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A simple guide to business loans and finance

3-minute read

Whether you’re looking to expand your business or simply need a quick cash flow boost, there are a few things to know about business lending. Learn what’s involved and how to prepare if you’re considering applying for a business loan.

Key take-outs
  • There are different types of business loans so make sure you align your business needs with a loan that suits
  • Residential and commercial property are commonly used to secure business loans
  • If you don’t have an asset to provide as security you may be asked for a guarantor
  • Lenders may look at the five ‘Cs’ when considering a loan application: character, capacity, collateral, capital and conditions

The basics of business loans

What is a business loan?

A business loan is a sum of money leant to your business. There’s many different types of business loans in Australia including chattel mortgages and invoice finance (we’ll discuss these in more detail later on).

 

You can usually choose to pay either fixed or variable interest rates, and select a frequency of business loan repayments that is most suited for your finances – such as monthly, quarterly or yearly. The regular business loan repayment amount is typically worked out over 1 to 30 years; and you can use different types of security – such as cash, residential property, commercial property or business assets – to ‘secure’ your loan. If you would prefer not to put up security against a loan, you could consider an unsecured business loan, though these tend to be for smaller amounts.

 

Interest rates vary depending on a number of factors, take a look at Westpac business loan interest rates to get an idea of what business loan interest rates to expect.

What do you need a business loan for?

Business loans can help fund expansion and growth along with managing cash flow. A business loan may be suitable for your business if you need funding for things such as a business acquisition, start-up costs, capital investment, property acquisition or development, or refinancing other lending.

Common types of business loans

With so many loan options, it’s important to know your business needs and align it with the most suitable loan type. There are multiple types of business loans available in Australia. The options vary depending on your business needs, the length of the loan and the terms of the loan. Here are some common types of business loans:

Business loan

A business loan is a lump sum of money leant to your business. The amount leant to you can vary as well as the loan term (the period in which you repay the loan), interest rate, interest rate type (fixed or variable), fees and security.

Business overdraft facility / line of credit

A business overdraft is a type of line of credit that is usually linked to your business transaction account, which you can access when you need to spend when you don't have enough money in your account. You pay back what you can, when you can - as long as the overdraft stays under the approved limit. Interest is generally only charged on the money you use, not the total limit of the overdraft facility.

 

This type of business finance is typically used to relieve the strain on your cash flow, by providing funds to cover expenses (such as purchasing stock and paying invoices and wages) until you get paid by your customers.

Fully drawn advance

A fully drawn advance loan is a type of term loan and provides an amount of money to the borrower which the borrower can use to purchase assets or for long-term investments. The borrower is required to repay the loan with principal and interest within a set time period. A fully drawn advance usually lets you fix the interest rate for a period to provide certainty and stability of repayments.

Finance lease

A lease, also known as finance lease, allows you to use an asset (like a car, machinery or equipment) for an agreed period of time. The lender buys the asset at your request and it is rented to you over a fixed period of time (the term of the contract). Once the lease period ends, you return the vehicle or equipment and pay the residual value.

Commercial hire-purchase

A hire purchase allows your business to buy assets over an agreed period of time. The lender buys the asset at your request and allow your business to use it in return for regular repayments. When all the repayments and final repayment is made, your business owns the asset.

Chattel mortgage (goods loan)

A chattel mortgage (sometimes referred to as a goods loan) is the most popular type of business asset finance. With a chattel mortgage, your business buys and owns the asset from the beginning of the loan term and makes regular repayments for an agreed period of time until the loan is fully repaid.

Invoice finance

Sometimes known as accounts receivable finance, this is a quick way to access cash to pay outstanding invoices. You can typically access up to 85% of the value of your approved unpaid invoices.

The difference between secured and unsecured business loans

The main difference between a secured loan and an unsecured loan is whether an asset such as commercial or residential property, or other business assets are used as security against your loan.

Loans for business with security

A secured loan requires an asset to be provided as security. This may be property, inventory, accounts receivables or other assets. This security covers the business loan amount if you're unable to pay it back.

 

Secured loans:

  • allow you to borrow against your assets, e.g. property, inventory, accounts receivables
  • generally involve a longer approval process, as there’s security to consider
  • may require value assessments and additional proof and documentation of assets
  • generally offer lower interest rates and higher borrowing amounts than an unsecured loan.

Loans for business without security

An unsecured loan doesn’t require physical assets (such as property, vehicles or inventory) as security. Instead, your lender will often look at the strength and cash flow of your business as security.

 

Unsecured loans:

  • often use the strength of your cash flow as security, instead of physical assets
  • are generally for smaller amounts
  • may be assessed quickly, as no security is considered
  • tend to have a higher interest rate than secured loans, as they’re deemed higher risk.

Business loan guarantors

If you don’t have an asset to provide as security for a business loan, you may be asked for a guarantor or directors guarantee. A guarantee allows lenders to recover any outstanding debts from the guarantor if you cannot make your repayments.

There are 2 types of guarantees:

First party guarantee: You guarantee the loan by providing security from an asset that you own, usually a property. This is the most common type of guarantee.

 

Third party guarantee: In some cases you’ll need someone else (a person or entity that is not you - the borrower) to guarantee your business loan. They’ll need to provide security from 1 of their assets.

 

If you can’t make your business loan repayments, the guarantor will be asked to pay them for you. In some cases, if the repayments aren’t being made, the guarantor may need to sell their nominated asset to cover the remaining debt, or offer further security.

Borrowing power

To increase your borrowing power, many small business loans are secured by an asset – usually property. The amount of equity available in the property helps to determine how much you can borrow.

 

Equity is the difference between what you owe if you have a mortgage on the property and what the property is currently worth. You can estimate your equity by subtracting what you owe on your mortgage from the amount your property is currently worth.

 

Current property value – amount you owe = equity

 

Generally, we'll lend you up to:

  • 80% of a residential property value
  • 65% of a commercial property value
  • 70% of a rural property value

Consider how lenders will view your credit score

Credit score also plays a part in borrowing power. A business credit score is a numerical indicator of the financial health of your business. This indicator is used by both banks and online lenders to assess your finance application and the risk in lending to you as a business.

 

It can be difficult to get approved for business loans with bad credit. But it may not be as bad as you think. Check out our article on how to find business loans with bad credit.

Business loan requirements and eligibility

There are several factors that can impact your business loan eligibility. Lenders may look at the five ‘Cs’ when considering a loan application: character, capacity, collateral, capital and conditions.

1. History and character

Your personal character and financial history as well as your business’s trading history are both relevant to lenders.

2. Income or capacity to repay a loan

When considering business loan eligibility, the lender is likely to expect evidence of how much money your business makes under recent and normal trading conditions. Be prepared to share your business and personal financial history.

3. Assets, security, collateral or capital

Providing collateral can help reassure lenders, since having security assets will help lower the loan risk on their part. You could offer property, land, vehicle or other assets as collateral to support your application.

4. Affordability and conditions

Loan conditions such as a repayment schedule, interest rates and other terms are key to providing a loan. But external conditions – such as the economic climate – can also be a significant contributing factor.

5. Loan purpose or necessity

Why do you want to borrow money? Is it to pay vendors, for staff training, to expand your business, or maybe even to handle litigation costs? Lenders need to know details, the amount you need to borrow, when you’re planning for repayments to start and how much you might be able to pay over which duration.

 

Keeping these eligibility factors in mind may help put you in a better position to achieve a successful application outcome.
 

Getting a loan for your business often simply comes down to understanding your options and matching them to your objectives. Business loans are available from many different lenders, with a myriad of choices tailored to the financial situation of your business. By understanding what’s required you’ll be able to prepare for success when you’re ready to apply for a business loan.


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Things you should know

This information is general in nature and has been prepared without taking your objectives, needs and overall financial situation into account. For this reason, you should consider the appropriateness of the information to your own circumstances and, if necessary, seek professional advice.

The taxation position described is a general statement and should only be used as a guide. It does not constitute tax advice and is based on current tax laws and their interpretation. Customers must seek their own independent tax advice in relation to their individual circumstances.