Guide to Getting a Business Loan

As with any form of credit, it’s important to carefully consider your financial situation before taking out a business loan. In this case, this should address the state of your business, whether it’s well established or about to get up-and-running, as well as your personal finances. If you do the sums and find you can’t pay down the principal amount you want to borrow while allowing wiggle room to also pay off interest (which may fluctuate if you choose a variable rate), you might not be in a position to take out a business loan.

If the numbers do add up, that is great news. You can use a business loan to fund your company’s growth or keep your day-to-day cash flow in the green while managing variable income streams. A few common business activities a loan can fund include:

• Buying new equipment
• Purchasing bulk stock
• Hiring new employees
• Paying staff wages
• Paying invoices
• Investing in other growth opportunities

Business loans are usually offered as a lump sum payment or an ongoing line of credit which you can draw on whenever is required, similar to a credit card. When you take out a loan, you’ll agree to repay the amount over a set timeframe plus interest on top of the principal and any set fees.

Since the purpose of business loans varies considerably, repayment periods for smaller amounts could be as little as a few months or even weeks, or extend into multiple decades for larger loans. With smaller loans paid over shorter periods, you may be required to make fortnightly, weekly or even daily repayments. Larger loan sizes will operate more like a home loan with monthly or annual repayments.

You’ll usually have the choice between a fixed and variable business loan. With the former, your interest rate should remain the same over the life of the loan, and with the latter it can vary based on market conditions. Similarly, you’ll need to opt for either a secured or unsecured business loan, which again impacts the interest rate you’re offered and the structure of the loan (more on this later).

In terms of assessing and comparing loan costs based on interest rates, business loans differ a little from home loans or personal loans. Lenders offering each form of credit will take your personal financial circumstances into account before offering you a loan with a unique interest rate, but business loan applications are often more stringent.

This is because the revenue, profits, expenditure, debts and cash flow of the business itself, alongside your personal credit score as the business owner, need to be assessed before a decision can be made by the lender. This is why you may see business loans advertised without a headline interest rate, or phrased as ‘starting from’ or ‘ranging within’ a certain interest percentage bracket.

Once you apply for the loan and all the necessary investigations have been made, you’ll either be rejected for the loan or accepted and offered the principal at a set interest rate. This process could take just a few days (or even hours) for smaller loans or less complex businesses, or become a lengthy process if there’s more money on the line or business activities that need consideration.

While the size of the loan, the interest rate applied to it, the time it takes to repay and the purpose it’s used for will differ between businesses, there are two ways to structure the loan: as a secured or unsecured loan.

Secured business loans require you to put up collateral to offset the risk the lender faces when supplying credit. This is usually in the form of a significant asset like residential or commercial property, a major savings fund or even the business itself. Since there’s this extra assurance that repayment can be drawn from elsewhere if you can’t manage it, you’ll usually find secured loans have higher maximum loan values, longer repayments and are offered at lower interest rates.

Unsecured loans don’t require collateral, and therefore generally have lower maximum loan amounts and higher interest rates since lenders are taking on greater risk. However, if you’re after a smaller loan to cover short-term needs, this could be a good option as unsecured loans are usually quicker to set up. These applications are often measured in hours instead of the weeks it can take to receive an outcome for a secured business loan application.

Just keep in mind, even an unsecured loan could see you taking on personal responsibility if the business defaults on repayments, as lenders may require you to make a personal guarantee upon application.

The finances of many businesses, especially small-to-medium enterprises, are closely tied to that of their owners. This is why lenders will often conduct an audit of your personal finances when you take out a loan for your business.

A personal guarantee is another type of insurance policy lenders employ to ensure repayment of a loan. It involves a business owner or executive making a written guarantee that they will repay the amount personally if the business finances cannot cover it. This effectively places the responsibility for the loan onto an individual rather than an entity, and should only be offered if you’re in a strong financial situation at home.

Business owners may make a personal guarantee if they’re confident in their personal finances and the business requires investment.

As outlined so far, finding a business loan that suits your needs will depend largely on what you’re hoping to achieve with the funding and your capacity to meet repayments. With that in mind, there are some key factors to consider while you hunt out the best deal.

Business loan interest rates

You’ll need to consider whether a fixed or variable interest rate works for you in terms of repayments, and if you want to put up collateral for a secured loan versus an unsecured loan. Each choice can impact the interest rate you’re offered. Some lenders may offer an interest-free period when you first take out the loan, which is also worth factoring into comparisons.

Business loans are often advertised with a ball-park interest rate figure or quoted upon application. This is because the complexities of business revenue, debts and cash flow need to be assessed by the lender (alongside the owner’s personal finances) before they can accurately determine the risk involved in lending to that business. As such, it’s difficult to determine what is a ‘good’ interest rate for any one loan—but it’s still worth comparing what’s out there.

Business loan fees

Like any financial product, business loans often come with fees. This could be expressed as a percentage of the loan or set as a dollar figure. Common business loan fees include:

• Application fees that are charged when you take out your loan.
• Ongoing fees (aka a service fee) that could be charged on a weekly, monthly or annual basis.
• Valuation fees could be charged if you’re taking out a secured business loan. This is to cover the costs for valuing the collateral you’re using against the loan.
• Early repayment fees, which some lenders apply as a kind of penalty when you pay down your loan early (since this effectively means they’re earning less in interest).
• Dishonour fees if a payment can’t be processed because you have insufficient funds in your account.
• Late payment fees that are charged every time you miss a repayment.
• Discharge fees (aka an exit fee) which some lenders will charge once your loan is fully paid off–even if it’s within the set timeframe–or if you refinance your loan with another lender.

Business loan features

If you’re looking for flexibility in how you repay your debt, keep an eye out for extra repayments and a redraw facility. Having the ability to pay down more of your loan sooner with extra repayments means you could cut out some accruing interest costs, while a redraw facility means you can access that money to cover unexpected expenses. Be sure to check for any fees related to these features, as well as early repayment fees that could minimise the savings you’d otherwise earn.

Funding speed could be important if you need to cover costs ASAP. Some lenders promise applications that take as little as 10 minutes and approvals within 24 hours, but you’ll usually find secured loans take a little longer to negotiate since there’s collateral to assess. If you are on a tight deadline, don’t forget to properly assess your options before committing to a loan, as this could hurt you in the long-run.

If your cash flow is less predictable than other businesses, you might want to look for flexible repayment periods. Some loan providers only offer set repayments intervals (daily, weekly, fortnightly, monthly or annually), but others may offer more lenient schedules.

Specialised business loans

Some lenders will offer specific loan types beyond a secured or unsecured loan in certain situations. This includes:

• Equipment finance business loans for purchasing big-ticket items.
• Short term business loans for a quick cash injection that can be paid off in a few months (or up to a few years).
• Trade finance business loans that run as a line of credit for international business transactions.
• Invoice finance business loans to manage cash flow when invoices are slow to roll in.

Banks vs online lenders

You may already manage your business banking needs through a bank or credit union, as the major institutions (NAB, ANZ, Westpac and CBA) alongside smaller banks offer tailored business bank accounts and credit cards. Incorporating a business loan can help streamline things into a simple package (with potential savings), while providing face-to-face services and still competitive rates.

Online lenders are companies that specialise in providing financing to businesses and individuals. These fintechs usually offer speedy services and some cost reductions since they’ve negated the need for a bricks-and-mortar operation. You might choose an online lender if you’re looking for immediate financing, lower interest rates or easy online management of your loan. A few players in the online business loan space include Lumi, Prospa, Bizcap and OnDeck, among many others.

Applying for any type of credit is a significant financial move that shouldn’t be taken lightly. Follow these steps when applying for a business loan to ensure you’re investigating all your loan options, as well as anything that could impact your personal financial situation or the business in the application process.

1. Assess your eligibility

There are numerous factors that can impact a lender’s decision to provide your business with credit. So, it’s worth assessing your eligibility before beginning the application process and see if you can clear up any problems proactively. Some of the key considerations that may impact whether or not you qualify for a business loan include:

Annual business turnover: Lenders assess cash flow to ensure the business is generating enough income to cover loan repayments, and usually require you to meet a minimum annual turnover (this varies between lenders and loans). Financial statements and sales records will be used to show this data.

The purpose for the loan: Most business loans cover a range of funding purposes, from paying wages to buying business equipment. But some lenders will specialise in specific industries like agriculture or healthcare, so you may want to investigate options specific to your operations.

How long you’ve been operating: You’ll often need to have been operating for some time before lenders will accept a loan application. This could be for as little as six months or go up to a few years.

Business and personal records: This includes everything under financial sun, from outstanding personal or business debts to any legal issues you or your business has been involved in.

2. Get your credit score in good shape

Your personal credit score can impact the outcome of your business loan application. While you can’t expunge every late mortgage repayment or loan application from your credit score, you can fix errors and ensure you’re in a good position moving forward. You can access your credit score freely every three months to check for any issues and contact the credit reporting agency to have these amended.

It would also be wise to pay down as much existing debt as possible before applying for another loan. This shows lenders you’re a responsible borrower and could also tip your credit score into a higher band.

3. Know your financial limits

There’s no point applying for a $500,000 loan if your business isn’t in a position to cover repayment costs. Once you’ve assessed your eligibility and personal financial situation, you should have a better idea of what amount of debt you can comfortably repay.

4. Research and compare business loans

You’ll need to assess what kind of loan is best for your business needs—secured or unsecured and fixed or variable— and what features, fees and (approximate) interest this comes with. Once you’ve nailed down the loan type, it’s time to see how different banks and lenders compare across these factors.

5. Organise your paperwork and apply

Application processes can often be started online and aren’t necessarily the arduous filing task of decades past. But there are still a range of documents lenders will need you to provide from the get-go. This includes:

• Your driver’s licence or other ID to verify your identity
• Your business’s ABN (Australian Business Number)
• Financial documents such as bank account statements, tax returns and projected cash flow for the business (and potentially documentation of your personal finances as well)
• A business plan for how you intend to use the funds

6. Wait for a response

This could take just a few days or many weeks, but be patient. It’s not advisable to apply for numerous loans, as every application appears on your credit score. Numerous applications, especially if they’re unsuccessful, can harm your credit rating which in turn impacts your eligibility for business loans down the track.

If your application is successful, then it’s time to read through the paperwork and ensure you’re happy to proceed.