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All you need to know about business loans

Running a business can be incredibly liberating but it also creates a unique set of challenges. Whether you work solo or with a large team, you’ll undoubtedly need to make critical choices about the best places to invest your time, energy and money.

One of the biggest decisions you need to make is how to best manage your cashflow. Cashflow is one of the most critical factors to the success of any business and a stress factor for many Australian business owners. A business loan can help you navigate this and many other challenges you face as your business grows.

But how do you know what type of business loan is right for you? There are a lot of loan options available for businesses these days, which can make the process seem confusing. To get started, you’ll need to consider several factors including the size of your business, how long you’ve been running, your industry, financial health and more.

We want to help make your business loan decisions a little easier. That’s why we’ve compiled all of the most important information you need to know about business loans.

With the right information, you can then get your business on the fast track for success.

Popular Loans
Loan by Business Type
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Long Term Business Loan

This is likely what comes to mind when you think of business loans. A long term loan is a lump sum, plus interest that you repay in regular installments over a set period of time. It is typically paid over a time period of 12 months or longer but can run for as long as 30 years. Long term loans are available from traditional banks as well as online lenders.

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Short Term Business Loan

Short term loans are similar to long term loans but are repaid over a shorter period of time, usually around 3 to 18 months. With a short term loan, businesses can access the capital they need more quickly, often within 24 hours. Businesses can also apply and receive approval more quickly as online lenders offer greater flexibility than traditional banks.

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Business Line of Credit

A business line of credit enables you to borrow a certain amount of capital annually. The amount is typically based on accounts receivable and current inventory but usually less than $300,000. A business line of credit can be helpful in managing cash flow shortages but should not be used for long-term investments or major purchases.

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Invoice Financing

Your unpaid invoices are valuable. Invoice financing enables you to use your outstanding invoices as collateral so that you can receive the money you need without waiting on overdue payments from your customers.

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Equipment Financing

If you need to purchase expensive equipment, you can use it as collateral to get a loan and purchase it outright, without hurting your bottom line.

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Merchant Cash Advance

With a merchant cash advance, a lender purchases a business’s future cash flow, so future transactions are used to repay the borrowed funds, in addition to a fee charged by the lender for the loan product.

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Business Credit Card

Business credit cards work similarly to personal credit cards but are design for work spending.

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Business Overdraft

A business overdraft allows a business to access more cash than they have available in their account to increase their cashflow. Overdrafts can offer an extra layer of protection for your business.

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Business Microloan

Microloans are usually reserved for amounts smaller than term loans and have become a popular source of funding for startups.

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Hospitality Business Loans

Running a hospitality business can be challenging. From purchasing additional equipment and paying staff wages, to ensuring you’re effectively marketing your company to attract new customers

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Small Business Loans

Small business loans can provide SMEs with the safety net they need to flourish. But what type of small business loan is right for you? And how can you gain quick and easy access to funds?

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Startups Loans

There are many different funding option that may be available to startups, from traditional loans to investors and crowdfunding.

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Aboriginal & Indigenous Loans

Unique loan options, grants and other business support through government and private organisations available specifically to Aboriginal and Indigenous businesses

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Professional Loans

Professional loans, also called industry-specific loans, are designed for the needs of businesses in certain industries.

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  • Long Term Loan
    Established small business
    Business financing an expansion or renovation
    Business refinancing
    Learn more about long term loans
  • Short Term Loans
    Businesses who need fast funding
    For accounts payable or inventory needs
    A business who needs working capital or overcoming financial setbacks
    Learn more about short term loans
  • Business Line of Credit
    Businesses looking to build their credit
    Who wants the flexibility of not having a set monthly payment
    Businesses able to repay promptly as the interest and late fees compound quickly
    Learn more about business line of credit
  • Invoice Financing
    Businesses that are struggling with cash flow issues as a result of late payments.
    For accounts payable or stock needs
    Learn more about incoice financing
  • Equipment Financing
    Businesses looking to invest in expensive and/or long term equipment
    To improve operations or fast track growth.
    Learn more about equipment financing
  • Merchant Cash Advance
    Businesses such as retailers receiving a high proportion of payments via credit card or EFTPOS
    Shops, cafés and restaurants or those struggling to manage cash flow
    Learn more about merchant cash advance
  • Business Overdraft
    Businesses who are looking for a bit of extra protection to ensure they don’t overdraw their account.
    Learn more about business overdraft
  • Business Credit Card
    Businesses of all shapes and sizes that have an ABN.
    Businesses may also like to take advantage of credit card perks and loyalty programs.
    Learn more about business credit card
  • Business Microloan
    Entrepreneurs or those looking to launch and grow a small business
    Covering start-up costs or other expenses.
    Learn more about business microloans
  • Professional Loan
    Professionals in specific industries
    Covering costs and other expenses for physicians, dentists, attorneys, accountants, veterinarians and more
    Learn more professional loans
  • Startup Loan
    Startups that are looking to develop products or services
    Launch or enter a new growth phase.
    Learn more about startup loans
  • Aboriginal & Indigenous Loan
    Aboriginal and Indigenous business owners
    Learn more about Aboriginal and indigenous loans

Secured vs Unsecured Loans - What's the difference?

The most important thing to know about a loan is whether it is secured or unsecured. With a secured business loan, financing is secured by a valuable asset that you own (such as accounts receivable, a home or equipment) as collateral. With an unsecured loan, you are not required to provide an asset as collateral.

There are pros and cons to both loan types and knowing which one is right for your business depends on your individual circumstances and business goals. Here is a quick breakdown of the key differences:

Secured Loans Unsecured Loans
Collateral Collateral required (see examples of what can be used) No collateral required
Interest rates Seen as less risky for lenders which means a lower interest rate, usually 2.5% to 13%. Often higher than a secured loan, usually 7% to 30%.
Loan amounts Higher loan amounts, could range from $300,000 to $50,000,000 Usually less than $50,000 but can be as high as $500,000
Loan terms Typically, longer terms, 12 months to up to 30 years Typically, shorter terms, 3 to 18 months
Approval Times Stricter requirements, usually takes 3 to 4 weeks Fast application, can be approved in as little as 24 hours
How applicants are assessed
  • Value of the asset used as collateral
  • Credit history
  • Cash flow history / projections
  • Business plan
  • Tax returns
  • Other personal and business financials and more
  • Annual turnover
  • Credit history
  • Length of time in business
  • Loan amount and purpose
  • Other requirements depending on lender
Best for:
  • Established businesses
  • Financing an expansion, renovations or businesses that are refinancing
  • Businesses with strong credit history
  • Businesses that need funds quickly
  • Businesses operating for less than two years
  • Seasonal or high-volume, small dollar sales businesses
  • Businesses with less-than-perfect credit history
Watch out for:
  • If you are unable to repay a secured loan, the lender can use the collateralised assets to recoup their losses.
  • Some lenders include hidden fees or charge for early repayments
  • Higher interest rates
  • Some lenders include hidden costs and fees
  • Some lenders charge fees for early repayment

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What Lenders Look for in Your Business Loan Application

For many small businesses, applying for a loan can be stressful. You may need the funds quickly to avoid running into cashflow troubles or perhaps, the funding will play a crucial role in growing your business. But no business owner wants to waste their valuable time and resources applying for a loan they might not receive.

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10 Mistakes Small Businesses Make on their Loan Application

Small business owners usually have a lot on their plate. Preparing a loan application takes valuable time away from your business so you want to be sure to get it right, the first time. Mistakes on your application can cost your business lots of time and of course, much-needed capital.

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How to Write an Effective Business Plan

What’s the first thing that comes to mind when you think of a business plan? You might imagine a lengthy document that takes weeks to pull together or prevents you from focusing on your day-to-day responsibilities. The reality, however, is that creating a business plan isn’t nearly as daunting as it first seems.

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Plan Your Business Expansion

One of the main reasons why SMEs seek a business loan is to assist with business expansion, and this trend doesn’t seem to be slowing down any time soon.

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Business Loans - Secured vs. Unsecured

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Applying for a business loan
How to get a business loan

During these uncertain times, it is paramount to be able to judge and classify whether something is good or not for your business. We wanted to give you an overview on how to get a business loan which is right for your business. Now, there are plenty of options out there to secure funding for your business. Which one is right for you? Every year, there are 1,000s of small-medium businesses in Australia looking for some sort of fundings. Deciding which funding is good for you is the tricky part. First of all, understanding how business loans work and the options out there, will guide you in deciding which one you should pursue. But let’s start from the beginning.

Two men discussing business loans on a computer
What exactly is a small business loan?

If you had to describe it to a newby, we would put it this way: small business loan is a financing provided by a lender to a small-medium company.

The company owes the lender an interest and may repay the principal on a given schedule over a certain period of time.

However, there are many factors like your credit history, the years you have been trading, and your current debts that affect your interest rates, fees and terms, not to mention our current financial instability which may have an impact on business forecasts.

The criteria to get a business loan

You’ll certainly apply for a small business loan to solve your cash flow issues and get the capital you need to operate your business efficiently.

Although, you need to consider the minimum criteria. Most of the lenders consider the following qualifications:

  1. Time in Business
    In general, you are needed to be in the business for either 1 year or 6 months. For instance, Lumi accepts trading for 6 months.
  2. Credit Score
    Actually, it is important to consider the history of your credits. However, the minimum score is normally based on a number of factors such as current financial trends and industry.
  3. Yearly Revenue
    It is important to note that most traditional lenders need you to have annual revenue of at least between $250,000 and $50,000. Meanwhile, microlenders might provide short-term loans at even $2,500. However, before you apply for a specific loand, make sure that the revenue threshold is exceeded by your business.
Needed Amount of Money

Generally, when you meet potential lenders, ensure that you have a certain amount of money that you would want to borrow. In fact, ensure that this number reflects the real amount of money that you need for achieving your goals and that you have the capability of paying the loan off.

Types of Lenders

Usually, when people think of a lender, they picture traditional types including financial organizations, credit unions, and banks but there are other kinds of business financing that can be considered for funding your business including:

  • Peer to Peer Lending
  • Merchant Cash Lending
  • Crowdfunding
  • Borrowing from family and friends
Loan Terms

Now, as you compare different options, you should consider the loan terms of each institution or the total time that the loan will last or stay if you make necessary payments on a monthly basis. In addition, you should look for additional conditions and terms listed under the terms of the loan. Terms of loans might vary by the type of loan and lender, from several years to a few months.

Repayment

You are expected, in most of the cases, to pay back a loan for your business over the loan term with a monthly payment. In fact, the amount that you will pay with each installment seems to depend on the borrowed amount, credit history, lender, and type of loan etc. Failure in repaying loan is recognized as a default and it can result in steep consequences for the creditworthiness of a firm.

Interest

Normally, with a traditional business loan, capital is provided by a lender to a business, and the amount borrowed by the business is repaid with interest over the term of loan. Rates of interest fluctuated constantly depending on the economy and they also seem to depend on the kind of loan that you need, qualifying factors, and the lender type.

Types of Small Business Loans

Actually, there are several types of lenders and loans, and understanding the differences among them can be difficult. Now, if you are considering a specific loan and you do not know where to begin, this guide will assist you in determining which loan is right for your small business.

  • Small business line of credit
    It is a common financing option and it operates as a credit card. Money can be borrowed up to a specific amount and interest has to be paid. As long as the credit limit is not crossed, funds can be borrowed and they can be repaid accordingly. It is ideal for businesses needing short-term capital to utilize a growth opportunity, offset seasonal fluctuations, and bridge a gap.
  • Invoice Factoring (or Invoice Financing)
    Generally, it is also referred to as invoice financing and accounts receivable financing. In this process, outstanding invoices are sold to a lender in exchange for advancements on the money that are owed by your customers and clients. Factoring is often used for improving cash flow and securing funds on different invoices. It is ideal for all businesses with longer terms of receivable payment, typically between 60 and 30 days. It is a good method for receiving money quickly if you want to improve cash flow.
  • Asset Based Loan
    This kind of loan is created for helping businesses in securing financing on the basis of collateral such as accounts receivable or inventory. Generally, these loans have easy qualifications and businesses get quick access to their capital for eliminating short-term financial needs. It is ideal for businesses that require capital for keeping typical business processes functioning and can utilize their resources as collateral resources.
  • Small Business Term Loans
    These loans are a type of financing in the short-term that is aimed at filling a specific need for helping the business in achieving growth. For instance, if an update is required, additional employees can be hired or expansion can be practiced, the financial gap can be bridged by a term loan for reaching there. As it is suggested by the name, this loan type has a fixed range and it ranges from years to a few months. It is ideal for businesses that require upfront cash for filling a financial gap for completing a certain task like opening a new branch or recruiting seasonal staff.
  • Merchant Cash Advance
    It is also referred to as cash advantage and it is funded from a specific provider on the basis of future credit card sales of a business. The advance has to be repaid with interest on the basis of credit card sales’ percentage until it is paid fully. As merchant cash advance is paid through your credit card receivables’ percentage, there is no specific payment term. Instead, the ability of repaying depends on how many sales are you making. It is ideal for all businesses depending heavily on transactions of credit card including restaurants and retail storefronts. It does not need to make manual payments for repaying advance or have an incredible credit score.
  • SBA Loans
    It can be utilized for any purpose virtually. It is a low-interest and long-term loan that is guaranteed partially by the government, particularly the Small Business Administration. Although the SBA does not directly loan the money, the risk is reduced by it for the lender. Sometimes SBA loans are tougher to qualify for compared to other loans. If a business succeeds in qualifying, the approval process can take a long time for receiving funds. It is ideal for businesses that have been operating for at least 2 years, don’t have other financing options, and have a decent credit score.
Business loan options and practices to avoid

At present, there are several funding options and alternative lenders that can get you the necessary capital for growing your business. Still, not every funding option is equal. Although traditional lenders have some strict requirements, they are trusted and established entities that ultimately require your business venture to achieve success. If your business, in many cases, qualifies for a specific traditional loan, it is understandable to consider this funding method.

However, if your business does not qualify for it, clever financing options and alternative lenders can fund your business but you need to be careful. Following are what you should avoid and some alternative financing options:

  • Business Credit Cards
    Actually, there are several reasons why you should get a credit card. A business credit card is capable of helping you in building business credit and it does not need collateral. But if you are not careful, the credit score can be hurt and more debt can be accrued quickly. This option can grow your business but it can also sink it if you’re not careful.
  • Invoice Factoring (or Invoice Financing)
    Similarly to a business credit card, it is an incredible solution for different businesses in certain situations. There are several benefits of factoring. For instance, cash flow problems are mitigated by it, it has a quick process of application, and the collections process can also be facilitated by factoring firms. But interest fees can quickly add up and if the customer does not pay, the advance will have to be paid.
  • Merchant Cash Advance
    Normally, if regular payment is received by your business through credit cards, you can be provided with quick funding by merchant cash without collateral or monthly installments, even if you do not possess a solid credit score. But they are quite expensive and considering another lending score can help you save money.
Small Business Loan Requirements

In spite of the business loan that you generally pursue, the requirements of getting approved and qualifying are often similar. Following are some requirements:

  1. Personal and business credit scores
    In general, if your business has a history of credits, some loan types will need lenders to perform a credit check on the firm or business. If your business has an incredible history of credits, you will have an easier time in getting approved. In addition, borrowing money’s cost will also be lower and the chances of securing favorable terms of repayment will rise.

    However, if your business does not have a history of credits, lenders will observe the score of your personal credit and will secure a guarantee that you will be paying the debt back with your personal assets if payment is not made by the business.

    Normally, the best method of securing a loan is building strong business credit and personal score. Many lenders will consider both when choosing to extend the financing and terms relating to it.
  2. Credit Reports
    Lenders will also be looking at credit reports to determine if you have bankruptcies, missed payments, accounts, or foreclosures. Now, if your credit score is not high as you would like, you might still be able to have a loan if your credit report is clear of red flags.
  3. Time in Business
    Normally, many lenders are cautious of offering specific loan types to new businesses because they do not have an indicator of risk. Many business loans including lines of credit and SBA loans need a business to operate for at least two years. Meanwhile, other financing types including invoice factoring and merchant cash advances are available to new businesses or firms as well.
  4. Business Finances and Collateral
    Generally, many lenders need detailed information about the business’s financial situation and they will ask for future projections, loss and profit statements, cash flow statements etc. If your business finances are strong, you will have an increased likelihood of being approved for a loan. Several business loans need collateral, particularly if the lender deems the business risky. Usually, a lender will be looking for a physical asset including real estate, inventory, or equipment.
  5. Cash Flow and Annual Revenue
    Actually, lenders will be looking at your cash flow and annual revenue for determining whether you will be capable of repaying a loan in the specified time period. Now, even if you have an incredible credit score, you will not be provided with capital if a lender does not think that you can afford the terms of repayment.
  6. Loan Amount
    Lastly, business lenders will be considering how much money you require and they will identify the risk. Actually, if you possess a subpar credit score or you are a new business, you might be approved for less than what you desired. But entering the market with a small loan is normally an incredible opportunity of proving your creditworthiness and creating a strong relationship with the specific lender.

    Normally, you do not have to worry about requesting for more than the amount that you quality for. Lenders have the desire of working with companies. Thus, they will often offer a smaller amount of money for doing business. You need to make reasonable expectations but you should not stress on asking for or requesting too much.
How to Apply for a Business Loan

It is true that applying for a loan can be difficult. However, it can be straightforward if you have the necessary documents with you.

  1. Business Plan
    In general, many business lenders do not need your business plan’s copy. Still, it is a decent practice to have a thorough business plan prepared. This plan should involve your plans for borrowing some money, your intent of repaying the loan, and its use.
  2. Bank and Financial Statements
    Generally, a key set of documents to have is your financial statements and bank documents. Lenders have the desire of knowing how much money is withdrawn ad deposited from the account on monthly basis and how money is being utilized. Financial statements must have cash flow statements, loss and profit statements, and other forms that are requested.
  3. Tax Returns
    You will have to offer personal tax returns for pass-through entities including partnerships and sole proprietorships. You will have to offer a return if a tax return is filed by the business.
  4. Employer Identification Number
    In general, your EIN is a number comprising of eight-digits that is assigned by the IRS. It is recognized as the Federal Tax Identification Number or Employer Identification Number. An EIN is required by banks for opening a bank account for your business.
  5. Proof of Collateral
    If you have to deliver collateral for securing a loan, you will have to deliver proof that you have something of enough or sufficient value including equipment or real estate.
How to increase the odds of a small business loan approval

Although getting approved for a loan is tough, it is not impossible. Following are some steps for improving your approval chances:

  • Improve Your Credit Score
    Even though not every loan includes an extensive or thorough check on credit, many tend to do. The most likely method of getting approved for a loan is concerned with improving your credit. You should remember that bad credit makes it difficult to secure a loan and it also makes money more costly and expensive when you are at that point. You should ensure that your business is registered with three credit reporting agencies including Equifax, Experian, and Dun & Bradstreet on their websites for official establishing and tracking your credit.

    Generally, if you apply for a specific amount and you are given a counteroffer, you should consider taking the offer establishing a relationship with the respective lender. Moreover, you should be prudent with line credit expenses or business credit card, and you should pay off debt quickly.
  • Provide a Personal Financial Summary
    Prepare documentation of your financials before speaking with the lender. These financials include investments, vehicles, and real estate. In addition, ensure to provide information regarding your liabilities such as credit card debt, loans, and mortgages. When it comes to your liabilities, be upfront.
  • Know Your Small Business Loan Options
    It takes research and time to be approved for a loan for your small business. Before pursuing a loan, ensure to have a better comprehension of your business, type of financing, and your industry.

    If you reached this stage you should have all the information required to apply for a business loan. Good luck with your search.

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