Commercial lending in Australia covers a broad range of lending solutions.
When you consider commercial lending options available in Australia you might think of a business overdraft or finance for purchasing commercial property but commercial lending also covers investment structures as well as a range of credit facilities designed to be solutions to a range of business needs.
Other examples of business loans could be equipment finance, unsecured loans, lines of credit that aid cash flow and working capital facilities such as invoice finance, trade and import finance.
Commercial lending is further defined by the traditional offerings of our major banks, their changing client preferences and then the other lending institutions who have structured their offerings to fill the gaps left by the banks with branches.
How will I know which kind of bank I should be using for my commercial loan?
Major banks typically wish to deal the strongest businesses.
This means they commonly want to see 2 years of financials from a business applicant demonstrating a consistently profitable business with no ATO debt. These banks will restrict certain industries and have preferences for others as industries experience growth and decline phases or government intervention and regulation.
Whilst there are commonalities between the banks preferences they constantly change which is why it’s important to use a broker experienced in commercial lending.
All of this shouldn’t be a reason to exclude the major banks. If your business and finance need is a match for a major bank they still offer a broad range of products and compete with each other to offer the lowest rates for their desired customer type.
Common business loan types
Overdrafts and Lines of Credit – The well know business overdraft is a line of credit usually secured by property. These are offered by a range of business lenders including the major banks and a number of other providers. These there are a number of Unsecured Lines of Credit that function in a similar way but don’t require property security. The process for application can often be done in a matter of minutes with facilities connected same or next day compared to the weeks or months turnaround time that is often true of major banks.
Asset finance and Equipment finance – asset and equipment finance is for the purchase of business equipment secured with a chattel mortgage. The equipment being financed is the security for the loan. Being a secured loan, equipment finance have low interest rates and a loan term that of 3, 4 or 5 years is typical. Many equipment finance loans can be assessed same day, approved and settled very quickly.
Sale and Leaseback – a Sale and Leaseback is an equipment finance loan type used to raise capital against the equity in your equipment or machinery. If you own a vehicle, a machine or something else of value in your business, you can borrow against that to raise capital. The benefit of this is that the rates are lower because the loan will be secured against your equipment. The loan term will be longer compared to other cash flow loans which means your repayments will be less than an unsecured loan.
Unsecured loans & Lines of Credit – Unsecured loans are familiar to many business owners. These loan types are great when fast finance is required as applications take minutes and it’s not uncommon for approval and funds in your account to occur in the same day. Unsecured loans attract a higher interest rate as this reflects the greater risk the lender takes on. For this reason, unsecured loans are a great option when you need fast finance to take advantage of an opportunity or take care of a problem.
Fitout Finance – Fitout finance is a business loan for the purposes of completing a commercial fitout. In addition to building works you can also use fitout finance for soft costs like plumbing and electrical. The benefit of this business loan is it allows the works to be completed upfront and then paid back over a term of 4 or 5 years.
Invoice Finance – Invoice finance, also known as Debtor Finance or Factoring, is a credit facility linked to your accounts receivable. Invoice finance aids cash flow by allowing you to claim the value of your invoice the day you write it to your customer. The lender provides credit secured by your invoice and when your customer pays the invoice it clears any credit you have used. This benefits business by bringing revenue recognition forward allowing you to pay wages and other cost inputs while you continue growing your business.
Trade and Import Finance – Trade and Import Finance is a line of credit for the purchase of material supplies, including petrol. With a facility in place you can use the credit to pay suppliers and receive 90 – 180 days to pay the money back. This is particularly useful for importers and wholesalers so they don’t have to dip into cash reserves as they move through their sales cycle.
Development Finance – In time’s past getting small residential developments funded by your major bank or home loan lender wasn’t too difficult. These days it’s considered a commercial loan type and most banks are not prepared to venture into this space. There are specialist lenders who are comfortable funding developments and if you have an experienced builder working to a feasibility study demonstrating strong enough funding you should be approved.
Private Lending – Private lending is a no or low document solution available to business. Private lenders could be funded by wealthy individuals, investor groups, superannuation funds, or even other lenders and are secured by property or high value assets like luxury cars. These loans are unregulated and there is significant variation in both rates and fees and even intent to fund. Whilst Private Loans can be an excellent resource with flexible features because of their unregulated nature it is strongly recommended using a broker and lender who can demonstrate strong experience in settling these kinds of loans before signing letters of offer or paying fees.