A Guide To Understanding Business Loans

Business loans play a crucial role in the Australian economy by providing financial support to business owners. In Australia, small and medium enterprises (SMEs) account for 99.8% of all businesses. They employ over 7 million people and contribute heavily to economic growth. However, starting and running a small business requires significant financial investment. New business owners often struggle to secure these funds. Small business loans are credit instruments that provide access to funding and help entrepreneurs finance their operations. These loans can support businesses in optimising cash flow, upgrading technology, financing purchase orders, and navigating exigencies. Let’s break down everything you need to know about business loan products and how to get a suitable loan for your firm!

Benefits of Business Loans for Small Businesses

Short-TermBusiness loans provide a much-needed cash infusion to any type of venture. These credit instruments help entrepreneurs manage urgent expenses, fuel growth, boost profitability, and support business expansion. Here are the benefits you can leverage when you opt for small business loans in Australia:

• Flexibility: Business owners can explore a variety of credit products while taking a loan. You can choose between asset financing products to buy business assets, lines of credit to manage cash flow, invoice finance to access quick cash, and many more. These options provide the flexibility to choose tailored solutions for your unique business needs.
• Cash Flow Support: Commercial loans help firms with cash flow management. They allow business owners to pay suppliers on time, maintain requisite inventory levels, ensure timely wage payments, and navigate other working capital needs.
• Business Growth: Entrepreneurs often require small business loans to execute their expansion plans. They can use the funding to set up new stores, buy equipment, or upgrade technology.
• Quick Approvals: SMEs can get fast business loans with minimal documentation. The process for securing these loans is quick and hassle-free, ensuring convenience and speed.
• Retaining Equity: Many business owners prefer debt financing to equity investments. Equity investments require entrepreneurs to give up a stake in their business. Debt, on the other hand, helps them retain ownership and ensure long-term growth. New businesses find it particularly challenging to raise money through the equity financing route. It is hard to determine a startup’s valuation and an entrepreneur might give up too much equity during the early stages. In such situations, startup business loans can help an entrepreneur set up their business. 

Types of Business Loans

1. Unsecured Business Loans

Unsecured business loans in Australia allow business owners to borrow money without providing any collateral. They need not pledge an asset to secure the loan. This option is best for small businesses that lack assets to seek secured loans. Unsecured business finance ensures fast approvals with no upfront credit checks. In many cases, lenders may approve unsecured loans up to $500kwithin just 24-48 hours. Unsecured business loans often require higher interest payments compared to secured loans. However, they are convenient credit instruments that help businesses meet urgent expenses on time.

2. Secured Business Loans

A secured business loan is a low-risk credit instrument backed by collateral. The loan terms stipulate that the lender will recoup their money by liquidating the asset if the borrower defaults on repayments. Small businesses can mortgage their property assets to get secured loans with lower interest rates. Typically, lenders may offer high loan-to-value (LTV) ratios of up to 80% if you take the loan against a property asset. Businesses with poor credit history can secure bad credit business loans more easily if they provide some collateral against the loan. Secured business finance is a valuable option for business owners who have access to real assets. Unconditional approval and settlement of secured loans can take 1-2 weeks.

3. Business Line of Credit

A business line of credit in Australia is an excellent solution for firms with frequent fluctuations in cash flow. Also known as a business overdraft, this instrument allows a business to utilise a pre-approved credit limit. The lender approves a ceiling amount and the borrower can withdraw any sum within this limit. The interest is charged on the amount withdrawn by the borrower. A business line of credit is a flexible solution for businesses with short-term cash flow issues. It allows them to access a buffer amount as required and pay interest on the sum they draw. A firm can access a revolving credit line between $10K and $1M..

4. Invoice Finance

Many SMEs in Australia sell goods on credit. Under this arrangement, they provide goods and services to customers before receiving any payment. They raise invoices for the transactions but many customers take time to clear the bills. As a result, these firms face cash flow issues that affect their operations in the short term. Invoice finance allows business owners to borrow money against these unpaid invoices. They can access up to 95% of the invoice amount at minimal interest rates. There are two types of invoice finance products: invoice discounting and invoice factoring. In invoice discounting, the business retains the right to collect the invoices. In invoice factoring, they sell their unpaid invoices and transfer the collection risks to the lender. Invoice financing helps firms avoid bad debt and ensure quick access to cash.

5. Debtors Finance

Debtors finance allows business owners to secure a credit limit against their accounts receivables. Debt factoring is a similar instrument that enables firms to sell their accounts receivables and get access to funds. Business owners can use the money to pay their creditors, buy inventory, pay salaries and navigate their working capital needs.

6. Vehicle and Equipment Finance

Small businesses require assets like tools, machinery, and vehicles to run their operations. However, buying these assets with upfront payment can prove to be costly for a business. Asset finance solutions can help a firm fund its asset purchase by securing the loan against the asset’s underlying value. For example, you can buy new equipment by taking a loan with your equipment as collateral. Vehicle, equipment, truck, and forklift finance options are available for business owners to acquire new assets. 

How Do Lenders Determine Loan Terms and Interest Rates?

Lenders determine business loan interest rates after evaluating several factors. They assess the financial health of the applicant’s business and account for industry standards before setting the terms. If you are planning to take a loan for the first time, you can use our business loan calculator to get an indicative quote about your repayments. However, please note that your interest rates and loan terms will be determined according to your firm’s unique credit profile. Lenders analyse multiple aspects of a firm’s financial performance, credit history, and industry factors before finalising the interest rates. Here are some of the considerations that influence your loan terms:

• Collateral: A secured loan represents a lower risk for the lender. When you put up collateral against the borrowed amount, the lender has a safety net in case you default on repayments. Hence, such loans tend to be cheaper than unsecured business loans in Australia. Secured loans have lower interest rates and favourable loan terms. However, the presence of collateral increases the approval time as lenders must verify the security details before lending money. If you do not have assets to put up as collateral, you can opt for unsecured business finance with fast disbursals.
• Credit Score: Credit rating agencies in Australia assign credit scores to individuals and organisations. These scores represent the creditworthiness of a certain entity. A business with a high credit score can get loans at lower interest rates with better terms. The credit score accounts for a firm’s repayment history, credit utilisation, credit inquiries, and other parameters. The higher an organisation’s credit score, the greater its reliability as a borrower. Such businesses are low-risk creditors, encouraging lenders to offer better loan terms. On the other hand, firms with poor credit scores may have to pay higher interest rates to offset the risk.
• Trading History and Business Performance: Lenders assess how long a business has been operational and how it has performed during this period. They may evaluate the firm’s financial records and cash flow position. Typically, the borrower must have an Australian Business Number (ABN), an average monthly income of $5K or more, and a minimum trading history of six months. However, if you have a startup business that does not meet these criteria, you can still find a business loan that suits your needs. The lenders will assess your business circumstances and determine an interest rate that reflects the same.
• Cash Rate: The current macroeconomic trends can influence the loan terms you get. The Reserve Bank of Australia (RBA) sets the cash rate, which affects business loan interest rates as lenders pass on its effects to their borrowers. However, the impact of the cash rate varies depending on your business circumstances and the type of loan you take.
• Industry Factors: The terms for small business loans in Australia also depend on industry-related factors. For example, if your firm operates in a stable, recession-proof industry with dynamic growth trends, you are more likely to get lower interest rates. On the other hand, if you run your business in a high-risk industry, lenders may charge higher risks to compensate for the risk.

You must account for these factors while estimating your loan terms and repayment obligations. A business loan calculator can give you a preliminary idea but the final terms are dependent on a multitude of factors. 

How to Choose a Business Loan Product?

Australian SMEs can choose between a variety of business loans to fuel their growth. However, many business owners find it confusing to compare business loans and finalise the right one. Here are some guidelines to help you assess your firm’s requirements and choose a business loan product that fits the bill!

• Determine the Loan Purpose: Why do you want to borrow the money? Answering this question is critical before choosing a business loan product. You must evaluate the purpose of the loan and find a corresponding credit solution. Do you want a loan to upgrade business equipment or cover seasonal fluctuations in cash flow? Each business purpose may require a different type of product. For example, a line of credit can help you manage cash flow while an asset finance solution can fund your equipment purchase. Hence, understanding the loan’s purpose is the first step while streamlining your search.
• Assess Your Urgency: How urgently you need the cash can also influence your choice. For example, if you need the money quickly to navigate a financial emergency, quick business loans with low-doc approvals may be the best. However, if you can afford to wait for a week or two, a secured loan with a lower interest rate may be the better bet.
• Evaluate Your Eligibility: You must assess your eligibility by taking stock of your assets, evaluating your cash flow position, and analysing your trading history. You can apply for a secured business loan only if you have sufficient assets. Similarly, many loans are available exclusively for firms with a trading history of six months or more. You can consult an experienced broker to understand how these rules affect your eligibility for a loan. This step will help you narrow the search and identify loan products you can apply for.
• Consider the Repayment Period: The repayment period can influence how much you pay back to the lender. Short-term business loans are convenient options for businesses that need quick access to cash with minimal paperwork. However, loans with longer repayment periods may cost the firm less in the long run. Hence, you must weigh the pros and cons of the available options before taking a call.
• Ascertain Your Limits: A business owner should have a clear understanding of their firm’s financial limits. You should not borrow a large sum if you cannot afford to make timely repayments. It is critical to assess your financial requirements and repayment capacity before choosing a loan.

Analysing these aspects can help you make a rational judgement about the business loan products. You can shortlist suitable loan options and submit applications to initiate the process. However, you should not submit formal inquiries for too many credit products as that can impact your credit score. 

Applying for a Business Loan: How it Works

Now that you have an overview of the business lending landscape, it is time to break down how to get a business loan in Australia. Here are the steps to follow to secure a loan:

• Conduct Background Research: You can explore business loan options through online research. This step will help you determine the business loan products relevant to you.
• Prepare Relevant Documents: In most cases, you will be required to attach the relevant business documents when you file a loan application. These documents include your bank statements, trading history records, cash flow statements, and income statements. You may also have to provide your firm’s audited financials and and tax returns in some cases. The exact requirements vary from one lender to the other. However, it is advisable to prepare these documents and keep them handy before initiating the loan application process. Ideally, a qualified accountant should prepare your financial statements to ensure the credibility of these records.
• Get an Indicative Quote: You can get in touch with reputed finance broker to understand your options. They can guide you on how to get a business loan and what to expect during the application process. At this stage, they can evaluate your business circumstances and estimate the interest rate and repayment obligations you may have. These discussions will help you get an overview of your loan options. The lending specialists can also provide you with an indicative quote.
• Complete the Application: Your lending specialist or finance broker can help you finalise the loan application process. They can identify suitable lenders who can offer favourable loan terms to suit your needs. During the pre-approval period, the lending specialists will get your paperwork in order and evaluate your application details to avoid any errors. Based on their analysis, they will submit your loan application and fast-track the process.
• Secure Approval: The next step involves waiting for loan approval. The approval and settlement time varies according to the type of business loan product. At this stage, the lenders evaluate your loan application process and determine the final terms. They provide their approval after a thorough assessment of your business requirements. Your finance brokers or lending specialists can help you understand this process better. They may also help with coordination in case of unexpected delays or roadblocks before the final approval.
• Read and Finalise the Loan Agreement: Once you receive the approval, you should spend enough time reading and understanding the loan terms. After finalising the loan terms, you can sign the agreement. At this stage, the lender will transfer the funds to your account if it is a lump sum loan arrangement. In case you apply for a business line of credit, you will get access to the revolving credit line.

Consulting a Finance Broker: How they Can Help

A finance broker or lending specialist can help streamline your loan application process to help you secure a suitable source of funding. Some business owners feel it is better to look for loans by themselves. However, in reality, finance brokers can play a critical role in simplifying the process. Here’s how consulting a finance broker can help you get a business loan in Australia.

• Assess Your Needs and Goals: Lending specialists have years of experience with commercial loans. They can use their know-how and experience to guide you better. They assess your business requirements and critical goals to ascertain the business loan products that suit your needs. Moreover, they can help you determine how much you need to borrow and how to make the most of your loan.
• Identify and Explain Loan Options: A finance broker will have in-depth knowledge of every type of business loan product. They can identify the most suitable options for your business. For example, if you want quick business loans to pay for urgent expenses, specialists can guide you to low-doc options with fast approvals. At the same time, they can help you understand how each loan works and how much it would cost you to pay it off. Many new business owners find it confusing to compare business loans and analyse their differences. A finance broker can alleviate this issue by providing relevant guidance.
• Provide Access to a Network of Lenders: Established lending specialists have strong relationships with reliable lending partners. With them, you can access a network of business lenders who can provide you with the funding you need. Your finance broker can match your business to the most suitable lender after a thorough analysis of your business needs. As a result, they can help facilitate a seamless borrowing experience for you and your firm.
• Facilitate Loan Application: The loan application process involves meticulous documentation and paperwork submission. The lending specialists can simplify these tasks by guiding you at every stage. They can go through your financial statements and application details to filter out potential concerns. Moreover, they can help you finalise and submit the loan application through the right channels at the right time.

Conclusion

The right business loan product can have transformative results for a firm. It can help the organisation seek scalable growth, facilitate business expansion, and navigate market developments. A reliable lending specialist can help you secure a small business loan so that your firm can achieve its full potential. At Broc Finance, we have a team of experts to guide SMEs through the process of securing a business loan. Get in touch with us today to know more about your options and apply for your finance solution!