How Much Will a Small Business Loan Cost? 

For a business owner, operating a business comes with its fair share of challenges. The most significant hurdle is often financial.

Small business owners frequently secure finance either from a specialist lender or a traditional business loan. Either way, these additional funds can be helpful to purchase inventory, hire staff, or cover unexpected expenses.

Read here to find out the cost for small business loan in Australia. 

What Is a Small Business Loan?

When you check your business financials and discover you need additional funds, you may want to take out a business loan. Business loans are offered by banks, credit unions, online lenders, and other financial institutions.

These financial injections can be used for whatever business purpose. However, most business owners use these funds for business expansion projects or to purchase commercial property, equipment, inventory, and other assets.

Business loans are repayable with interest and fees over a fixed term usually between 1 month and 5 years.

To qualify for a business loan in Australia, your business should have operated for at least six months, with a minimum monthly revenue of $5,000. Typically, you can borrow money relative to your revenue. Some business lenders can approve loans greater than $300,000 depending on their assessment. However, in these cases, you’ll usually have to choose a secured loan.

Bear in mind that each lender has their own lending criteria so make sure you compare them to find the right fit for your business. 

Types of Small Business Loans

There are many business finance options that can help you manage your day-to-day operations.

Ongoing credit facilities, invoice finance, or factoring have become a trend nowadays. However, small business loans are always worth considering.

Before you compare business loans either from the bank or a specialist online lender, learn about the two general types of small business loans first.

Secured Business Loan

Secured finance requires the borrower to provide collateral, usually property, before securing a loan. The collateral acts as a guarantee for the lender, offering less risk and allowing them to give competitive interest rates and higher loan amounts.

A business asset, residential property, or commercial property is often used as asset security. If the borrower defaults on their loan repayments, the lender can use the collateral to recover their losses.

The cost for a small business loan here is covered by the collateral.

Unsecured Business Loan

An unsecured business loan typically doesn’t require collateral like residential property or other business assets. Instead, your financial situation will determine whether or not a loan will be granted to you.

Since there’s no collateral involved, unsecured loans are typically riskier. Lenders will typically give a higher interest rate or lower borrowing limit. A lower credit score may affect your chances of approval.

However, the application process for an unsecured loan is typically straightforward. These are suitable for businesses seeking smaller loan amounts. The main cost for a small business loan that’s unsecured comes from the accrued interest.

Small Business Loan Eligibility Requirements

To speed up the approval process of your business loan application, make sure to meet the specific eligibility criteria. If you apply online, you’ll typically have to provide bank statements.

Generally, a business lending specialist will look for the following eligibility requirements for standard business loans.

• Australian Business Number
• Goods and Services Tax Registration
• Proof of Australian citizenship or permanent residency
• Personal and business credit history of the applicant
• Details of your business, including the industry your business operates in, location, and structure
• Business revenue and cash flow reports
• Proof of your business operating for a minimum of at least six months
• A business plan outlining the purpose of the loan, expected ROI, and repayment strategy
• Business bank statements, including a business balance sheet

Calculating the Cost of a Small Business Loan

Here’s a basic formula to help you estimate the cost for small business loan.

Total Repayment = Loan Amount + (Loan Amount × Interest Rate × Loan Term in years)

• Loan Amount: This is the total amount you’re borrowing from the lender. Also often referred to as principal.
• Interest Rate: The interest rate, also known as the annual percentage rate (APR) expressed as a decimal. For example, a yearly interest rate of 10% is 0.10.
• Loan Term: The duration of the loan.

Additionally, consider application fees, processing fees, or early repayment fees, which increase the total costs for a small business loan.

Small Business Loan Interest Rates Explained

Considering business loan options can be utilised for expanding your business or managing cash flow. That said, it’s crucial to understand the cost for small business loans, especially when it comes to interest rates.

In Australia, it’s common to have a fixed or variable rate. Some lenders might even offer a combination of both.

Fixed Rate

A fixed business loan interest rate means your interest rate remains constant throughout the loan term. You have fixed repayments monthly, making it easier to plan and manage finances.

Variable Rate

A variable rate fluctuates over time in response to market conditions. While these offer lower initial payments and the potential to benefit from rate decreases, they also pose the risk of increased payments if interest rates rise.

Combination

Some business loan brokers offer a combination of fixed and variable rates. Businesses can enjoy fixed rates for a specific agreed period, and then switch to variable interest charges for the remaining loan balance.

This hybrid approach provides a balance between stability and potential cost savings, especially if you anticipate fluctuations in the market.

Other Factors Affecting the Loan Cost

Other factors can significantly impact the overall cost for small business loans. These include the following.

Loan Term

This refers to your loan’s repayment period. You can benefit from lower monthly payments with longer loan terms. However, you will likely incur higher overall interest costs. Shorter loan terms mean higher monthly payments but lower total interest expenses.

You may want to choose a term that aligns with your current financial situation, capacity to repay and long-term goals. 

Lender’s Early Repayment Policies

Many lenders have specific policies if you repay the loan early. Generous lenders may allow borrowers to repay the loan before the term ends, without additional fees. This can help you save on interest costs.

However, certain lenders might charge prepayment fees or limit the benefits of early repayment. It’s essential to clarify these policies before signing the loan agreement to avoid incurring additional expenses.

Principal Amount

The loan principal is the total loan amount you borrow from the lender. Borrowing more money increases your monthly payments and the total interest paid over the loan term.

To avoid unnecessary interest expenses, evaluate your business needs carefully and borrow only the amount that is necessary.

Conclusion

Applying for a business loan can seem daunting but remember, conducting thorough research, understanding the terms of the loan agreement, and seeking professional assistance if necessary are essential steps in making informed borrowing decisions.

We hope this article has helped you understand the factors that add up to the cost for a small business loan.