Compare business loans

How does a business loan work?

Business loans can be secured or unsecured and can come as a line of credit or lump sum payment. Banks tend to require security for business loans, but you can find some that do not. Non-bank lenders, including those on this page, generally will not require security for a standard business loan and offer terms of between three months to three years. Costs differ but a fixed rate is usually charged and repayments can be made daily, weekly or monthly depending on the lender you select. However, it's usually lined up with your business' cash flow. Depending on what you're borrowing for, how you need to repay and which lender you borrow from, the loan will work differently. Compare your options to find out.

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Quick guide to business loans

Are you eligible for a business loan? How do business loan applications get approved? Why do applications get rejected? We take you through your business loan application to help you get it across the line.

What business financing options are available?

Business finance is split into two main categories: debt finance and equity finance. Equity finance is provided by an owner or an external investor, whereas debt finance is provided by a bank, credit union or business lender. Below, you can find out more information about the different types of short-term and long-term debt finance that are available.

• Business overdraft

  Business overdrafts are attached to your business banking account and allow you to overdraw up to a specified limit on that account. You only pay interest on your outstanding balance.

  • A pre-determined limit that you can overdraw up to on your business bank account
  • Suitable to manage day-to-day cash flow fluctuations in a business

  • Usually come with an application fee, line or facility fees and interest is paid monthly when the overdraft funds are used

• Business line of credit

  You have a set limit and can use up to and including that limit as and when you need to. Repayments are flexible as long as you keep the account in good standing.

  • Draw on an account balance up to an approved limit
  • Line of credits can be secured or unsecured and more non-traditional lenders are starting to offer them

  • Interest is usually charged monthly and repayments include interest plus fees

• Short-term business loan

  You are approved for an amount of funds which you are required to pay over a set term, which is usually between three and 12 months.

  • Repay what you owe quickly
  • Repayments are usually daily or weekly to mitigate the impact on a business' cash flow

  • Interest may be charged on the principal or the outstanding amount depending on the lender and fees may apply

• Credit card

  This works just like a personal credit card except for business expenses and you can add multiple additional cardholders.

  • Opt for personal or business credit cards to fund the immediate cash flow needs of your business
  • Benefit from interest-free days, rewards and additional cardholders

  • Interest can range from 8-20% if balance is not paid back monthly

• Cash flow lending

  This type of lending allows you to use your expected cash flow as collateral for the loan.

  • Use your working capital assets as security for a loan
  • Drawdown on funds as required, with your cash flow determining your loan

  • Interest is charged on the balance outstanding and fees may apply

• Invoice financing

  If you have outstanding invoices and you need them to be paid, you can sell them to an invoice financing company and receive what you're owed minus a fee.

  • Use your outstanding invoices as finance
  • Receive up to 85% of the invoice amount and choose which invoices you want to finance

  • You'll need to pay a percentage of the invoice amount

• Trade finance

  This type of finance allows you to fund the purchase of goods from domestic or international suppliers.

  • Various types are available such as letters of credit or bank guarantees between the buyer and seller
  • Fill large orders without putting a stop to your cash flow

  • You'll be charged interest on the amount provided for each trade as well as fees

• Fully-drawn advance

  This is a long-term business loan that allows you to borrow a set amount of money and repay it in pre-determined repayments.

  • Long-term financing available to purchase a business, property or equipment
  • A longer loan term of up to ten years is usually available

  • Repayments are usually made monthly with both fixed and variable rates available

• Business vehicle finance

  This is a secured loan available for businesses of all sizes with leases also being available.

  • Various types are available to sole traders, small and medium-sized businesses
  • Depending on the cost of the car and how it's used, there are tax benefits available

  • Repayment terms vary depending on the type of finance selected but competitive rates are on offer if the loan is secured

• Equipment finance

  There are various options available to let you purchase or lease equipment.

  • Options include commercial loans, equipment hire purchases, finance leases and novated leases
  • Have your choice of purchase or lease depending on your business needs

  • Compare costs and rates to select the right financing option for the equipment you need

How do lenders judge your business loan application?

Lenders use a variety of criteria to see if you fit their risk profile and ensure your business can repay the loan.

• Age and turnover of the business. Startup finance is harder to find and be approved for, so if your business is established you will find it easier to be eligible for a loan. The turnover of the business is also considered with lenders usually having a minimum requirement for monthly or annual turnover, or using your turnover to determine what the business can afford to repay.
• Credit profile. The director's personal credit scores will be assessed as part of the application process and, if the business is established, so will the company's credit score.
• Credit card volume. If you receive credit card payments in your business, lenders may use the volume of these payments to judge your ability to repay the loan. The assumption among some new lenders is that this volume will largely be used to repay the loan.
• Accounts receivable. Similar to credit card volume, lenders may factor your accounts receivable value into their asset ratios to help them make a decision.
• Company structure. Lenders will check what company structure you have and how long you have been in the existing structure. If you have recently undertaken a restructure or are applying for finance in the middle of restructuring, lenders may not want to finance you at this time.
• Existing debt. Does your business have an existing debt with another lender? This will be considered as part of your application.
• Profitability. For a revolving line of credit your business will usually need to be profitable to be approved.

Common mistakes that can get your application rejected

• Frequent changes to your company structure. One way lenders judge your business is to see how long you've been in your current structure. If you're applying for finance when you're undergoing a restructure, or if you've been through multiple restructures, this could be a red flag.
• Not having a clear loan purpose. If you don't have a clearly defined plan for all the funds you're applying for then lenders will be hesitant to lend it to you, even if your financials show you can repay it. Have cash flow projections that incorporate the loan you're applying for and show how you will use and repay it.
• Asking for too much. Lenders will use the information you give in your application, including business details and account information, to work out how much you can comfortably afford to borrow. If you ask for too much at the onset the lender may reject the loan rather than offer you a lower amount. However, asking for too little may mean you need to borrow again soon. Work out how much you can comfortably afford so you have the best chance of being approved.
• Being impatient. Each lender will have a different approval process for business loans and the first lender you approach may not necessarily close the deal for you. You are entitled to ask your lender how long the process will take, but keep it mind it may take longer than you first thought. Take the time to do the paperwork properly because it will be used to determine whether your loan will be approved or not.
• Relying on your cash flow. Lenders look at things other than cash flow, such as how long the business has been in operation, the financial situation of the directors and the reason for the loan. Remember to give as much detail as possible to help your application.

How can you compare business loans?

• Do you meet the eligibility criteria? Checking you meet the minimum eligibility criteria before you apply is the first step in your comparison process. This will help you narrow down choices that are the most suitable for you.
• How much will the business loan cost? If you know what loan you need, the next step is deciding what your business can afford. Look at your incomings and outgoings to see what you could comfortably repay without putting too much strain on the business. If it's a loan for a startup, you'll need to rely on cash flow projections.
• Do the repayment terms meet your business' needs? Lenders offer repayment terms of varying flexibility. Some will allow you to repay daily, others weekly and some will require you to repay your loan monthly. Work out which will best meet your business' needs in terms of your cash flow.

"My business loan application wasn't approved. Now, what?"

There are a range of reasons why a business loan application can be denied, it is important to ask for feedback from your lender if you do get rejected. This feedback will give you an insight into what you did wrong, which you can improve on for the next time you apply. If the lender is unable to provide this feedback you may want to review your application and see if you can spot any red flags yourself. Common rejection reasons for large and small business loans can include bad credit listings, cash flow issues, insufficient security or simply not meeting the lender's criteria. Before applying again make sure you compare business loan options thoroughly so you apply with a lender that meets your needs and suits your financial situation.

Where in Australia can I get a business loan?

No matter where in Australia you're looking for business finance, there are loan options available. Take a look at the map below to see what some of your options could be.

• WA
• NT
• SA
• Tas
• QLD
• NSW
• VIC
• ACT

Continue reading: Find out more about unsecured business loans