SMALL BUSINESS LOANS

2017 Guide to Getting the Best Small Business Loan

+ Learn how to maximise your chances of getting approved.

Click here to get an unsecured small business loan quote

Small business loans, whether secured or unsecured can be a minefield. There are 17 different ways you can finance your business - each with its own array of considerations. The process of evaluating these options is no small feat. By the end of this guide you will know your options and which loan is best for your business.


PLEASE NOTE: This is a comprehensive guide, if you know the bank will not offer you a loan or do not have the time to wait for them to make a decision - click here to learn about alternative, fast business finance.

More than half of all 2,066,523 Australian small businesses have a loan facility of some description and only 30% are debt-free. The majority of small businesses turnover less than $200,000 per year.

In general, the longer you have been in business, the more revenue (and profit) you should have. The way you collect revenue can also determine which loan product you are best suited to.

What is a small business loan?

It is a commercial financing arrangement up to $2 million. However, most small businesses want nowhere near this amount. Just under 60% of business loans in 2015 were for under $100,000.

What the large majority (89%) of small business owners will tell you is that they do not believe that business finance is easily accessible. Since the GFC in 2008, big banks are notoriously difficult to get a loan through, (especially when you haven’t been operating for 10 years with millions of dollars of consistent revenue). Typically big banks want some form of security which a lot of us small business owners simply cannot provide or are hesitant too. We are typically “all in”.

One of the biggest challenges we face as business owners are payment delays from our own customers adding insurmountable financial pressure and cash restraints.

Queue the rise of the “non bank lender”. Businesses are using alternative business finance more frequently and the space is booming. Focused on technology and the ability to make quick decisions, a non bank lender uses different metrics to assess your business credit worthiness and will offer you an unsecured small business loan.

Get an unsecured small business loan quote

01

The main reasons SME’s
want/need funding

  1. Purchase real estate
  2. Renovations
  3. Buy inventory and stock
  4. New employees
  5. Buy equipment or machinery
  6. Increase working capital
  7. Advertising and Marketing
  8. An opportunity that is too good to pass up
  9. Buy a competitor out
  10. Move premises
  11. Pay staff
  12. Pay BAS or Tax Payments

02

The three basic principles
to consider when
evaluating finance.

These fundamentals will have a big impact on:

  • Your ability to be able to secure a loan
  • Speed to access funds
  • The fees and interest you will pay

Fundamental Principles

Match the type and term of finance to your business needs

You can cover fluctuations in working capital with flexible short-term financing like an overdraft – but if you’re making a big purchase you’ll need a long-term loan with a repayment schedule that matches your cash flow.

Safeguard your cash flow

Maintaining cash flow is one of the biggest challenges faced by any small business, so it’s vital that you have funds available when you need them – but be aware that you’ll pay more for at-call financing like an overdraft, which gives you access to funds whenever you need them.

The risk dictates the rate

To successfully secure financing you’ll need to convince a lender that you are a good risk (as per how they determine this). For some types of loan, you’ll need to offer security, such as your property. With any financing application you’ll have to provide full financial data about your business – and a realistic repayment schedule that takes into account factors such as seasonal fluctuations in turnover, and the risk of late payment by your customers.

The different types of business finance offered by BIG banks, where collateral must be used (ie your family home), as well as the pro’s and cons of each;

Credit cards: Around 25% of small businesses have a credit card but no other forms of debt. Business credit cards will often be securitised against you personally.
Type Purpose Secured Pros Cons Tips
Overdraft / Line of credit A flexible loan facility to cover short-term working capital needs / smooth out fluctuations in cash flow Secured or unsecured – interest rates will be higher for an unsecured line of credit
  • Extremely flexible – draw and repay funds as you need them
  • No minimum amount - only borrow and pay interest on what you need – usually calculated daily
  • Quick and simple application process
  • No long-term certainty – can be cancelled at any time and is repayable on demand
  • Likely to incur fees even if not used
  • Terms vary and you may be required to pay off the overdraft at specified intervals
Be sure to repay your borrowings regularly to minimise interest charges Be careful not to exceed your overdraft or you may attract substantial fees and penalty interest
Business Credit card For purchasing business consumables / equipment To cover short-term working capital needs and smooth out fluctuations in cash flow Unsecured
  • Convenience – very easy to make purchases
  • Flexible source of emergency cash flow
  • Interest-free periods on some cards make them an economic short-term purchasing tool
  • Fast application process
  • May be linked to your personal rather than business finances
  • Interest rates can be very high
  • Can incur considerable fees and charges even when not used

Ensure you pay off credit card regularly to take advantage of interest-free periods

Be wary of charges on cash advances

Shop around as fees and charges vary considerably

Bank guarantee An alternative to a rental bond where the bank guarantees your payment obligations under a contract For purchasing plant, equipment or stock as an alternative to providing a deposit to the seller Secured, usually by a cash deposit or property
  • Avoids the need for advance payments while providing surety to vendors / suppliers
  • Avoids depleting working capital – can be secured with existing term deposits or other assets, so you continue to use and earn interest on your cash until the contract is fulfilled
  • Fast application process, especially for cash-covered guarantee
  • Some banks offer guarantees with no minimum or maximum amount
  • Attracts fees on set-up and periodically over the life of the guarantee

Bank guarantees can be open-ended or time-limited – be sure to match your guarantee with the length of the contract

Business term loan Long term borrowing facility Ideal for buying land and buildings, plant and equipment or drawing equity from existing assets to cover business set-up or expansion costs Secured, usually with personal or business property or the asset being financed
  • Many lenders allow you to choose between fixed and variable interest rates or a combination
  • You may have a choice of interest-only or interest plus principle repayments
  • The loan term is usually tied to the life of the asset and you can set a repayment schedule to match the cash-flow of your business
  • Loans secured by non-residential assets attract higher interest rates
  • Most loans have minimum borrowing amounts
  • Lengthy and rigorous application and approval process – only available to established businesses

Mortgage loans Long term borrowing facility ideal for buying land, buildings and other fixed assets Secured by property or other fixed assets
  • You may have a choice of interest-only or interest plus principle repayments
  • Many lenders allow you to choose between fixed and variable interest rates or a combination
  • Variable rate mortgages often allow flexibility in repayments and redraw of funds
  • Suitable for sole traders / small businesses that don’t meet business term loan requirements as can be secured on residential property
  • Usually has a minimum borrowing amount
  • Lengthy and rigorous application and approval process – only available to established businesses
  • Attracts set up and often ongoing fees and charges
  • Variable rates loans leave you vulnerable to fluctuations in interest rates

Combination loans give you some surety over repayments while allowing you to take advantage of flexible features like redraws or early repayments

Commercial bill of exchange Short-term or long term, for any commercial or investment purpose – including bridging finance or smoothing out seasonal cash flow / working capital fluctuations Can be unsecured or secured by residential or commercial property and/or business assets
  • A short-term facility with the option to roll-over at each maturity date
  • Can be used as a revolving line of credit (draw down funds as you need them) or a term loan with the principle reducing at each rollover
  • Interest is payable on maturity – terms vary with maturity at agreed intervals (eg. 30, 60, 90, 120, 150 or 180 days) and the potential for periods of fixed interest
  • Interest is payable in advance and includes a margin above standard rates
  • Variable rate bills are very sensitive to fluctuations in interest rates
  • High minimum borrowing amounts (often $500,000) – only suitable for established businesses with high turnover

Lease financing Fixed-term lease of plant, business equipment or motor vehicles Secured – the asset is owned by the lender throughout the contract
  • Small or no deposit or up-front payments, minimising the initial impact on working capital
  • Flexibility to set a repayment plan to suit your cash flow, usually over a term of up to five years
  • Quicker and easier to secure than loan financing
  • You may be able to claim GST credits for GST included in the lease charges
  • Higher interest rates and costs than loan financing
  • No equity built up in the asset – you do not own the equipment the end of the contract
  • Lease contracts usually have substantial early-termination fees so you’re locked in even if you no longer need the equipment

Build in the right to upgrades during the term of the contract so you can take advantage of advances in technology

Leasing contracts can be complex - make sure you fully understand the terms, your obligations, and who is providing the finance

Hire purchase / asset purchase financing Medium-term facility suitable for buying plant, business equipment or motor vehicles. Secured – the asset is owned by the lender until the end of the contract
  • Fast access and easy application process
  • Flexibility to tailor your repayment play to suit your cash flow needs and match the life cycle of the asset
  • You own the asset at the end of the contract and can continue to use or dispose of it as you wish
  • You may be able to claim GST credits for GST included in the purchase charges
  • Unlike leasing you will need to pay a deposit, which will impact your working capital
  • Higher interest rates and costs than loan financing
  • You do not own the asset until the end of the contract

Personal loans Short to medium term borrowing facility suitable for buying motor vehicles or business equipment or any other business need Secured or unsecured – interest rates will be lower on secured loans
  • Suitable for sole traders / small businesses that don’t meet business term loan requirements
  • More economical than leasing or hire purchase for buying vehicles or equipment
  • Can usually be repaid early without penalty
  • Repayable in instalments, spreading the cost of equipment purchase
  • Availability and amount will depend on your personal credit rating
  • Personal (not business) responsibility for repayments

How to apply for a bank business loan

The key to securing any type of business loan from a bank is preparation. Compiling comprehensive financial and credit data about yourself will give you a clear picture of how much you can afford to borrow and which type of financing best suits your needs.

This information is essential, because you will need to prove to lenders that you:

  • Are a good credit risk
  • Have the collateral they require for security
  • Will be able to meet your repayment obligations.

Loan application steps

01

Prepare your business plan

Lenders will want to see that you have a well-structured, viable business and that you have a strategic plan for sustainable business growth. Your business plan should provide sufficient background to help a lender understand your business, including information on your:

  • Location and business structure
  • Leadership structure and management expertise, including business record
  • Market sector, competitive landscape and SWOT analysis
  • Growth history and key achievements
  • Existing and proposed products and services
  • Outlook / growth projections for your business and your industry
  • Details of your key advisers, including accountants, lawyers and auditors if applicable
02

Prepare your financial statements and forecasts

You’ll need to provide complete financials for your business – and also for yourself, if you plan to use personal assets for security or to take personal responsibility for loan repayments. You will need to assemble:

  • Balance sheets for the past three years, indicating the equity currently available in your business
  • Profit-and-loss statements for the past three financial years
  • Analysis of any exceptional circumstances that have influenced your turnover or operating performance over the past three years
  • Comprehensive report on your debtors and creditors indicating outstanding amounts and bad debtors – consistent late payments can have a critical impact on liquidity and cash flow
  • Key liquidity, efficiency and profitability ratios Cash-flow projections for 12 – 24 months
  • Statement of assumptions underlying your cash flow projections
  • Statement of your personal financial position (depending on the size of your business and the nature of the financing sought)
  • Business and personal credit ratings
03

Prepare a business case for the loan

Lenders will want to know why you need the funds and how they will be used, and how you propose to repay your borrowings. You must clearly outline:

  • The amount you wish to borrow
  • The purpose of the loan
  • The type and term of loan you are seeking (which must be matched to the purpose of the loan)
  • Depending on the type of financing you’re applying for, you may need to make decisions about whether you want fixed, variable or combination interest rates, and interest-only or interest-and-principal repayments
  • What assets you are offering as security
  • Your proposed repayment schedule. This will need to be based on projected cash flow and make sufficient provision for fluctuations in turnover, exceptional costs and late payment by customers
04

Select a lender and loan product

Each bank has a different appetite for lending to small businesses, and they all offer slightly different product ranges, repayment terms and interest rates. If you are unsure of which bank is best suited to your needs and how to compare the loan products on offer, it’s wise to seek professional advice from a registered financial advisor or finance broker.

05

Make your application

Each lender will have an application process to follow. This will usually involve completing a standard application form, providing supporting documents, and potentially meeting with a bank representative to present your case and discuss options.

For lower risk / lower value financing options like hire purchase contracts, you may be able to complete the entire application online.

Pro Tip: Be prepared. You will need a business plan and be able to demonstrate how you will repay the loan. Know your numbers.

Main reasons a bank
will decline your application

  1. You cannot offer the level of collateral/security the bank requires as security
  2. The majority of your revenue comes from a handful of suppliers
  3. Your revenue is inconsistent
  4. You haven’t been in business long enough
  5. Existing debt or loan facilities
  6. Your business is seasonal
  7. Your industry is weakening
  8. Poor credit history
  9. They haven’t taken the time to understand it

Non bank lenders (unsecured small business loans)

Small business lending in Australia is on the same trajectory as the US market. In the US the Small Business Lending Index indicates, alternative non bank lenders approve around 64.1% of all applications whereas the big, risk averse banks would approve less than one fifth (17.8%) of the same commercial applications. In fact, Morgan Stanley recently predicted that alternative finance would lend $11.4 billion annually to SME’s by 2020 in Australia.

While the major banks might seem like the obvious place to turn for a loan, they aren’t always a viable option for small businesses. Bank loan application processes can be slow and burdensome – and without a solid financial history or security to offer, small business loan applications frequently get rejected by banks.

If you don’t meet the banks’ onerous credit, collateral or financial history requirements, alternative sources of finance include credit unions and a growing number of ‘Fintech’ online loan providers.

Business loans offered by non bank lenders are generally unsecured. This means you offer no business or personal assets if you are unable to pay. Consequently, they have higher interest rates to reflect this risk. In an environment when the banks have said no to you and you need to continue to fund your business' growth, the higher interest rate can seem insignificant. It could be considered short term pain, for long term gain. We recommend you seek professional advice before accepting any finance product.

Types of Unsecured Business Loans Available from Alternative Fintech Lenders

Type Purpose Secured Pros Cons Tips
Unsecured business loan Any business purpose – such as purchasing stock or equipment, covering cash flow fluctuations, or financing expansion or new business opportunities Unsecured
  • Application processes are usually fast and simple
  • Finance available to smaller businesses that do not meet the banks’ rigorous lending criteria
  • Unsecured loans are a higher risk for the lender, so interest rates are likely to be higher
  • Terms, rates and conditions may be obscure and result in high costs
  • You may need to provide a personal guarantee, which means you will be responsible for repayment if your business is unable to meet its obligations

Make sure you fully understand the pricing of the loan, including charges and interest rates

Research the lender and product to ensure they are reputable and the structure of the loan suits your needs

Factoring

Sale of accounts receivable / invoices to a third party at a discount rate, for an immediate cash injection

Can be used for any business purpose such as buying equipment or covering working capital requirements

Unsecured - the buyer is now responsible for collecting payment on the invoice
  • Immediate injection of cash – no need to wait for payment of invoices
  • Removes the risk of late or non payment of invoices
  • You receive less than the face value of the invoice
  • Usually more expensive than loan finance
  • Many lenders have minimum turnover requirements – may not be available to new businesses without an established sales history
Read more about Invoice Factoring
Merchant cash advance

A short term loan that provides an immediate cash injection

Can be used for any business purpose such as buying equipment or covering working capital requirements

Unsecured – the lender collects payment over time as a percentage of your sales
  • Quick and easy online application process
  • Immediate cash injection – funds usually available within days
  • Repayments directly linked to cash flow - no fixed interest payments or repayment schedule, with repayments made as an agreed percentage of sales
  • Only available to ‘merchant’ businesses making daily debit or credit card sales e.g. retailers, restaurants
  • History of achieving a minimum average level of sales may be required
  • Often considerably more expensive than other financing options with rates as high as 60% –200% APR
  • No government regulation on lenders, so terms and conditions can be complex and restrictive

Be wary of contract conditions that can restrict the way you do business – e.g. prohibiting you from offering cash discounts, seeking other forms of finance or temporarily closing your business

Trade finance

Various forms of short term loans or guarantees that facilitate international or domestic trade, by reducing the risks to both parties

Financing bridges the gap between the placing of an order and receipt of payment from your customer, enabling you to pay your suppliers or provide surety that they will be paid

Unsecured
  • Fast and simple application process
  • Enables businesses to take advantage of trade opportunities that might otherwise be out of reach
  • Suppliers receive immediate payment or guarantee that payment will be made
  • Repayment of finance made on receipt of payment from your customer
  • Removes the risk of non-delivery / non-payment for goods in transit
  • Can be more expensive than loan financing, with high fees and penalties for non payment
  • May require substantial history of successful trade, making it inaccessible for new businesses
  • Only available to businesses supplying physical goods – most commonly used by importers and exporters

How to apply for a non-bank business loan

Applying for non-bank financing is a far simpler process than securing bank financing. Often, the application can be completed entirely online, with many lenders evaluating applications and giving approval within a matter of hours (compared with the weeks, or even months it can take to get approval for a bank loan). In some cases, the funds can be in your bank account within a day.

Depending on the type of finance you are seeking, you will need to provide information about your business, current financial position and sales history, personal financial position, or specific transactions / purchases you wish to finance.

How to apply for a non-bank business loan

01

Assess your needs and capacity

Before you apply you’ll need to prepare a basic business case and budget for your loan, to establish how much you need to borrow and how much you can afford to repay, over what period. Decide on the type of financing that best suits your needs.

02

Choose your lender

Online lending is becoming a crowded market and there are new providers popping up all the time, many specialising in particular forms of business lending like factoring. Each have different requirements (e.g. minimum borrowing amounts) and offer different terms and conditions. Take care with your research to find the most suitable terms and rates for your needs – and be wary of any provider who is not transparent about their fees and rates, or imposes prohibitive conditions on your business.

03

Prepare your supporting documents

Prepare your supporting documents

  • Your bank statements for the last 4 to 6 months
  • Your credit sales / merchant statements for the last 4 to 6 months
  • Proof that you have been operating for the lender’s minimum required period
  • Proof that you meet the lender’s minimum turnover requirements
  • Personal identification documents
04

Apply

Each lender will have a specific application form for you to complete and no two are exactly the same. However, you can expect to answer questions on:

  • How much you want to borrow, and for how long
  • How you will use the funds
  • Basic details about your business – ABN, structure, location, sector, turnover, time in business
  • Basic details about yourself (specially where you are required to provide a personal guarantee)

You will need to upload copies of your supporting documents, and may receive a follow up call from a representative of the lender if there are any unanswered questions.

Business Loans For Start Ups

If you are a start-up, you’ll find out that no one really wants to lend to you, you’re just too high risk. Or as they say on Shark Tank “It’s just too early”. You could consider doing sweat equity deals (people provide services to you at reduced or no cost in exchange for equity) or sell some equity.

Alternatively you can search for a suitable grant or beg family and friends. We wish you the best of luck in your endeavours to grow your business.

So how much will a business loan cost? Use our Business Loan Calculator to work out your repayments.