Getting business financing right is an important part of managing your business. If you’re a start-up business or have tax debt, it’s no good going to a major bank to seek a business loan when their credit policy requires two years of financials and no money owing to the ATO.
Getting the right loan for business comes down to matching your business circumstances with the right lender for your industry, your loan purpose and the speed you need your solution. With so many bank lenders, non-bank lenders, working capital specialists, private lenders and Fintechs making up the lending market it can be hard for business owners to work their way through the various lender policies, industry preferences and navigate lender process. In this article we’ll explain how business financing differs from consumer lending, lift the lid on different business loan types and their application process, and include essential information for startup business loans. After reading our article you will better understand business lending and be able to identify which type of loan suits your business needs.
How is a Business Loan different from a Consumer Loan in Australia?
Consumer loans are covered by the National Consumer Credit Protection Act 2009 (NCCP) and can be for any personal or domestic purpose, including home and investment lending. The NCCP aims to promote responsible lending and obligates lenders to make reasonable inquiries about a consumer’s financial situation and requirements. Consumer loan terms and conditions usually have a section requiring borrowers to declare the loan is not for business purposes.
A business loan is a loan that is specifically for business purposes – business loan contracts and terms will include a declaration the loan is for business purposes only. Accordingly, the NCCP does not apply to business loans and many lender’s loan contracts will make the point that by signing a business loan contract the borrower agrees the NCCP does not apply.
In addition to the differences in regulation, in real terms business loans are more flexible than consumer loans and there are many different types of loans designed to support the varying needs of business. Loan application processes vary between different lenders and reflect a lender’s risk appetite. Whilst business loan regulation does not have the same protection afforded consumers under the NCCP, business owners can access more different forms of finance.
Types of Small Business Loans
Small business bank loans include an ANZ business loan, NAB small business loans, Westpac business loans and Commbank business loans.
Business bank loans for small business lending tend to have the broadest kinds of loan facilities and with the lowest business loan interest rate. The application for business loans for small businesses is often a full-doc application and can take from 2 weeks to 2 months depending on the complexity of the loan.
Loans Secured and Unsecured: Both of these loan types are typically term loans. The main difference between secured and unsecured loans is if the lender requires security. Loans can be secured by property or other assets like vehicles, machinery or your accounts receivable. An unsecured loan relies on a personal guarantee from directors, the business itself and does not require security in the form of property. For this reason, unsecured loans have smaller limits although loans of $1M and even $2M on occasion can be sourced. Secured loans of up to $50M are not uncommon and can be higher still if a borrower’s circumstances and security warrant a loan of that size.
Application processes for secured and unsecured loans can vary depending on the lender but an increasing number are completed through the analysis of a read only bank link from business bank accounts. This makes for a fast approval and many lenders can settle within 24 hours.
Lines of Credit: A business line of credit works in a similar way to a credit card. Businesses can draw on their line of credit, often a business overdraft, up to a predetermined limit. A business line of credit could be secured and there are also unsecured overdrafts.
The benefit of a line of credit is the cashflow support it provides business. They’re also ever green because as funds are paid down, the credit becomes available again up to a borrower’s predetermined limit without having to make a new application.
Applications for unsecured overdrafts with limits up to $500,000 can be completed without documents at some lenders and are normally assessed and settled within 24 hours. Bank lines of credit normally take a few weeks to be approved and set up but can take longer depending on the applicant’s circumstances.
Equipment Finance and Machinery Loans: Equipment finance and machinery loans are loans for business assets. The kinds of assets covered by these loans are broad and relate to any business equipment. Common assets purchased with equipment finance include vehicles, trucks, trailers, construction and manufacturing equipment but also can include very specialised equipment as well.
Equipment finance and machinery loans are normally paid back over 4 or 5 years and are secured by the assets related to the loan. Because equipment finance and machinery loans are secured they usually have lower interest rates and fees than unsecured loans.
Loan applications for equipment finance can be full-doc applications or no-doc applications depending on how long you’ve been in business, the type or age of equipment you’re funding or the lender’s policy. Some of our lenders have no-doc equipment finance applications up to limits of $500,000.
Private loans: Private lending involves borrowing money from providers that are not traditional banks or financial institutions. Private lenders can include private loan companies with their own funding lines, financial planning investment funds, high net worth individuals or a combination of these.
Private lending can include first mortgages, second mortgages and caveat loans. Lenders will assess loan applications based on the business loan to value ratio against the security that’s being offered and an applicant’s exit plan for the loan. The advantage of this type of application process is that it doesn’t require financials and private lenders usually do not credit score applicants, which makes them an ideal bad credit solution.
Private lending is offered to companies and trusts and is not offered to consumers. For this reason private lending is not regulated with the same levels of protections for other kinds of loans. Because of the significant standard between private lenders and the potential for poor experiences we strongly recommend borrowers work with a specialist private lending expert.
Startup Business Loans
Unlike what you might have been told at your major bank, startup businesses can get access to startup business loans. Whilst banks will want to see 2 years of profitable financials and other information you can only provide once you’re an established business, startup businesses can access private lending and equipment finance. Unsecured loan options are available from 3-6 months depending on the revenue you’re making and more options are available once your business has had its first birthday. We’ve had great success in providing a business loan for startup businesses and helping startup businesses purchase assets that have helped their business generate income.
Work With The Right Finance Expert For Your Business Loan
Securing the right finance for your business shouldn’t feel like a trek through the wilderness. Whilst the contrasts between business loans and consumer loans are significant, you can get help to navigate the vast number of business loan options. From the traditional routes of secured and unsecured loans, bank loans, to the flexible lines of credit, equipment finance, and even the lesser-known terrain of private lending, there’s a diverse spectrum of funding to cater to your business circumstances. By matching your business situation with the lender best suited to your industry, purpose and timing, the finance puzzle becomes less daunting.
For expert support and guidance for your business loan contact darkhorsefinancial.com.au here.
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