There are many reasons to apply for a business loan, including improving cashflow, buying new equipment or stock, debt consolidation, etc.
Whatever the loan purpose, it’s important that your business meets the lender’s eligibility criteria and can afford to repay the loan without harming your operations or cashflow.
Key points about getting a business loan
- You need to provide bank statements and information about your business when applying for business finance
- Around half of small business loans are secured against a residential mortgage, according to the RBA
- If you can’t provide collateral for your business loan, you could ask for a guarantee (this would make the guarantor personally liable for the debt)
- In 2023, the median unsecured business loan amount requested was $134,000, according to Lend proprietary data
Who's eligible for a business loan?
The standard eligibility criteria to get a business loan in Australia include:
- Australian citizenship or permanent residency
- An active ABN or ACN (including sole traders and self-employed individuals)
- At least six to 12 months of trading history
- Minimum $10,000 monthly revenue
- Proof you can repay the loan in full (i.e. bank statements)
- A good credit score — the minimum credit score for business lending is around 400.
Keep in mind that eligibility requirements vary between lenders. It’s typically easier to secure finance through non-bank lenders as they have more lenient criteria.
On the flip side, banks have stringent standards for business lending and prefer to deal with businesses with a higher minimum turnover and security to offer for the loan. It's best to speak with a business loans broker if you’re unsure about your eligibility. Brokers have access to many different types of lenders and will advise on which ones are likely to approve your loan.
Collateral for a secured business loan
About half of small business loans are collateralised with a residential mortgage, according to the Reserve Bank of Australia (RBA). This is known as a secured business loan where an asset — usually property — is used as security for the loan. You can sometimes use other business assets as collateral. This reduces the risk to the lender and the interest rates for the borrower (you), but it means the lender can repossess your assets if you default on the loan.
An unsecured business loan is not backed by collateral, which increases the risk to the lender and, therefore, your interest rate. If you have an unsecured loan, some lenders may ask that you provide a personal guarantee. It allows them to recover any outstanding debts from the guarantor if you can't make your repayments.
What can you use a business loan for?
You can use a business loan for any genuine business activity. According to proprietary Lend data, the most common purposes small businesses apply for finance in 2023 are:
- Working capital: 25%
- Buy vehicles or transport: 24%
- Buy machinery and equipment: 21%
- Expansion: 8%
- Other (e.g. marketing, inventory, hiring staff, etc.): 6%
- New fit-out or renovations: 4%
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Documents you will need to provide to apply for a business loan
A business loan application requires less documentation than a personal loan application because there’s fewer regulatory requirements for commercial lending. Here’s the documentation you’ll need to supply with your business loan application:
1. Your financial documents
Lenders will want to assess your cashflow and business revenue to determine your ability to repay the loan in full (serviceability). You, as the business owner, and any directors or partners, will need to provide financial documents, including:
- Bank statements for the business from the last six to 12 months
- Business registration and tax information (e.g. BAS statements, tax returns
- Identification documents (e.g. driver’s licence, passport)
If you require between $150,000 and $500,000, or your business has been trading for less than 12 months, you may be asked to provide additional financial documentation, including:
- Profit and loss (P&L) statements (prepared by an accountant)
- Business balance sheets
- A business plan outlining how you plan to spend the funds
- Financial projections for the business if approved for finance
2. Your business information
Lenders will first want proof of your ownership of the business. Then, they will look at your business trading history and experience to ascertain the viability of your business and its future performance. Here’s what they will look at:
- Proof you’ve been operating for the minimum required period
- How your business is structured (e.g. company, partnership, joint venture, sole trader)
- The location of your business
- The industry your business operates in
3. Proof of collateral
Your lender will verify proof of ownership of your home or asset(s) by conducting a title search on the Personal Property Securities Register (PPSR), the national online register managed by the Australian government.
Questions your lender will ask when you apply for a business loan
How much do you want to borrow?
Lenders will need to know how much you want to borrow, when you can start making repayments on the loan and the duration of the loan term. In 2023, the median loan amount requested was $134,000 (unsecured business loan), according to Lend proprietary data.
What’s the purpose of the loan?
Lenders will want a breakdown of how you plan to spend your borrowed funds. Be as specific as you can. For example, what percentage of the money is going towards vendor and staff costs, and the rest on marketing? Or are you planning to use the entire loan amount on a refurbishment?
What’s your business history?
Lenders will want to know 'who' your business is. They will ask how long you've been trading, if you've owned previous companies, what your experience is in your industry, if you've previously declared insolvency, and so on.
What’s your business structure?
Your business ownership structure will affect how lenders will process your loan application. For example, a business with multiple partners must provide information about all parties with a stake. If you've established a business under a trust, you'll need to give information about the beneficiaries. The more complex your business structure, the higher the fees on the loan.
What’s your preferred repayment schedule?
Most working capital lenders have weekly repayment schedules, but you can always try to negotiate a repayment plan that works with your cashflow. Secured loans generally have more flexible repayment options than unsecured loans. Depending on your situation, you can negotiate the loan terms, repayment schedule, and interest rate.
The five Cs: How a lender will assess your loan application
Lenders all have a different tolerance to risk, but they use a similar process to assess loan applications. There are five criteria, known as the ‘five Cs’ of business credit, against which your business will be evaluated.
1. Capacity: This is your ability to meet your repayment obligations, and it’s the most important part of the assessment criteria. You’ll need to prove your business is making enough clear profit to service your loan. If your income is seasonal and your capacity fluctuates, you can set a repayment schedule to match your cashflow.
2. Collateral: If you can offer assets as collateral for your loan, you present a much lower risk to the lender. While most banks require collateral for business loans, many alternative lenders offer unsecured business loans, although the cost is likely to be higher.
3. Capital: Just having assets in your business, even if you’re not planning to use them as security, will reassure lenders. After all, if your business gets into difficulties you’ll be able to sell your assets to repay your debts. If your business is entirely funded with debt and you have no equity, you may find finance hard to come by.
4. Character: Are you and your business reputable? Are you known for paying your bills on time and keeping your commitments? A weak credit rating is the most significant indicator of poor financial character, but some lenders will also investigate your reputation with suppliers, customers and other creditors. They may also look at factors like the condition of your industry as a whole and your place within it, the knowledge and experience of your leadership team, and the size and diversity of your customer base.
5. Conditions: Lenders set their own terms and conditions, but there’s always room for negotiation. Provided you meet the capacity requirement, banks may be willing to take a risk on everything else, for the right price. If your application is rejected initially, you may still be able to secure finance provided you’re willing to pay a higher interest rate or agree to conditions that protect the lender (for example, that you won’t take out any additional loans, or you won’t offer credit terms to your customers).
Why a lender may decline your business loan application
There could be various reasons why your business loan application is initially rejected.
Your business financials don’t reflect your ability to repay the loan: Your financials don't accurately reflect your business turnover or you haven’t provided sufficient documentation that show your business can meet its repayment obligations.
You haven’t been in business long enough: Startups and companies that have been trading for less than a year don't typically generate stable, regular income and can find it difficult to secure finance, unless they have provided collateral or a guarantee for the loan.
Your business has too many debt liabilities: Your business already owes money to third-party creditors or has too many outstanding debts or loans.
Your industry is considered too high risk: Lenders tend to steer clear from lending money to businesses in industries that have a poor outlook or that are considered risky like gambling, adult entertainment, tobacco, etc. Some lenders prefer to work with businesses in specific industries, or with particular business models (those that make high volumes of credit card sales, for example)
Your business is seasonal: Lenders don’t usually like to deal with businesses with cyclical downtimes. But this will be assessed on a case-by-case basis. For example, hot air balloon operators can make enough revenue in the cooler months to cover shortfalls in the warmer months.
Your business revenue comes from a handful of suppliers: Your revenue must be diversified and your business should have multiple suppliers or contractors on the books before you can be approved for finance.
The business owner or director has bad credit: If you have a poor personal or business credit rating, you may not qualify for a standard business loan.
Lack of preparation: Assuming that getting a business loan is easy is a mistake. Not having a business plan, providing incomplete paperwork or incorrect information can see your application denied.
FAQs about how to get a business loan
What are interest rates on a business loan?
Small business loan interest rates range from 10-25% p.a. Many factors will influence the amount of interest you pay, including the type of finance you take out, how much you borrow, the term of the loan, and how you structure your repayments. Generally, the more risk you present to the lender, the more you’ll pay — so unsecured loans tend to be more expensive than secured finance, and newer businesses in high-risk industries can expect to pay a premium.
How long does it take to get a business loan application approved?
Online applications can take just a few minutes, provided you have your supporting documents ready. With some lenders you’ll get an instant assessment on the spot, while others will follow up with a phone call to collect more information. You can often have approval within hours and the funds in your account within days.
Do I need a deposit for a business loan?
Business loans typically don’t require a deposit as they’re either secured against an asset or verified against business revenue (unsecured). Some lenders may ask for a down payment for asset finance (usually with a hire purchase) or if you’re buying an existing business.
Does my personal credit score affect a business loan application?
Yes, lenders may look at your personal and business credit rating if you don’t have a well-established business history or if you’re taking out a loan to buy an existing business.
Can I get a small business loan with bad credit?
Yes, you can apply for a bad credit business loan. It works like an unsecured loan but with higher interest rates. You may initially be able to only borrow up to $50,000 until you build up your credit score. The minimum credit score for business lending is generally 400.
1. Proprietary data of small businesses who applied for finance through Lend.com.au and have been operating for at least five years (2023).
2. Reserve Bank of Australia, Household and Business Finances in Australia (2023).