Small business loans: Everything you need to know
- Jim Yanevski
- Aug 28, 2017
- 2 min read
Updated: Nov 17, 2023
Small business loans can be great when you need to get your brand up and running or cover unexpected expenses. However, it’s useful to understand the difference between the available options before committing to one.
To help you make the right choice, here’s what you need to know about some of the more commonly used business loans.
Line of credit/overdraft
A line of credit involves overdrawing on your business’s bank account up to an amount approved by your financial institution. This is commonly used for short-term capital, or as a source of cash flow to keep operations running smoothly.
Pros:
Flexible – use funds as needed and repay at your own pace.
Allows you to establish a good credit history for future borrowing.
Simpler application process than other loan types.
Cons:
The bigger the overdraft, the bigger the fees.
May incur fees even when not being used.
Bank term loan (secured or unsecured)
A bank term loan is a medium-to-long-term loan option commonly used for purchasing equipment or covering business start-up costs. It involves borrowing form a lender and making regular repayments over an agreed period.
Pros:
Flexible – choose from fixed, variable, split rate or interest-only loans.
Allows you to borrow a larger sum over a longer term, with lower interest rates.
May be able to match the loan term to the life span of the underlying asset.
Cons:
May be subject to borrowing minimums.
Attracts set-up and service fees.
Variable rates can fluctuate, resulting in higher repayments.
Mortgage loan
A mortgage loan can be used to cover most of the upfront costs of purchasing a property for your business. The property is then used as collateral by your lender until you’re able to repay the loan amount and the incurred interest.
Pros:
Flexible – choose from fixed, variable, split rate or interest-only loans.
May offer features such as redraw facilities and no-penalty early repayment.
May be easier to obtain than a bank term loan.
Cons:
May be subject to borrowing minimums.
Attracts set-up and service fees.
Variable rates can fluctuate, resulting in higher repayments.
Lease financing
Used primarily for equipment and vehicle purchases, lease financing means the lender owns the asset and charges the business a hire fee. At the end of the lease agreement, the business may be able to refinance or purchase the asset.
Pros:
Allows you to maximise the use of your working capital.
May entitle you to certain tax deductions.
Cons:
May be more expensive than other types of financing over the long run.
May be subject to hefty early termination fees.
Looking for the right business loan?
Understanding how the different commercial loans vary can help you choose one that best suits your business needs. Make sure you speak with Alecto Finance before making any decisions to ensure your business gets the right level of financial support.
Business Loans: A FAQ for Start-ups and Small Businesses
How to get a business loan?
Do your research: Before you apply for any loan, it's important to do your research and compare interest rates and terms from different lenders. You can use online resources like RateCity or Finder to compare lenders and find the best deal.
Have a strong credit score: Lenders will look at your credit score when they consider your application for a business loan. A good credit score will show that you are a reliable borrower and that you are likely to repay the loan.
Be prepared to provide financial documentation: Lenders will want to see financial documentation when you apply for a business loan. This will help them to assess your ability to repay the loan. Be prepared to provide things like your business tax returns, profit and loss statements, and bank statements.
Have a clear plan for how you will use the loan: Lenders want to know that you have a clear plan for how you will use the loan. They want to make sure that you are not just using it to cover personal expenses. Be prepared to explain how the loan will help you to grow your business.
Consider working with a finance broker: A finance broker can help you find the right business loan for your needs and negotiate with lenders on your behalf. This can save you time and hassle and help you get the best possible interest rate and terms.
How do business loans work?
Business loans are a type of loan that is specifically designed for businesses. They can be used to finance a variety of business expenses, such as purchasing equipment, expanding operations, or covering working capital needs.
Business loans typically have higher interest rates than personal loans, but they may offer longer repayment terms. The terms of a business loan will vary depending on the lender and the borrower's creditworthiness.
How to apply for a business loan?
To apply for a business loan, you will need to provide the lender with certain information, such as your business's financial statements, your personal credit report, and your business plan. You may also need to provide collateral, such as a business asset or personal property.
The lender will then review your application and decide whether to approve your loan. If your loan is approved, you will be required to sign a promissory note, which is a legal document that outlines the terms of your loan.
Can I get a business loan?
Whether or not you can get a business loan will depend on a number of factors, including your business's financial health, your personal credit score, and the lender's requirements.
If you are unsure whether or not you qualify for a business loan, you can speak to our finance brokers. We will be able to assess your situation and give you an idea of your chances of approval.
How much deposit do I need for a business loan?
The amount of deposit you need for a business loan will vary depending on the lender and the type of loan you are applying for. Some lenders may require no deposit, while others may require a deposit of 20% or more.
If you are able to make a larger deposit, you may be able to get a lower interest rate on your loan.
How much credit do I need for a business loan?
The minimum credit score required for a business loan in Australia will vary depending on the lender and the type of loan you are applying for. However, most lenders will require a credit score of at least 600 for a standard business loan. If you have a credit score below 600, you may still be able to get a business loan, but you may have to pay a higher interest rate or provide collateral.
What do you need for a business loan in Australia?
The requirements for a business loan in Australia will vary depending on the lender and the type of loan you are applying for. However, there are some general requirements that you will need to meet in order to be approved for a business loan.
A business plan: A business plan is a document that outlines your business goals, strategies, and financial projections. Lenders will want to see a business plan in order to assess your business's viability and potential for success.
Financial statements: Lenders will want to see your business's financial statements, such as your income statement, balance sheet, and cash flow statement. These statements will help lenders to assess your business's financial health and track record.
Personal credit report: Lenders will also want to see your personal credit report. This report will show your credit history and any outstanding debts.
Collateral: Lenders may require you to provide collateral for your loan. Collateral is an asset that you can pledge to the lender in case you default on your loan.
Good credit score: A good credit score will help you to get approved for a business loan and to get a lower interest rate.
Want to learn more? Talk to our brokers today!
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