How To Get A Small Business Loan In Australia
How To Get A Small Business Loan In Australia

A small business loan is a form of business financing that enables small businesses to fund their daily operations costs. The loan is often provided by a lender or a high street bank and is usually secured against an asset, or unsecured. Finding a loan in Australia might be difficult, and in the article, we will explain how to get the small business loan that is available.

Small business loans come in many forms today, from “unsecured business loans” that provide fast, short-term funding to take advantage of an opportunity, to a “short-term business loan” to cover a shortfall. There are more small business finance options to consider than the standard business loans the banks offer. Business loans can be used for any genuine business purpose too, there aren’t any restrictions.

Over 50% of Australian small businesses have a loan facility of some description.

What Is Unsecured Business Loans in Australia?

Photo:  Small Business Grants
Photo: Small Business Grants

When you apply for a loan from a traditional lender, it is standard practice for the financial institution to seek some collateral to use as security against the loan. In the case that the borrower defaults on their repayments, this collateral can be used to help the lender recover their lost assets.

An Unsecured Business Loan is considered "unsecured" because there is no collateral involved. Lenders in this category expose themselves to greater risk, as they have little recourse if the borrower defaults. For this reason, the borrower’s credit plays a more important role in determining how much they can borrow at one time.

Unsecured Business Loans can provide a boost to your working capital and allow you to make investments in inventory, equipment, renovate, hire new staff – ANY business activity.

Some business owners use this type of business loan to cover cash flow fluctuations and even for new business opportunities.

What is a secured business loan in Australia?

A secured business loan or a commercial property loan uses collateral – usually in the form of residential or commercial real estate to back the loan. Secured business or commercial loans involve less risk to the lender because if the borrower doesn’t make repayments, the lender can rely on the security property. This means that secured business or commercial loans usually offer higher loan amounts and lower interest rates.

Many secured business loans have commercial real estate security. For example, if a doctor owns the building that the medical practice operates from, they might leverage the equity on the commercial property as security for a loan to update their medical equipment.

Some business owners have no need for an actual storefront or office location, or they rent or lease their commercial space. This does not necessarily mean they can’t get a business loan for operating expenses or growth opportunities. Some business owners put up their residential homes as collateral for a secured business loan. Others don’t own any commercial or residential real estate but have strong enough business financials and liquid assets to get an unsecured loan with a personal guarantee.

Types of business loans in Australia

Photo:  Sure Capital
Photo: Sure Capital

1. Traditional bank term loans

This is what comes to mind when most people think of a business loan from a bank. With a bank term loan, you will need to complete a lot of paperwork. Besides the application, you will be required to provide financial statements and possibly a business plan. Being a secured loan (requiring collateral), the interest rate will be lower. Like a term loan, you will have a regular monthly payment. The main drawback of a traditional bank loan is the time it takes to get approved, which can be up to two months. Another challenge is that banks in Australia reject 74% of small businesses that apply for these types of loans.

2. Business credit cards

Business credit cards are a popular form of small business finance in Australia. Although the interest rates can be high for business credit cards, most offer an interest-free period (usually 55 days) on charges. So if you pay off the amount within 55 days of the charge, you don’t pay any interest. When applying for a business credit card, the provider will want basic details such as income and length of time in business. They will also check your credit report and score to determine your creditworthiness. Sometimes, business owners use personal credit cards for business finances. This can be a simpler form of business finance if it’s not possible to get a business credit card. However, it’s a good idea to keep your business and personal finances separate, so this option can bring some challenges.

3. Business overdraft

With a business overdraft, you are allowed to run a negative balance on your regular transaction account up to a predetermined amount. You pay interest on any funds that are overdrawn from your account. In addition to the interest on funds used, you will be charged fees. These include an establishment fee and a regular accounting fee. Business overdrafts are available in secured and unsecured forms, with different interest rates reflecting varying levels of risk to the lender.

4. Business line of credit

With a business line of credit, you get approved to borrow an agreed amount but only pay interest on what you use. For example, if your bank approves a line of credit for $100,000 and you only use $50,000, you will only pay interest on the $50,000 you are using. This gives you the flexibility to use the money only when you need it. You can also repay the loan at your own pace. Business lines of credit usually start at a $50,000 minimum, so if you are looking to borrow a lower amount, a business line of credit won’t be an option for you.

5. Business equity loan

A business equity loan can be in the form of a loan or line of credit which is secured against residential or commercial property. Several advantages of a business equity loan are that you can borrow up to 100% of the value of a residential property used as security for the loan and get a competitive interest rate. The biggest shortcoming of this type of loan is that your property is at risk if you get into financial difficulties and cannot make the payments.

6. Low-doc and no-doc business loans

If you don’t have financial statements and proof of income for the previous two years, a low-doc loan could be the solution. If you can’t provide proof of income, a no-doc loan might be suitable for meeting your business finance needs. Low-doc and no-doc loans are backed by residential property. The main drawback of these loans is higher interest rates due to the increased risk to the lender. Low-doc and no-doc business loans are usually provided by specialist non-bank lenders such as Liberty. Approval times for these types of loans can vary from a few days to weeks.

7. Invoice finance

If you don’t want to wait to receive money from your customer invoices, you can work with an invoice finance company to receive the funds sooner. When you create an invoice, you ‘sell’ it to an invoice finance company. They pay you a percentage of the total invoice value (80% to 95%) immediately and charge an advance fee (usually between 2% and 5%) of the invoice amount. When the customer pays the invoice, you get the remaining funds, minus any fees and charges.

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Business loan requirements – what you need when applying for a business loan in Australia

Photo: EBroker
Photo: EBroker

Before you apply for a business loan

Before you approach a lender, you will want to cover a few things:

The amount and use of funds – before you speak with a lender, you will need a clear picture of how much money you need and what you will use it for. Even if you’re not starting a new business, you might want to create a business plan for this purpose. Conduct research to support your numbers. If you need a piece of machinery for a manufacturing business, for example, get quotes from companies that supply this machinery. Remember to include all costs. In the machinery example, this would include delivery and installation.

Credit report – a lender will view your credit report, so it’s a good idea to know where you stand before asking for a business loan. Any late payments default and judgments will make it difficult to get a business loan. You can get your credit report for free. Learn more about your credit report and credit score, and where to get yours.

ATO tax debt – if you are in a payment arrangement with the ATO, you are less likely to be approved for a business loan from a bank. Before entering a payment arrangement with the ATO, discuss your ATO debt with potential lenders to find out if this will prevent you from getting a business loan.

Collateral for a secured loan – if you are seeking a secured loan, consider what you will pledge as collateral. Loan security can include residential, commercial, or rural property and business assets. If you plan to use the property as collateral, make sure you know what it’s approximately worth and what you owe on it.

Business loan requirements for bank loans

Identification – when applying for a business loan, the bank will need to know who you are, including researching your background. For these reasons, having your ID – driver’s license, passport, or both – is the first step in meeting business loan requirements.

Financial statements – there are four types of financial statements (Balance Sheet, Income Statement, Cash Flow Statement, and Statement of Retained Earnings). In seeking a business loan, a bank will usually want to see the first three of these which show your assets, liabilities, and net worth. In addition, you may be asked for other documents such as your most recent tax returns and business activity statements (BAS).

Proof of personal income – you will probably need to provide your two most recent tax returns and notices of assessment if you are a shareholder and/or director in a company.

Bank statements – the lender will want to see your latest business bank account statements either in hard copy or electronic format. Also, any other statements showing assets and liabilities, such as business savings and credit cards, will be required when seeking a business loan.

Business plan – a business plan is a common requirement for start-ups and new businesses seeking a business loan. Writing a business plan will require substantial time and research. Find out what’s typically included in a business plan.

How do I apply for a business loan?

Photo: Canstar
Photo: Canstar

Applying for a business loan doesn’t need to be daunting. A good starting point is to seek out the services of an experienced business finance broker. You want someone who understands what you’re trying to achieve and can identify lenders that have an appetite to back your situation.

A good business finance broker will guide you through the application process and help ensure your loan application is approved. Remember that each time you apply for credit, a notation is made on your credit file and this impacts your credit score. For this reason, it’s important that whoever you decide to formally apply with has an appetite for your loan and circumstances.

Read More: How To Get A Business Loan With Bad Credit

Factors that impact business loan interest rates

In addition to the type and term of your business finance, and the amount you need to borrow, these are some of the main factors that can influence how much your business loan is likely to cost:

1. Security

If you have property or other assets to offer as collateral, you can expect to pay less than you would for an unsecured loan, because the lender is taking much less of a risk. Some lenders, especially the big banks, may only be prepared to offer you some types or levels of finance if you have security to offer.

2. Trading history

This is also a matter of risk – if yours is an established business with a strong record of profitable trading, a lender has good reason to expect they will receive their interest payments and principal repayments on the agreed schedule. If you have a small or newly-established business you may still be able to find the finance you need, but you can expect to pay higher interest rates and fees as an incentive for the lender to take the greater risk.

3. Type of lender

Bank finance is typically lower in cost than that offered by alternative or ‘fintech’ lenders – but it’s also a lot harder to secure. Banks are notoriously risk-averse and tend to have strict criteria (including credit rating, collateral, and financial history) which many SMEs simply cannot meet.

What’s more, the application process for bank finance can be arduous and lengthy – if you need fast, flexible business finance you may need to approach an alternative lender instead, but you can expect to pay more for your loan.

4. Fixed or variable rates

Another important consideration is whether your business loan interest rate is fixed or variable. Fixed rates give you certainty over how much you will pay for an agreed period (typically up to five years) but often come with restrictions about early repayment, and leave you locked into a higher rate even if interest rates fall. Variable rates allow you to benefit if interest rates go down during the period of your loan – but also leave you vulnerable to much higher costs if interest rates go up.

The economic factors that influence interest rates are totally beyond your control, so it’s important to look closely at the impact that rate increases could have on your ability to repay your loan before applying for any type of variable rate finance. Interestingly, Australia has the 4th highest short-term commercial rates of the G20.

5. Terms and conditions

Business finance often comes with conditions. The higher the risk you present, the more likely a lender is to impose conditions when offering you finance. Even the big banks will often prohibit borrowers from taking out additional loans – but some alternative lenders, which are not subject to the same regulation as Australia’s banks, may impose other restrictions. These could impact your ability to pursue opportunities to expand your business or prevent you from offering discounts and incentives to your customers during the term of your loan.

Be aware that even if accepting restrictive conditions results in a lower interest rate, they could have a hefty financial impact on your business in the long term.

Type of Loan

Secured or Unsecured

Interest Rate* (per annum)

Line of Credit

Secured or Unsecured

5% to 12%

Business Overdraft

Secured or Unsecured

7% to 12%

Merchant Cash Advance

Secured

20%+

Equipment Finance

Secured

6% to 15%

Business Credit Cards

Unsecured

12% to 22%

Invoice Finance

Secured

12% to 36%

Bank Term Loan

Secured

5%+

Unsecured Online Loan

Unsecured

25%+

* These rates are based on information found on websites of banks, non-bank lenders, and business finance brokers when this guide was created. Interest rates are subject to change.

Business loan terms – from short-term to long-term business loans in Australia

Another factor to consider when selecting a business loan is the term, which is the length of the loan. These can vary greatly between business loans in Australia. In general, the shorter the term, the higher the interest rate. For example, a traditional secured bank term loan will have an interest rate of around 5%. In contrast, an online business loan with a two-year term will have a higher interest rate. As we explained earlier, the interest rate on a business loan is influenced by whether the loan is secured or unsecured.

The loan term should be taken into consideration when choosing a business loan. If you need funds to cover short-term cash flow needs, a short-term loan could be the answer. If the loan is to be used to purchase a commercial property for your business or high-cost machinery, a long-term loan would be more suitable. The term of your loan will also be determined by your ability to make repayments. If you want to borrow a large amount, you probably don’t want a short-term loan as the payments could be too high for you to make regularly, according to Moula.

Can I get a commercial loan with my SMSF?

If you have a self-managed super fund, you may be able to use it to take out a mortgage on commercial property. Some SMSF members buy residential or commercial properties to help diversify their investment portfolio. Buying residential or commercial real estate with SMSF funds allows members to collect rental income, build equity, and capture capital gains if they sell the property. If you’re not buying a home for you or a family member to live in, you can use your SMSF to take out a mortgage the usual way.

For commercial property purchased with an SMSF, buyers are generally also allowed to use the property – provided it’s being used exclusively for business purposes. Whether held personally or in an SMSF, mortgages on commercial property tend to have slightly higher interest rates than those on residential property. And while the mortgage’s term is usually shorter, some lenders will go up to 30 years.

Can I get a business loan if I have bad credit?

You can still get a business loan if you have bad credit. However, these borrowers will usually be subject to higher interest rates and will need collateral to secure the loan. Unsecured business loans are hard to get unless you have an above-average credit history. If you’re seeking a business loan and your credit score is on the low side, you’ll need to present a good case to your lender.

There are specialty lenders who may still approve you if you can show that your financial situation has improved, and you can service the loan. You’ll want to show a solid record of consistent business revenue, or if you’re starting your own business, a similarly solid history of earnings in the same industry.

The bottom line is that you want to show the lender that you’re a risk worth taking and that repayment problems are unlikely to recur. Mainstream banks and credit unions are less likely to approve business loans to applicants with low credit scores. But a business finance broker will know which lenders may still consider you and tell you what documentation will help your chances, according to Liberty.

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