Best Small Business Loans in Australia

A secured business loan is a longer-term borrowing facility, with a personal or business assets (usually property) required as collateral. Secured business loans often offer lower interest rates compared to unsecured loans.

Secured business loans are generally used for lender-term business goals such as financing vehicles or equipment, fit-outs, or even getting finance to buy out a competitor.

Pros

• The loan term is usually tied to the life of the asset and you can set a repayment schedule to match the cashflow of your busines
• Often come with lower rates and more flexible terms than unsecured loans

Cons

• Loans secured by non-residential assets attract higher interest rates
• Usually a longer application process

An unsecured business loan is short-term finance without security, typically used to cover immediate business requirements. Unsecured business loans typically have higher interest rates because the finance isn’t backed by a physical asset or something of value, meaning the lender is taking on more risk.

You can use an unsecured business loan for any business activity, including to boost working capital or invest in inventory, equipment, renovations, hiring new staff, etc.

Pros

• Generally faster to apply for and get approved as the requirements are simpler
• No fixed asset or collateral needed as security for the loan
• Can be used for more or less any legitimate business purpose, from purchasing inventory to financing the purchase of an existing business

Cons

• Interest rates and fees are higher due to the increased risk to the lender
• Smaller loan amounts and shorter loan terms

A business line of credit (aka an overdraft) gives small businesses access to an agreed amount of capital that you can access anytime you need. Your borrowing capacity for a line of credit will depend on your credit score and accounts receivable. You will only pay interest on the drawn down amount, plus a line fee to maintain ongoing access to the credit.

A business line of credit can help small businesses manage cashflow shortages, but are generally less suitable for long-term investments or major purchases.

Pros

• Extremely flexible – draw and repay funds as you need them and repay regularly or with lump sums without any penalties
• You only pay interest on the amount you borrow, not the total amount available

Cons

• Higher interest rates than standard business loans
• Shorter repayment terms and you may be required to pay off the overdraft at specified intervals

Invoice finance or ‘factoring’ is a form of trade finance. It allows you to borrow against your outstanding invoices in exchange for a cash advance. It’s basically ‘selling’ your payable invoices to a lender to secure funding. The lender will forward you up to 80% of the value of the invoiced amount. You can either retain control over collecting the payment from your client or pass that responsibility to the lender.

Invoice finance can also be suitable for businesses that may struggle to access other types of financing, such as startups.

Pros

• Immediate injection of cash – no need to wait for payment of invoices
• Allows your business to offer flexible payment terms to new customers

Cons

• You receive less for each invoice by financing
• Usually more expensive than loan finance

A merchant cash advance is a form of cashflow finance. It's alternative financing model that provides you with a lump sum payment, which you repay using an agreed percentage of daily EFTPOS credit and debit card sales, plus fees charged by the lender. The total cost of a merchant cash advance will depend on your factor rate which is a decimal figure, not an annual percentage. You can convert your factor rate into an annual percentage rate (APR).

Pros

• Immediate cash injection – funds usually available within days
• Repayments directly linked to cashflow ( an agreed percentage of card sales)

Cons

• Only available to merchant businesses making daily debit or credit card sales (e.g. retailers, restaurants, etc.)
• Often considerably more expensive than other financing options

Equipment finance, also known as asset finance, is a fixed-term loan or lease used to purchase or lease equipment, plant or machinery for your business. The lender will either lend you the money to buy the asset or you may choose to rent the equipment from the lender. This works like a leasing agreement which means repayments are classified as a business operating expense and therefore tax deductible.

Pros

• Lower interest rates than unsecured business loans

• Longer loan terms (up to 7 years)

Cons

• Some equipment finance may require a deposit

• You may not own the equipment at the end of the contract (under a lease agreement)

A chattel mortgage works much like secured business car finance for vehicles or assets purchased for commercial purposes. You get ownership of the asset from the outset which is used as security for the loan until it’s paid off. Your business can claim the interest on chattel mortgage payments and tax depreciation if the asset is used to produce income. This is makes a chattel mortgage different from a hire purchase or finance lease whereby the lender buys the assets and leases them to your business in exchange for regular payments.

Pros

• Interest rates are usually lower than unsecured loans

• Flexible repayments structure in line with your cashflow
• Can be used for assets big and smalll - from coffee machines to finance for trucks

Cons

• A balloon or residual payment may be payable at the end of the term

• Early payment penalties may apply

All lenders have their own method of calculating interest payable on a business loan. The main types of interest rates include:

• Annual rate (simple interest): The annual interest charged on the principal amount. This rate does not include fees or charges.
• Annual percentage rate (APR): The yearly interest rate charged on the loan over the term, plus all compounding fees and charges.
• Factor rate: The factor rate is interest on the loan is expressed as a decimal figure.

Small business loans typically fall within two categories — secured and unsecured.

Secured business loan: Requires using an asset as collateral for the loan — usually property — although some lenders allow you to use equipment or other physical assets as a guarantee for the finance. Secured finance usually offers lower interest rates and fees since it poses less risk to the lender. The lender could reclaim the asset(s) secured against the debt to cover any losses.

Unsecured business loan: Doesn't require any collateral for the loan. Instead, the lender will look at your creditworthiness and the cashflow of your business to assess your serviceability. Unsecured business loans often come with higher interest rates and fees to reflect the additional risk to the lender. You also may not be able to borrow as much with an unsecured business loan.

How much you can borrow will depend on the size of your business, your borrowing capacity and the type of loan you apply for.

If you opt for an unsecured business loan, you could borrow between $10,000 and $500,000

You could be eligible to borrow up to $5million with a secured loan (with collateral).

The main difference between a small business loan from a bank and a specialist lender is the application process. The approval process is generally quicker with a specialist online lender. It depends on the type of loan you are applying for, but in most cases, the entire process from loan application to decision takes under an hour.

Specialist lenders are also typically more flexible in terms of which businesses they will lend to.

It depends on the type of loan you’re applying for. In most cases, the entire process from loan application to decision takes under an hour if you apply for unsecured finance with an online lender. Secured loans may take a few weeks depending on the guarantee/collateral, paperwork required, and credit approval process.

Lenders require bank statements to assess your financial situation and therefore the risk of lending their money to your business. They look at your business revenue, income stream(s), billing history and debt liabilities. They will also look for dishonours (missed payments).

No, you don’t need a deposit to get a term loan for your business. Some lenders may ask for a down payment for asset finance or if you’re buying an existing business. Please note a deposit is not the same as security (collateral) which is required for any secured business finance.

Yes, most lenders will allow you to pay out your loan early without penalty. However, there are some exceptions to this rule, so be sure to check the fine print with your lender. Some lenders will charge you break costs and this could undo any savings made on the loan.

Business loans to start a new business and for startups are more difficult to secure than standard business finance. It’s best to apply for finance for a new business with a non-bank lender with less stringent lending requirements. Banks don’t like to lend to businesses that aren’t established.

Yes, you may still be eligible for a business loan if you have bad credit. You can apply for a bad credit business loan which is similar to a standard unsecured loan, but comes 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 around 680.

Getting rejected for a business loan may be attributed to (but not limited to) any of the following reasons:

• Your business financials don’t reflect your ability to meet your repayment obligations
• You haven’t been in business long enough
• You have too many debt liabilities
• The outlook for your industry is not promising or your industry is too high risk
• Your business is seasonal
• The majority of your revenue comes from a handful of suppliers
• The business owner or director has bad credit.