Small business loans

Small businesses are the backbone of the Australian economy. If you're looking for a loan to support your small business, there are a range of options available. The best loan for you will depend on a variety of factors, including what you need the funds for. Your business will also need to meet minimum turnover, age and credit score requirements.

What is a small business?

According to the ATO, there are over 4 million small businesses in Australia. They employ around 6 million Australians and contribute to around 30% of all income tax.

But there isn't a single definition of what a small business is. Different government agencies have their own definitions. According to the Australian Bureau of Statistics, it is a business employing less than 20 people. For ASIC, it is a business with fewer than 100 employees. They also need to have a consolidated revenue of less than $50 million and/or gross assets less than $25 million. For taxation purposes, the ATO defines a small business as partnerships, companies and trusts with a turnover of up to $10 million, as well as individuals associated with these businesses. Sole traders receiving business income up to $10 million are also included in the small business bracket.

For the purpose of a loan, there are a number of requirements you'll have to meet. This will differ based on the lender, but there will be minimum turnover requirements. The age of your business will also play a role, as well as your business financials and credit profile.

What is a small business loan?

A small business loan is finance for your business. There are different types of loans you can apply for, depending on what you need it for. These loans are available from both bank and non-bank lenders. To qualify for a small business loan, you must be either the owner or a director of a listed company and have an ABN or ACN.

What types of small business loans are available?

There is a wide range of small business loans you can apply for, no matter your financing requirement. These include:

• Business term loan. These loans provide lump sum payments, which must be repaid within an agreed period of time and can be secured or unsecured. They come with fixed or variable rates and are suitable when you have a fixed purchase price or expense that you need to finance.
• Line of credit. A line of credit acts like a credit card, but with a higher borrowing limit and lower interest. Credit limits are not as high as business term loans, but a line of credit comes with the advantage of flexibility. You can draw funds as and when you need them, on a revolving basis, up to the approved credit limit. This is ideal if you want access to short-term and seasonal capital.
• Business overdraft. A business overdraft is linked to your transaction account. It can be either unsecured, or secured for higher amounts. It allows your business to draw beyond what you have in your account, up to the approved limit. You pay interest on what you borrow.
• Business credit card. Business credit cards work the same as personal credit cards, but are used for business purchases and you can add multiple cardholders. They can be used to meet immediate cash flow needs, and can offer benefits through rewards programs. However, they can be expensive if you don't pay off your purchases during the interest-free period.
• Peer-to-peer business loans. With peer-to-peer lending, you can access business financing from a single investor or a pool of investors. These loans are easy to apply for and offer an alternative source of funding to traditional banks. These loans are risk based, and your interest rate will be based on your credit score.
• Business vehicle finance. This is a secured loan that can be used to buy a vehicle for your small business. You can also lease business vehicles. Depending on how the financing arrangement is structured, you may be able to take advantage of tax benefits.
• Equipment finance/lease. There are multiple equipment finance options available to help your purchase or lease business equipment. This includes commercial loans, equipment hire purchases, finance leases and novated leases.
• Invoice financing. With invoice financing, you can take a loan against your unpaid invoices. You can convert some or all of your unpaid invoices into funds. Most lenders offer up to 80-90% of the total invoice amount, with the balance paid (minus a fee) after the customer has paid.
• Impact-linked financing. Depending on the nature of your business, you could qualify for impact-linked financing. If your business is active in the community, or has sustainable initiatives, you could qualify for a loan with financial incentives.

How do I know which type of financing is best for me?

If you're not sure what type of loan is right for you, these questions can help narrow down your options:

• What do I need the loan funds for? Business loans can be used for a variety of reasons, but some loans have restrictions. Equipment loans, for instance, can only be used for the purchase of equipment. If you want funds for the purchase of equipment and to expand your business, an equipment loan may not fulfill those functions. You should consider a loan that will allow you to use the funds in a way that can fulfil your business needs.
• Do I want the funds in a lump sum or on an ongoing basis? If you want the loan funds in a single release, then a term loan is more suitable. But if you want funds on an ongoing basis, overdrafts or lines of credit may be more suitable.
• How much do I need to borrow? Each loan has its own maximum and minimum borrowing amounts. Look at the borrowing amounts to decide whether the loan will adequately service your needs. Make sure you check that it falls within the range you require.
• Do I want the option to access more credit? Topping up a fixed amount term loan is difficult. It usually involves having to take out another loan. If you think you might need top ups, opt for an overdraft or line of credit.
• Can I afford the loan? Some loans are more expensive than others. You need to consider whether you can afford the loan and that it sits comfortably within your budget. If you think you may have difficulty paying it back, you may want to consider a cheaper option.
• Am I eligible for the loan? Some loans may have attractive fees and terms, but you may not be eligible to apply. To avoid rejection, ensure you meet the minimum eligibility criteria. Each lender has a different criteria, so be sure to check all your nominated options and ensure you meet them.

How much can I borrow with a small business loan?

As a small business owner, you can generally borrow from $5,000 to $250,000. Some lenders may allow you to borrow up to $10,000,000. How much you can borrow is generally tied to the size, age and revenue of your business. You may notice that some secured lenders don't have borrowing limits. Your asset security will have to be greater or equal to the value of the loan funds.

How do I compare small business loans?

• Interest, fees and comparison rates. Comparing interest rates is a good way to check if the loan is competitive. But as important as it is to compare interest rates, you should also keep an eye on fees and the comparison rate. The latter takes into account interest and the fees you will be charged, and will give you an indication of the true cost of the loan.
• Loan term. Your loan term is how long you have to repay the loan. The length of the term will affect how high your repayments are. That is, with a short term, you can expect higher monthly repayments. But with longer terms, you pay more in interest and fees. You can use a business loan calculator to get an idea of what your repayments will be like with different loan terms.
• Loan amount. Lenders have set minimum and maximum lending amounts. Make sure the amount you need is on offer from the lender.
• Loan features. If there are specific loan features you would like to have, make sure to check which loans offer these features. This can include early repayments, early exit without penalty and redraw facilities.
• Turnaround time. Check how long the lender takes to approve the loan and transfer the funds to you. If you need your funds within a certain time, make sure the lender is able to accommodate this.

What can I use a business loan for?

You can use a business loan for any worthwhile business purpose, including:

• Purchasing equipment or stock
• Improving cash flow
• Debt consolidation
• Business expansion
• Marketing and advertising
• Payroll

How much does a small business loan cost?

This will depend on the type of loan you've applied for and the lender. There are 3 factors you need to consider when calculating the total cost of a small business loan:

• The loan amount. The more you borrow, the larger your repayments will be.
• The interest rate. The higher the interest rate, the more the loan will cost you. You'll get to choose between fixed or variable interest. With fixed rates, your repayments will remain the same for the duration of the loan. With variable rates, your repayments will change in line with market rates.
• Fees and charges. You'll need to read the fine print to find out what upfront and ongoing fees apply. These include establishment and ongoing monthly or annual charges.

What should I avoid when applying for a small business loan?

• Choosing the wrong type of finance. Picking the wrong loan for your business could be costly to the success of your business. You should determine what your financing needs are and whether the loan suits them before applying. If you're unsure, contact an expert, such as a finance broker.
• Getting into debt you cannot afford. Check the cost of the loan and make sure you can afford it. You should be able to comfortably include your repayments in your budget. You should also avoid borrowing more than you need.
• Multiple applications. Every loan application shows up on your credit report. Several applications within a short period can have a negative impact on your credit score, making it harder for you to get a loan in the future. Select a single loan that you're eligible for and that suits your needs and apply with that lender.
• Long-term repercussions and legal issues. Once you sign a loan agreement, you are bound to its conditions. You will have to pay the loan and all the fees. Keep in mind that for unsecured loans, the lender can initiate legal proceedings against you if you don't repay the loan. It can also report the debt to a credit reporting body like Equifax and use the services of a debt collector. For secured loans, your asset could be repossessed if you default.

Is my small business eligible for a loan?

Lenders consider a number of factors to determine whether your business is eligible for a loan. While the exact criteria will vary from one lender to the next, they will consider the following:

• Turnover. Your small business may need to have a minimum turnover to be eligible. Depending on the lender, this could be calculated on a yearly or monthly basis. While one lender may require your business to have an annual turnover of at least $100,000, another may need to see evidence of monthly sales exceeding $10,000.
• Age of business. Your business may need to have been operating for a minimum period of time. Most often, this period is 6 to 12 months. Established businesses are considered a much lower lending risk than new startups. However, there are some lenders that cater to startups looking for finance.
• Business financials. In addition to turnover, lenders will request other financial information. This could include details of your existing bank accounts and loans, previous tax returns, profit and loss statements, and future financial projections. You will also have to declare outstanding debts if you have any.
• Credit profile. Lenders will look into your business credit history and directors' credit profiles. This will give them an idea of whether you're a risky or safe borrower. If your credit history is less than perfect, a bad credit business loan may be a solution. Some invoice finance providers also cater to bad credit borrowers.

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How can I apply for a small business loan?

🤔 Work out what type of loan your business needs, how much you need to borrow and what you can afford.
🔎 Start comparing lenders and loan products. Don't forget to compare interest rates, fees and eligibility criteria. You can use the comparison table above.
✅ Select a lender. Click "Go to site" to be directed to the lender's page, or "More info" if you want to read about the lender.
🖨️ Organise and prepare the required documentation. This will make the application process easier.
📱 Apply. Most lenders have their applications online.