Small Business

What is a business loan?

Pretty simply, any loan taken out by a company for commercial purposes. Similar to a home loan, the interest rate on a business loan can be a fixed interest rate or a variable interest rate.

Loans can be the starting point for a new business venture, or to support financing an existing company. For an Australian business looking for more funding, a business loan can be a handy way to help run and grow your business.

How do small business loans work?

There are two types of business loans – secured and unsecured that allow businesses to borrow. Businesses can opt to be lent a lump sum payment or a revolving line of credit. Similar to a home loan or personal loan, you will be charged fees and an interest rate. This can either be a variable rate that fluctuates over time or a fixed rate that will remain the same for the life of the loan. Repayments can be required on a daily, weekly, fortnightly or monthly basis.

What are the benefits of a small business loan?

A business loan allowed you to be able to invest in your business. A loan can help provide a return that outweighs the interest paid over the course of the loan.

How much can I borrow with a business loan?

The amount that can be borrowed from a lender will depend on a number of factors like the size of the company, the needs and the balance sheet. Typically the more profitable and secure a business, the more money that can be borrowed against the business. From the lenders perspective, a highly successful company is more likely to be able to repay a loan. Lenders will ask questions about the length of trading, the company balance sheet and what the loan will be used for.

Who offers business loans?

The big four banks, smaller banks and even some non-bank lenders all offer business loans.

How is a business loan regulated?

Any bank offering a business loan is regulated by the Australian Prudential Regulatory Authority (APRA). The non-bank lenders are regulated by the Australian Securities & Investments Commission (ASIC).

How does the interest rate work?

Generally speaking, business loans are more expensive than a home loan. However, the interest rate on a business loan is still significantly less than the interest rates on a business credit card. The interest rate can be calculated at different rates and repayments could be per fortnight, per month or even per annum. This is something to keep in mind when trying to compare business loans. Some lenders will even calculate a unique rate for each business based upon their unique situation.

What are the fees with business loans?

As mentioned, business loan interest rates are a little different. It’s important to keep a close eye on the rates and fees being charged. Here are some of the fees you might find with a business loan:

• Application fees: an initial fee charged at the start of your loan. This could be a dollar figure or a percentage of the total amount of the loan.
• Discharge fees: a fee charged once your loan has been completely paid off, or charged for refinancing a loan.
• Dishonour fees: a charge if a repayment isn’t able to be processed due to lack of available funds in your bank account.
• Early repayment fees: a fee charged by some lenders if the loan is paid off early in full.
• Ongoing fees: sometimes known as a service fee, charged either weekly, monthly or annually.

How do I get a business loan?

There are two pathways to applying for a business loan. The first is to approach a lender directly, which is often a time-consuming process as the lender will need an in depth understanding of your company prior to making a decision. Compare options and fees at InfoChoice then real directly with the lender. The second way is to go through a finance broker who can assist with navigating the complexity of a loan on your behalf.

Is it hard to get a business loan?

Many online lenders have a quick and easy application process. You can apply in under 10 minutes and receive an approval and funding in as little as 24 hours. Numerous lenders offer unsecured and secured loans without a requirement to verify the financials or tax returns.

How long does it take to get a business loan?

Many lenders offer quick approvals in in under 24 hours and funds can be available the next day. It helps to shop around as the process with some lenders could be a lengthy one. Lenders need a clear and comprehensive understanding of your business prior to making a decision. Typically it may takes several weeks up to get a business loan depends on the complexity of the deal and the risk appetite of the lender..

What assets can be used as security for a business loan?

The conditions of what can and cannot be used to secure a loan will vary between lenders. This is something to look out for when you compare business loans. Some examples include commercial property, residential property such as your home, company equipment or vehicles—even the company itself could be used.

What should you look for in a business loan?

That depends on what type of features you are looking for. When you compare business loans, you may be interested in funding speed, that is the speediness of a lender to process and approve a loan. Many online business loan providers promise a ten minute application process with funding delivered in 24 hours. Flexible repayments might be something to look for, rather than the traditional set repayments (daily, weekly, fortnightly, monthly). The ability to make extra repayments can be useful if your goal is to pay down debt faster to cut down on interest paid. Be aware that some lenders will charge a fee for extra repayments made. If you are intending on making extra repayments, then a redraw facility may be a useful things to have with your loan. If you ever need to redraw any of those extra repayments to pay for unexpected bills or expenses it could be a big help.

What do you need to apply for a business loan?

The big four banks and small business lenders have online applications, some able to finish in as little as ten minutes. However, you will need some documents including your drivers licence, business ABN and financial documents like projected cash flow, tax returns and business bank statements. You will also generally need to provide a business plan that details how you intend to use the funds of the loan.

How do lenders decide if you are eligible for business finance?

There are quite a few factors that lenders use to decide if you are eligible for finance. Lenders will take into consideration your businesses annual turnover, how long your business has been trading, what the funds are for and the period of time needed to repay the loan.

What are some reasons a business loan could be declined?

Out of all small business loans in Australia, only around 50% are successful in securing funding. There are a number of different reasons a lender may have for not approving an application.

Your business is too new

One of the main reasons for a loan being rejected is for not bein gin business long enough. Most loans require a business to be operating for at least 6 months with a steady turnover. As most loans are unsecured, a lender will want to be certain you will have steady revenue to make repayments.

Your revenue is too inconsistent

A business with fluctuating revenue may struggle to have a loan application approved. A lender will want to be sure your business has adequate cash flow to be able to sustain your business and any loan repayments. Most lenders will typically expect an average minimum turnover of $5,000 per month. If your business has a cash component, it’s important to file your BAS and submit statements alongside any bank statements to give sufficient evidence to support your business loan application.

Your credit history is poor

A poor credit score can be a reason why your business loan gets declined. Different lenders will have different thresholds of risk and it’s worth enquiring with different lenders. If you do have a poor credit history, it’s important to work towards improving it prior to applying for a business loan. You can approach lenders with a bigger appetite for risk, but be aware the repayment amounts might be higher to compensate for the higher risk.

Your business is not registered in Australia

Majority of Australian lenders require your business to be registered in Australia. This means having a valid ABN/ACN that has been active for more than 6 months prior to applying for a business loan. This is a minimum criteria for most lenders.

You have previously defaulted on a loan

If you have a pending default on a repayment on an old loan this could dampen your ability for future loans and affect your credit score. Even if the default has been paid. You can ensure you do not default on any repayments, and only secure funds that can be effectively used to drive revenue for your business. For any defaults you do have, work on repaying them and improving your credit history before you approach a new lender.

You have existing loans

Lenders for small business loans will fund business owners up to 100% of the business monthly revenue. This means that with existing loans, depending on their amount, it would be unlikely for you to be able to secure a new loan that combined with the current loan would exceed your monthly turnover. If you are in need of funding, other options could be for a personal loan of a secured business loan.

You lack collateral

Secured business loans often have more competitive interest rates. Without a valuable item to use as security against the loan, lenders can reject applications. You could go for an unsecured business loan, which minimises risk but also attracts a higher interest rate.

Your industry is considered to be ‘risky’

Some lenders can be apprehensive of approving loans, particularly from industries deemed risky such as high investment or low margin businesses. This is not a reflection on your business or capability to make repayments, but it can means your business struggles to secure a loan with some lenders. This is where seeking out specific lenders that cater to your industry will be key for your business. Ask your peers or a broker to help identify opportunities with these lenders.

You lack a strong business plan

Lenders need to assess your ability to make repayments, and this includes knowing how the funds will be utilised. They need to be convinced that you—and your business—are a good risk. Having a strong business plan is key. Outlining the purpose of the loan, and how the funds will be used to help grow your business. Whether it’s for cash flow, to purchase necessary stock or equipment, marketing costs or other business purposes. All of this will improve your chances of being approved for a business loan.

Your paperwork is incomplete

Paperwork isn’t something many of us enjoy doing, but it is important to be armed with all documentation needed before applying for your loan. This helps the lender gain a complete picture of your business loan application and determine whether your loan should be approved. Keep key paperwork up to date to make the loan application process easier. This included latest bank statements, completed business activity statement (BAS), and photo ID such as a drivers licence.

Your revenue is not diverse enough

Some lenders may pause if the majority of your income is from one or two suppliers. This could be perceived as increasing likelihood of being unable to make your repayments. Businesses with multiple streams of income may be looked upon more favourably by some lenders.

Your business is seasonal

Small businesses with seasonal revenue could find it more challenging to secure a business loan. Similar to having inconsistent income, businesses with seasonal work could be questioned over ability to make repayments in their off season. Be prepared with plenty of documentation and evidence to support your loan, and seek out a financial broker or look at smaller lenders.

Your business does not qualify for a particular loan

It’s important to understand loan details before you take the plunge and apply. Read up on the various types or loans to help understand which will best suit your small businesses needs. Many lenders can match you with inhouse lending specialists that can assist with matching the right loan for your business. Alternatively, you can approach a financial broker or use the InfoChoice comparison tables to help find the right loan.

What are the different types of loans available?

There are a number of options available to Australian small businesses and business owners. We will detail the major ones below including:

• secure business loans
• unsecured business loans
• business lines of credit
• Invoice finance and invoice funding
• Equipment finance
• Vehicle finance
• Truck finance

Secured business loans

A secured business loan is—like it’s name suggests—secured against an asset or collateral. This could be property, vehicle, personal assets or even against the loan itself. To apply for a secured business loan you would need to provide a prospective lender with complete details of income generated by the asset being used as collateral. Copies of the proof of ownership documents, details of any existing loans for the asset, and documentation that certifies the value of the asset. Any insurance policies or other documentation relevant to the asset that will help the lender assess whether the asset is valuable enough to cover the value of the loan.

• The use of collateral means more competitive rates and fees
• Higher maximum loan values and longer loan periods
• Useful if you need a larger loan amount or can make repayments over a longer period

Secured business loans often have terms of up to 5 years and longer for property loans. Most lenders require you to have been in business for more than 12 months, provide full business financials and a full business credit check along with your collateral. Approval time typically takes 1 days to 3 weeks but there is no limit on the amount that can be borrowed.

Unsecured business loans

An unsecured business loan lets you cover business related needs by boosting capital to be able to invest in equipment, renovate, hire staff and anything your business needs. Loans are available from $5,000 to $300,000. Unlike a secured loan it does not require security or collateral to obtain the loan.

• Typically it is a short term loan of 3 to 24 months
• Fast, simple often same day approval
• Can be a good option for a smaller business that does not meet a banks strict lending criteria
• Considered higher risk to likely to have higher interest rates
• Overall terms, rates and fees may result in higher borrowing costs
• You may need to provide a guarantee, which means you will be held personally responsible for repayments if your business is unable to meet the obligations of the loan.

Unsecured business loans are becoming a top choice for small business owners in Australia seeking capital. This is partly because unsecured business loans tend to be less restrictive than secured loans. Unlike a secured business loan, unsecured loans do not require long-term trading history or security. They suit both new businesses trying to jump start their business but also established businesses scaling or looking for a short term cash injection. Even a business with a strong track record of successful finances can be held up with red tape when applying for a business loan. An unsecured business loan can take off some of that pressure. Additionally, many new businesses may not have commercial assets to put up as security or collateral for a loan. Furthermore, they may not want to put up personal assets like a home as security. An unsecured business loan could be the answer.

What is a line of credit?

A business line of credit is an agreed amount with a lending institution that you can access anytime you need it. A business line of credit is generally between 3 to 12 months. Often with a business line of credit you will only pay the interest on the drawn down amount. A business line of credit can be secured (by inventory, receivables or other collateral) or unsecured depending upon the state of your business. Business lines of credit typically suit businesses that have a stable monthly turnover, have been around longer and have a higher credit score. For any business in need of a continuous injection of funds could be a good fit for a business line of credit.

• Flexible option as you only draw and repay funds as needed
• There is no minimum amount and interest is usually calculated daily on amounts borrowed
• Quick and simple application process typically of 1-2 days
• It can be cancelled at anytime by the lender and is repayable
• Strong likelihood to incur fees even if not used

What is an unsecured line of credit?

A subset of unsecured business loans, an unsecured line of credit is a flexible option allowing the customer to redraw funds when needed.

• Revolving term of 12 months
• Useful as a cash flow option
• Great for business with irregular cashflow
• Only incurs fees on the amount drawn upon – no line fees

What is invoice finance?

Invoice finance is also known as “factoring” finance when you sell your invoices to a lender. A lender will then forward up to 80% of the total invoice immediately and take on responsibility for collecting the payment from the supplier.

• Can be used for any business purchase like new machinery or paying a tax debt
• Is an immediate cash injection without waiting for payment of invoices
• Takes away the risk of late or non payment of invoices
• Can cover short term finance issues
• On the downside, it’s usually more expensive than loan finance
• You end up receiving less than the total value of the initial invoice

What is debtor finance for?

Debtor finance is another term for invoice finance or factoring finance. Immediately after a business has issued an invoice to its customer, they can be purchased from owners for a fee. This means that up to 80% of the balance due on the invoice is paid to the business owner within 24 hours. Invoice finance is useful for companies focussed on growth. Most Australian businesses offer customers credit terms of 30 to 60 days—or even longer. That can put a strain on many businesses’ cash flow. Fortunately, debtor finance provides immediate cash flow to businesses which can help ease financial stress. Other terms for debtor finance include invoice finance, invoice factoring and invoice discounting.

What is equipment finance?

Equipment finance is a business loan used to purchase a piece of equipment. That piece of equipment—perhaps a truck or piece of machinery—is then used as security for the loan. The type of equipment finance will differ depending on your business needs. Some equipment finance are for equipment hire for a period of time, in which case the lender would be the owner of the equipment. Other equipment finance loans are to assist in buying equipment with a shorter-term loan, in which case the lender will own the collateral until the loan is repaid. This means you cannot resell equipment until loan closure.

• Equipment finance can also refer to a business loan used to lease a particular piece of equipment.
• Offers flexibility to set up a repayment plan that fits in with your cash flow
• Simpler than loan financing, and you may be able to claim GST credits for any GST included in the lease charges
• No equity in the asset for the duration of the loan
• It’s also important to be aware of any early-termination fees as they can be substantial

Let’s breakdown the different types of equipment finance available. Most start from $5,000 with a 1 year term.

Chattel Mortgage

Also known as a secured loan agreement this is a fixed-term loan secured on the asset you intend to buy for your business. It’s similar to how a home loan works, but over a much shorter period of time. The equipment is considered your property from the beginning of the loan, but as it is considered collateral for the loan you cannot sell it until the loan has been repaid in full. If you do need to sell the equipment, you will need approval from the lender and pay out the balance of the loan. On top of this there will most likely be an early termination fee as well. Most lenders will work with you to structure the loan so the repayments match your cash flow. This works well for high-value recruitment that has a long life span and is unlikely to become obsolete for the life of the loan. An example might be a retail fit out or an agricultural vehicle.

Commercial Hire Purchase

This is known as a tripartite agreement which takes place between you as the business owner, the seller of the equipment and the finance company. The lender will purchase the equipment from the seller, and then you will gradually purchase it from them in instalments over a period of time. You can expect to pay an upfront deposit and then a series of repayment instalments, with a possible final payment at the end. Once the final payment is made you will gain ownership of the asset and have the right to do what you wish with it. However, for the life of the loan the lender or financier is the legal owners. This works well for medium value assets like vehicles or power tools.

Finance Lease

This type of equipment lease can also be known as a capital lease which is usually used for high-value purchases. It’s a common alternative to a chattel mortgage (as above) as it puts you the lessee as the owner taking on all the risk and reward of the asset. The lender will purchase the equipment direct from the seller and rent to you for the duration of the agreement. You will not own the asset during the lease agreement but you are responsible for maintenance, running costs and repairs. Over the term of the lease, the lender or financier will typically recoup full purchase price plus interest on the asset. At the end of the lease you can return the asset to the lender, make an offer to purchase the asset from the lender or lease the asset for another period at a low cost. This last option is known as peppercorn rent.

Operating Lease

Sometimes known as a rental agreement, an operating lease offers maximum flexibility for short to medium term financing options. Typically from 12-60 months, a lender will purchase the asset on your behalf and rent it back to you. The lender will own the asset, and at the end of the lease you do not have the option to buy the equipment from the lender. Inseat you will return the asset to the lender who will then sell or lease the asset to a new client. The lender is generally responsible for the service and maintenance during the lease period. Many operating leases allow you to upgrade your equipment even during the term of the lease. This type of equipment finance is best suited to lower value equipment or technology that is rapidly obsolete like IT or telecommunications assets.

When should I use equipment finance?

Most small businesses looking at equipment finance is for cash flow reasons. It could be an option for your small business if you need to fit out a premises or buy major equipment. If you wish to spread the cost of your equipment purchases or need to know a set amount paid monthly for budgeting reasons. There are a number of options available and of course both financial and tax implications to consider with any equipment finance or any other financial product. Generally speaking, equipment finance can be more expensive than a small business loan, particularly than secured business loans.

What is a bad credit business loan?

A bad credit business loan is a loan for entrepreneurs or companies who have insufficient or troubled borrowing history. A bad credit business loan must be used for commercial purposes only. There are no bad credit loans with automatic approval in Australia, but with a business that’s performing well then your credit history may be overlooked. It’s important to research any bad credit loan lenders, and scrutinise the interest rates. Be prepared to pay a higher interest rate than a standard business loan—secured or unsecured.

Who offers bad credit business loans?

Bad credit business loans are offered by specialised, small, non-bank lenders.

Why do you pay more for a bad credit business loan?

The higher interest rate charged by a lender helps compensate for the risk involved in lending to you. If your business is late in making a repayment, the lender will lose money. If you personally or your business has a history of defaulting on financial obligations many lenders including the major banks may not take the risk of loaning to you again. The lenders that will issue bad credit business loans will need to reap enough returns to make the risk worth their while.

How do you get a bad credit business loan?

Similarly to a standard business loan, you can apply either by directly approaching a lender or with the assistance of a finance broker. However, in Australia currently alternative lenders are not regulated in the same way as the banks, and can impose certain restrictions that could interfere with your business. Similar to any other business loan, prepare a strong business case, prepare your documentation and look for the right lender for your situation.

Is a bad credit business loan the only option?

If you find that less reputable lenders are the only ones offering a loan, it’s important to weigh up how helpful this will be to your business. 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 should you look for in a bad credit business loan?

Apart from trying to secure the lowest interest rate possible, there are a few other things to look for in a loan. Be on the lookout for any hidden fees, and potential penalties that could be incurred throughout the duration of the loan. Ask if your lender charges early payment penalties. Trying to pay off your loan as quickly as possible makes smart financial sense, and neither you or your business should be penalised with a hefty prepayment penalty. A bad credit business loan should only be applied for to cover genuine and legitimate needs for the business.

What is a short term business loan?

A short term loan is what the name implies—a loan that is paid off over a short period of time. A short term business loan will typically have a repayment period of 12 months, but can be up to 36 months.

• Approval usually within 24 hours, some can even give pre-approval in minutes
• Businesses with poor credit history may still be eligible for a short term business loan
• A short-term period can mean higher interest rates compared to longer term business loans
• Some short term business loans can have inflexible repayment options

Here’s some of the situations where a short term business loan might be a good fit for your business:

Your business is a start-up

Brand new businesses can have a lot of setup costs. To get up and running fast a short term business loan could work.

Your business is fast-growing

A rapid business expansion is welcome but also adds pressure to existing operations. Hiring new staff, buying new equipment and setting up infrastructure to keep up with growth can be costly. A short term business loan provides an influx of capital needed to sustain the growth of the business.

Your business has cash flow problems

Waiting on outstanding invoices to be paid? This can put strain on your businesses ability to pay bills and cause cash flow issues. A short term business loan can help keep your business solvent whilst getting cash flow back on track.

Your business is in an emergency situation

When an emergency arises your business may need immediate access to capital, which is a perfect case for a short term business loan. An example might be tendering for a big project which has a condition of full staff training. A short term business loan could cover the cost of staff attending training prior to starting the new work.

What is business car finance?

A single car or a full fleet of vehicles needed for your business can all be used through business car finance. From truck finance to company cars on leases, there’s plenty of options to consider.

• Highly competitive market making it pretty easy to access
• Choice of repayment schedules and loan types to suit your business’s cash flow
• Can claim deductions for interest payments
• Overall borrowing capacity is reduced

Some of the types of car finance we’ve discussed above in the chattel mortgage and line of credit, but let’s dive into a few of the others.

Hire purchase

A third party finance company buys your business vehicle and then gradually sells it back to your business. Similar to a chattel mortgage you can opt to pay the loan off in equal instalments or left with a balloon payment to be repaid at the end of the contract. Unlike a small business loan or chattel mortgage you have to pay an up front deposit.

Operating lease

A rental agreement where a third party finance company purchases a vehicle and loans it back to your business.

Finance lease

Similar to an operating lease, but with a finance lease you have the option to purchase the vehicle for an agreed residual repayment. This can be useful for truck finance if the value of the truck is higher than the residual payment (although the opposite can be true with depreciation). Tax deductible.

Novated lease

A novated lease is another tripartite agreement which your employees can lease a vehicle using salary sacrifice. This allows them to make substantial tax savings on the purchase price of their car and any running costs. Employees will have to pay Fringe Benefits Tax, but your business will be responsible for managing this for them.

Fleet purchasing

If your business needs to purchase 15 or more vehicles for your business then fleet purchasing can be a great choice, opening you up for substantial discounts. Look for a dealer with a dedicated fleet department to get the ball rolling quickly. Fleet purchases can be funded with any of the business car finance options we’ve outlined from chattel mortgages, hire purchase or small business loans.

What is a merchant cash advance?

A merchant cash advance can 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 is getting a lump sum upfront.

• Free choice to use the borrowed amount however you choose
• Lenders will collect repayments from your daily cash sales
• Will get an agreement with lender for a percentage of daily credit card sales as repayments
• Can be a good option for businesses with a good history or daily sales for 12+ months
• May only be available to businesses with daily credit card sales

What is a 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 assets required to start afloat in the meantime.

What is a Low Doc business loan?

Like it’s 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 of documentation to apply. Low doc business loans can be used for a multitude of business purposes to help small business owners.

What is a No Doc business loan?

No doc business loans are for business owners who cannot provide any proof of income. Understandably, this type of low doc business loan also comes with higher interest rates due to the increased risk faced by the lender.

How can you choose the best business loan for your situation?

Once you have made the decision to take out a small business loan it’s natural that your next question is—which is the right loan for my small business? How do I compare business loans? A lot of small business owners find it challenging to identify the right lender for their business needs. There are a few different factors to consider. The first is the reputation of the lender. Is it a transparent institution that explains their transactions and approach? Are all the terms and conditions clearly stated before your loan is processed? Are there any sneaky or hidden charges? Next you will need to look at a lender that specialises or at least deals with your particular industry. Each lender has a different appetite for risks. It’s important to identify a lender that will cater to your industry, which ups your chances of being approved. So you’ve narrowed down your options to a few key lenders that specialise in your industry. Now what? This is where your inner detective comes into it. It’s time to get do some research. Fortunately, InfoChoice helps here by compiling the different loans for your business needs. Look at the features, rates and terms to compare what is best for your needs. Another way to compare business loans is to look at the annual percentage rate or APR. The APR is the percentage that determines the actual annual costs of funds over the term of a loan. This includes fees or other additional costs associated with the transaction. It does not take compounding into account. If you’re feeling a little unsure about which loan would be best for your needs, or how best to compare business loans, you can look for a business broker to assist.