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How to get a business loan

Starting a business requires patience, determination, and — most importantly — capital.

Most entrepreneurs can’t cover startup costs, and even if they could, it’s best to avoid emptying your personal savings to start a business. Business loans can provide the boost entrepreneurs need, as well as help established businesses manage expenses or grow their organisations. 

In this post, we’ll cover how to get a business loan in Australia, the types of financing available and the pros and cons of various lending options. By the time you finish reading this piece, you should be well prepared to apply for the funding you need.  

What is a business loan?

A business loan is funding that a bank or private lender provides to a business owner specifically for business-related expenses. The loan details will include a repayment agreement that contains provisions such as interest rates, number of payments and length of the repayment period. 

It may also include an amortisation schedule that shows what percentage of each payment will be applied to the principal. 

Types of business loans

So which type of loan is the best for your business? The answer to that question depends on several factors, such as the purpose of the loan, the amount, and when you’ll be able to repay it. 

1. Business line of credit

This type of loan is ideal for funding short-term projects that have an unspecified cost. 

For example, a restaurant owner who wants to remodel a dining room may have a few estimates for the project cost. However, the exact cost may be unknown until the project is complete. 

A business line of credit would allow the owner to borrow up to a certain amount, as needed, and repay only the funds that are used. Generally, applicants for a business line of credit must have an exemplary credit history, as well as reliable recurring revenue. 

2. Business credit card

While most people might not think of credit cards as loans, they function in primarily the same way. Borrowers are approved for a specific amount, which they then repay, with interest, on specific dates. Business credit cards are ideal for smaller purchases, such as office supplies or business-related travel. 

One perk of using business credit cards is that they may offer rewards or points that can then be used for future purchases. 

3. Business term loan

A term loan is lump-sum cash provided upfront, repaid over time, with interest. This type of loan is best for established businesses that have a good credit rating. It may require a collateral guarantee (an asset that the lender can take, should the borrower default on the loan).

Businesses that apply for a loan through an alternative online lender may be able to get funding in just a few business days. 

Read more: Small business and startup grants to fund your growth

4. Equipment loan

Equipment loans are specifically for purchasing equipment, and the repayment term usually aligns with the equipment’s life expectancy. These loans may therefore be good for businesses that need longer repayment terms than what a typical term loan offers.   

Something to keep in mind with equipment loans is that if your equipment fails before the length of your loan, you’ll still have to finish repaying your loan. 

5. Merchant cash advance

This type of loan involves borrowing against future earnings, so it’s not a true loan, but it can provide cash when businesses most need it. 

The repayment plan for cash advances may include a set percentage of your daily credit and debit card sales, or daily or weekly payments. Interest rates for cash advances can be significant, so this type of lending might be one of the last options to consider. 

6. Invoice factoring

With invoice factoring, businesses sell their invoices to a factoring company, and that company assumes control of collecting payment. That means businesses with a long payment cycle can get cash sooner than usual.

Invoice factoring companies generally pay most of the invoice total (up to 90%) when they purchase the invoice. After collecting on the invoice, they pay the remainder of the total, minus their fee — usually about 3% of the invoice amount. 

Secured vs. unsecured business loans

Secured business loans

These loans are backed by collateral. For example, with equipment loans, the equipment is the collateral, and should the borrower default, the lender could take the equipment and sell it.

Unsecured business loans

These loans are based on the borrower’s overall creditworthiness and financial standing. Qualifying for these loans may be more difficult than qualifying for secured loans.

Types of business loan lenders

Businesses have three choices for getting a business loan:

1. Traditional banks

Traditional banks tend to offer the best interest rates for business loans. Compared to other lending sources, traditional banks may also offer better or more personalised customer service. 

Pros:

  • May offer other perks, such as discounts for business insurance.

  • May offer higher loan amounts than alternative lenders

Cons:

  • Decision-making process may be longer than with other lending types

  • May not be a viable option for startups that lack detailed financial records

2. Online/alternative business lenders

Alternative business lenders like Lumi and Nimble may offer a simplified application process, compared to traditional banks. (Lumi claims its loan application can be completed in 5 minutes). 

Pros:

  • Fast loan decision-making, with funds often available the same day

  • Borrowers with inadequate credit history may be able to qualify

Cons:

  • Interest rates and fees may be high

  • No other financial products available 

3. Peer-to-peer lenders

Peer-to-peer lending platforms such as SocietyOne help connect private lenders and borrowers. Loans available through such platforms are for business or personal expenses.

Pros:

  • Simple application process

  • No restrictions on how to use loan funds

Cons:

  • Minimum loan amount required

  • Higher fees and interest rates

What you need to apply for a business loan

Before you begin researching how to get a small business loan, make sure you’re prepared to apply. Most lenders will require the following:

1. Business plan

You may already have a business plan. If not, you can download a business plan template. Your business plan should demonstrate knowledge of your sector, lay out a plan for growth and define measurable objectives. 

2. Loan purpose

Lenders assume a degree of risk when awarding loans to businesses, so decision makers will want to know what the loan is for. Applying for a loan that supports the routine operation of the business, such as staff training, should improve the odds of loan approval.

3. Financials

Lenders want to see evidence that you’ll be able to repay your loan. Be prepared to share earnings reports as well as information about your personal financial history. 

If your business is newly established and you don’t have a detailed financial history, you might need to apply for funding through an alternative lender.

4. Creditworthiness

Lenders may use different methods for determining your creditworthiness, but they'll likely base this determination mostly on your income, savings, assets and debts. They may also consult one or more of the three credit reporting bodies in Australia (Experian, Equifax and Illion).  

5. Security

Security is the value of the asset used as collateral. This does not apply to unsecured loans. 

6. Legal documents

Lenders may want to review your tax returns, any contracts you have with other businesses, your commercial lease agreement, other loan agreements and other legal documents.

7. Business outlook

Lenders may consider the outlook for your industry when deciding to lend to you, and economic factors outside your control may influence that decision. Research these points before applying. During periods of economic uncertainty, it might make more sense to delay applying for a loan.

What to look for in a business loan lender

Once you’ve gathered everything you need to apply for a business loan, it’s time to begin your search for a lender. 

1. Lending products and services

If you’re just looking for a small, short-term loan, an alternative lender might be right for you. But if the breadth of products and services is important to you, you’ll probably be more interested in the options offered by traditional banks. 

2. Interest rates, fees, and repayment terms

Interest rates make a big difference in a loan’s total repayment amount over time, so you'll want to compare rates for several different lenders. Also consider fees, such as extra costs for the application, loan origination, early repayment and late payments. Some lenders may also charge fees for certain payment methods. 

3. Customer service

Would you prefer to speak to a person when you have questions about your loan, or is email or online chat enough? Either way, you’ll probably be looking for timely answers to your questions, so take a moment to look at online reviews for any lender you’re considering. Even better, ask your business associates if they can recommend a lender that offers great customer service.

As you prepare to apply for your loan, be aware of these common pitfalls: 

1. Failing to prepare a business case

Prepare and review your business plan, as well as the reason you’re applying for a loan. The lender may contact you with further questions, so be fully prepared to answer them.

2. Choosing the wrong type of finance

As mentioned earlier, different types of financing are available for businesses, so be sure you’re choosing the right type for your business. 

3. Rushing into it

Typically, businesses that rush the financing application process do so because they waited too long to apply. By making sure you have a clear grasp of your financial health, you’ll be better able to predict when you need additional funds. 

Business accounting software can accelerate the lending process

MYOB helps businesses manage their day-to-day finances, as well as anticipate ebbs and flows in cashflow. With features such as automatic bank reconciliation, single-touch payroll reporting, and single-click invoice generation, you can focus more on “big picture” operations, and count on MYOB to keep you organised. 

Get started now. Sign up for MYOB’s 30-day free trial.

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