What is a business loan?
A business loan is a type of loan that’s specifically used to help your businesses grow, manage cashflow, make big purchases, or meet everyday running costs.
Like other loans, business loans can be secured with collateral or unsecured and can have variable or fixed rates. Business loans can also be held over long and short terms, and will usually come with some upfront or ongoing fees.
So why do Australian businesses take out business loans? Your business might require more funding than you have in your business bank account to get it started or maintain cashflow, which could make a business loan a viable option.
Choosing the best loan for your business
There are many kinds of business loans, and it’s important to choose the right one for your company’s needs. These can include:
If you are in need of emergency funding or a business loan over a shorter period of time (generally between 3 to 24 months), you may need a short term business loan.
If you have to finance expensive tools or machinery, you may want to look into equipment finance.
If you’re a small business trading with other small businesses, invoice financing may be useful for maintaining cashflow while you wait on the payment of invoices.
If you need to draw beyond the money in your account, you may need to consider a business overdraft.
Not sure where to start? Find out how to finance your business, or see the complete list of business loan providers available.
What can a business loan be used for?
In Australia, you can use your business loan for all sorts of purposes, whether it’s to cover short-term cashflow gaps or to support longer-term investments.
Some of the popular ways business loans are used in Australia include:
Since there are so many different reasons why a business might need extra finance, some lenders do offer a range of specialty business loans to meet specific funding needs.
How to compare business loans
When it comes to choosing the financing you need, working out how to compare business loans can be challenging but is an important step one.
The way to do this is to figure out which features you will need in your business loan, and exactly what type of loan you will need. You can then find all of the business loan providers available and see how the fees, interest rates and features compare between loans. Mozo can be used to compare business loan providers to help you find the option that best suits your needs.
Need help getting a business loan?
If you’re starting out with business loans and need some help, we can guide you through how to get a business loan.
Once you’ve chosen what type of loan you need, you’ll also have to decide on a few key things about the loan. These include the term of the loan, the features you need, and choosing between secured and unsecured loans.
Like with other types of loans, securing a business loan with collateral can increase risk for you (as you will be putting assets up against the borrowed money), but it can also mean lower interest rates and smaller repayments. Unsecured business loans may have higher interest rates and stricter eligibility requirements.
Business loan application and eligibility
To apply for a business loan, you will need to submit any required documents either in person or online, including:
Your licence or other points of identification
Your business’ ABN (Australian Business Number)
Financial documents such as bank account statements, tax returns and projected cash flow
A business plan for how you intend to use the funds
Your eligibility for a business loan will be determined by several factors, including:
Time in business: Some business loans may require you to have been in business for a set amount of time, from 6 months up to 2 years.
Annual turnover: Certain lenders may have requirements for businesses to bring in a required amount of annual turnover, which is why you will need to provide financial records for your company.
Outstanding tax: Business loan providers may look at your tax history similar to a personal credit history, where any tax owing signals a risk to a lender.
Loan purpose: Depending on the business loan, they may want to know what the money is being used for, with some loans only accepting applications for specific purposes.
Personal and business record: When you apply for a business loan, both the records of your business and yourself will be looked into to ensure that you are a viable borrower. This can include any legal issues or failed business ventures.
Other options for business finance
If a business loan is not the right option for you, but you are in need of other business finance tools, there are other things you can look into.
Business credit cards and charge cards are an option for maintaining everyday cash flow at your company without taking out a larger business loan. Most business credit cards will allow multiple cardholders, often up to 100 on the same account, which can be useful for small businesses with shared financing. You can also often collect rewards points as a team, rather than individually. You may also consider business charge cards, which attract no interest rate but need to be paid off in full each statement period.
A line of credit could be useful for businesses who need access to ongoing extra finance but do not have a set amount in mind. With a line of credit, your business will be approved to a certain amount and only pay interest on what you withdraw. A business overdraft is a form of this. There may be fees for drawing down more money. This tends to be an option for businesses with unpredictable cashflow.
If you need a loan to get started on something that may eventually evolve into a business, but might not yet qualify for a business loan, a personal loan might be a better option. Personal loans do not look at your business history but rather your personal income and creditworthiness.