Small Business Loans

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.

Secured or unsecured?

1. 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.

2. 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 are the different types of loans available?

Numerous loan options are accessible to small businesses and business proprietors in Australia, but the fundamental distinction lies in whether the loan is secured or unsecured.

Some options outside of secured and unsecured are:

• Line of credit
• Unsecured line of credit
• Invoice finance
• Debtor finance
• Equipment finance
• Bad credit loans
• Short-term loans
• Car finance
• Merchant cash advance
• Business overdraft
• Low or no-doc loans

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. You will also have to look at the comparison rate, which is a reflection of fees payable, as explained below.

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.

Fees are usually indicated in the comparison rate. A large discrepancy between the advertised and comparison rates can mean the product attracts higher fees.

How do I get a business loan?

There are two main pathways to getting a business loan – applying with the lender directly or through a broker. Both usually start with an application form, which involves supporting documents such as business activity statements (BAS), your identification and other supporting documents.

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. What can make it harder to get a business loan include less than two years of business activity statements accrued. This usually means you need to find a low-doc loan, which likely attracts a higher interest rate.

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?

There are a few features to look for in a business loan, beyond just the interest rate and fees payable:

• 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 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.

Small Business Dictionary