A business loan is a popular business finance options offered by both banks and non-bank lenders. Businesses are lent a lump-sum payment, which is then repaid, with interest, over an agreed term (generally anywhere from three months to five years).
Business loans come as either secured or unsecured loans and allow businesses to borrow from $5,000 to $1,000,000. Most business loans come with a fixed interest rate and you will need to make repayments on a daily, weekly or monthly basis.
You will need to use an asset, generally a residential or commercial property, as security against the loan. In return, you will generally receive a lower interest rate, have the ability to borrow a larger amount and are more likely to be approved by the lender.
You do not need to use an asset as security on an unsecured loan. As an unsecured loan represents more of a risk to the lender, you will generally be offered a higher interest rate and may be less likely to be approved for a loan, depending on the strength of your application.
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Quick guide to business loans
Are you eligible for a business loan? How do I compare business loans? How do business loan applications get approved? We take you through your business loan application to help you get it across the line.
Is your business eligible for a loan?
Age of the business. You'll need to have been operating for at least one year for most unsecured business loans offered by alternative lenders and banks, but some do offer unsecured startup finance. Invoice factoring and equipment loans have less stringent criteria on business age, but you'll need to have been operating for at least one year for business overdrafts or a line of credit.
Turnover. Your business may need to be making a certain amount of turnover in order to be eligible for a loan. This revenue may be monthly or yearly and can range from $50,000 to $200,000+ p.a. Other lenders simply require you to connect your business's accounting software or financials as part of the application process so they can calculate a loan your business can afford.
Credit profile. The lender may check the personal credit histories along with the company's credit (unless you're a startup). If the business has unpaid defaults or tax debt, you may need to find a bad credit business loan.
ABN/ACN. You'll need to have an Australian Business Number (ABN) or Australian Company Number (ACN).
How can you compare business loans?
Do you meet the eligibility criteria? Checking whether 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.
Compare business loan interest rates and fees. Once you've determined what you can afford to borrow, you should compare the rate and any fees or charges for a variety of business loans to find the one that represents the best value for your business.
Do the repayment terms meet your business's 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's needs in terms of your cash flow.
Compare business loans in Australia
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 get a loan. The business turnover is also considered and lenders usually have a minimum requirement for monthly or annual turnover. They may also use your turnover to determine what the business can afford to repay.
Credit profile. The lender will assess the company directors' personal credit scores as part of the application process, and if the business is established, the lender will also check 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 you will use this volume 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.
What should I avoid when applying for a business loan?
There are a number of mistakes that applicants make when applying for a business loan, from choosing the wrong loan option to submitting an incomplete application. You should always understand what you'll need to provide to the lender before beginning your application.
There are a number of reasons why a lender may reject a business loan application. It is important to ask for feedback from your lender if they do reject your application. This feedback will give you 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.
Is my personal credit file checked or my company credit file?
The lender will specify which credit history they will need to check, but generally, the lender will want to verify the company directors' credit histories. Your business's financials may also be checked using accounting information that you connect as part of the application process.
What other 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 business debt finance that are available.
Elizabeth Barry is Finder's global fintech editor. She has written about finance for over five years and has been featured in a range of publications and media including Seven News, the ABC, Mamamia, Dynamic Business and Financy. Elizabeth has a Bachelor of Communications and a Master of Creative Writing from the University of Technology Sydney. In 2017, she received the Highly Commended award for Best New Journalist at The Lizzies. Elizabeth has found writing about innovations in financial services to be her passion (which has surprised no one more than herself).
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