Small Business Loans: What You Need To Know

Securing finance for your business is something most owners and entrepreneurs need to do when they are looking to grow or simply manage their day-to-day cash flow.

Australian SMEs have a huge range of options to choose from when it comes to getting a small business loan, but how do you know which one is best for you? Moreover, how complicated is the business loan application process, and what type of collateral will you need to put up?

We’ve got the answers, whether you’re just starting out or hoping to become best-in-market with a smart expansion. Here’s everything you need to know about how a business loan works so you can invest in your company’s future success.

What are the different types of business loans you can get?

Depending on your size, where you are at in your growth phase, your financial situation, how many assets you have, your industry type and a range of other factors, a different loan will suit different businesses. Here are some of the most common types:

• Term business loan: They can be called different things, but this is the most standard loan type where a lump sum is borrowed and repaid with interest over a set period. They can be either secured or unsecured and have a fixed or variable interest rate.
• Line of credit: Your business can borrow up to a certain limit and only pay interest on the amount you actually use.
• Equipment loan: Specifically for purchasing business equipment, vehicles, machinery, etc. The equipment itself usually acts as security for the loan.
• Business overdraft: This facility lets you withdraw more than is available in your bank account, up to an agreed limit, to cover short-term cash flow needs.
• Invoice financing: Can help your business with cash flow by letting you borrow against unpaid invoices.
• Commercial property loan: For businesses looking to buy or develop commercial real estate.

What are some of the reasons for getting a business loan?

• Working capital: To maintain the day-to-day operations of an existing business or cover cash flow gaps during seasonal periods or slowdowns.
• Expansion: Many businesses take out loans to open new locations or invest in new markets. You might also need to hire more staff to meet growing demand.
• Buying equipment or inventory: To finance major purchases like vehicles, machinery, or bulk inventory.
• Real estate: Buying commercial property a new office, warehouse, retail location, rural property (e.g. agriculture sector), etc.
• Debt consolidation: Some businesses use loans to consolidate all their existing debts into a single payment.

What documentation do you need for getting business finance?

In addition to things like credit criteria and the business loan application itself, you’ll also need to provide a few different documents to demonstrate your business’s financial health and your ability to repay the loan. These include but are not limited to:

• Business financial statements: Profit and loss statements, balance sheets, cash flow statements and more. Lenders will want to see your financial health over at least the previous 12 months.
• Detailed business plan: Outlining how you intend to use the loan and how it will benefit your business.
• Tax returns: You might need to provide both your business and personal tax returns for the past two years.
• ID: You’ll need to provide personal identification, including proof of your business registration or Australian Business Number (ABN).
• Bank statements: Lenders will want to review your business’s bank statements for the past six months (at least) to have a better understanding of your cash flow.
• Personal financial information: In some cases, you might need to share personal financial information, especially if you’re seeking an unsecured loan.

Having all of these documents ready to go before you apply will speed up the process and improve your chances of approval.

How does the interest rate differ for business loans?

Generally, secured business loans – where you put up assets like property or equipment as collateral – come with lower interest rates because the lender isn’t putting themselves at as much risk. On the other hand, unsecured loans tend to have higher interest rates because they pose a greater risk to the lender, since there is no collateral to recover in the event of a default.

The interest rate over the loan term can be fixed or variable. A fixed rate period means the interest rate stays the same for the life of the loan, whereas a variable rate fluctuates based on market conditions and the RBA, which could mean higher or lower repayments over time.

Your interest rate will also depend on the length of the loan and the lender’s terms, so it’s important to compare different deals to find the best option for your business.

What can you use a business loan for?

• Paying suppliers for bulk inventory purchases or to manage cash flow while awaiting customer payments.
• Commercial property loans can help you buy or lease real estate for offices, retail spaces or warehouses.
• Investing in a new business plan. Whether you’re launching a new product or expanding into new markets, business lending can give you the essential funding.
• Expanding your workforce can be expensive, and a business loan can help cover recruitment costs and training.
• Upgrading equipment like office technology or heavy machinery.

The flexibility of a business loan means you can use the funds in the way that best matches your company’s needs and growth ambitions.

What’s the difference between secured or unsecured business loans?

The biggest difference between secured and unsecured loans is collateral. Secured loans require you to put up collateral – usually things like real estate, vehicles or equipment. Because the lender has something to fall back on in the event of default, you’ll likely get a better interest rate – even if you have less-than-perfect credit.

Unsecured loans don’t require collateral and are instead based on your creditworthiness and the financial health of your business. Since unsecured loans are riskier for lenders, you can expect to have a higher interest rate and they might be harder to qualify for.

So whether you need capital to expand, invest in new equipment or simply manage your day-to-day operations without stressing about money, there’s a business loan out there that will meet your needs and put you in a healthier financial situation.