured finance.

A secured business loan is one that’s backed up by your collateral, such as residential property, machinery or vehicles. An unsecured loan is based on (and relies on) your cashflow to be paid back and these loans are often smaller.

Even with an unsecured business loan, if you get into serious difficulties, your assets may be used by debt collectors to recoup the outstanding amount.

Why are the interest rates different between secured and unsecured loans?

Quite simply, an unsecured loan is riskier for the lender as it’s not backed by collateral, so the interest rate will be higher to reflect this extra risk on the lender’s part.

What about fixed and variable interest rates?

Both fixed and variable interest rates have their pros and cons. With fixed rates, you know exactly what you’ll be paying over the life of the loan and you’ll also know that you won’t suddenly be paying more as interest rates rise. On the other hand, you won’t pay less if they fall.

Variable interest rates are good if you’re expecting rates to fall, but not so good if they’re likely to rise.

What do you need when applying for a business loan?

You’ll need quite a lot of facts and figures, as well as supporting evidence to back up your request. And you need to have a definite figure in mind

As well as a definite purpose. You’re more likely to get the loan if you approach the lender with a definite amount for amazing new technology that will cut your production costs by 20 per cent. If you can show the lender – with industry-backed evidence – that the going rate for this tech is $50,000 but that it’ll pay for itself in 18 months, then you’ll have a good case. Include all costs, like delivery, installation and staff training.

Your most recent credit report

Your lender will examine your credit file, so it’s a good idea to find out what’s on it before applying for a business loan. If there’s any black marks on it, it may be worth waiting until they’ve been removed. It’s also vital that you pay off any tax debt before you apply for a loan, too, as this can prevent your application being approved.

Work out your collateral

If you’re looking for a secured loan, get your property, vehicles and equipment valued and decide which items you’re willing to put up as security.

Other requirements

You’ll need your ID

Your passport and/or your driver’s licence is a good start.

You’ll also need your financial statements

These include your balance sheet, your income statement, your cashflow statement and your statement of retained earnings. Your lender will want to see the first three of these and possibly some recent tax returns and business activity statements.

Your proof of personal income

This is usually your two most recent tax returns and your notices of assessment (if you’re a shareholder and/or a director).

Your bank statements

This means your business bank statements, as well as any other statements that show your assets, debts and liabilities, like credit card statements and savings.

A business plan

You’re more likely to need this if you’re a startup or still relatively new. A business plan is quite an involved undertaking, so you need to know what you’re doing.

How much can you borrow?

Lenders use quite a few factors when they decide how much they’re prepared to lend you.

Qualitative factors

These factors include things like any credit defaults you may have had, how long you’ve been in business and how stable you’ve generally been. If you’ve been operating for 15 years but you’ve usually been just scraping by, that’s not much better than an enterprise that’s been going well for just 11 months, for example. If your credit rating is patchy, you’ll need to improve it before applying. Similarly, most lenders will want you to clear any tax debt with the ATO before approving your application.

The purpose of the loan also counts, as there are often very sensible reasons – like that fancy new machinery that’ll improve your bottom line. If it’s to smooth out cashflow fluctuations, the lender might be a bit more circumspect.

Are you looking for a secured or unsecured loan?

Secured loans tend to be for higher amounts and with lower interest rates because the lender can use the collateral to recoup any outstanding amounts.

Your financial factors

Your lender will want to look at your net profit, after expenses, tax and depreciation of assets. This figure gives the lender an idea about how well you’re doing based against similar enterprises in your industry. It also shows how much money you have free to repay the loan.