Maximising Business Credit – Your Business Loan Guide

Key Takeouts From This Article 

• Business loans can be used to fund growth, meet working capital needs, invest in equipment and bridge revenue gaps.
• There are a range of loan providers that fill all business credit needs.
• Different loan types exist to support business owners with different circumstances.
• Business lines of credit are typically best to manage cash flow and working capital.  
• Term loans are best for funding investments in the business.
• Equipment finance can be used to acquire assets for the business and you can access equity in equipment to raise capital or consolidate debts.

The Purpose of Business Loans

Expansion and growth opportunities:

For many businesses, growth often requires an influx of capital. Whether it’s opening a new site, launching a new product, or entering a new market, the funds from a business loan can provide the capital to support ambition to become reality. Think of a trucking company wanting to open a second depot in a key location or a food supplier seeking to expand their offerings – in both scenarios business loans can play a pivotal role.

Meeting working capital needs:

Working capital is the funds necessary for daily operations such as paying wages, replenishing stock, and covering short-term debts – it is crucial to maintaining business liquidity. However, there can be times, especially for seasonal businesses, when cash flow isn’t consistent. A long term business loan can bridge the gaps, ensuring the companies can remain operational during lean periods.

Investment in equipment and infrastructure:

As technology evolves and industries progress, the need to update or purchase new equipment becomes evident. Whether it’s a civil construction company needing to expand capability with a new excavator, a manufacturing business needing a new CNC machine, securing a long term business loan can help cover these significant expenses without draining a business’s cash reserves.

Bridging operational expenses and revenue gaps:

There are moments in a business’s lifecycle when operational costs might surpass incoming revenue, especially during initial stages, periods of high growth or through a restructure. Business loans can act as a safety net during these times, ensuring operations don’t come to a halt due to temporary financial strains.

Business Loan Providers

Major banks:

For decades, the major banks – ANZ, CBA, NAB and Westpac – have been the go-to institutions for business loans. Whilst much maligned by the media the banks have the broadest business loan products and typically offer them at the lowest rates.  While not a big bank we’d include Macquarie in this list for the expertise in lending to professional services. However, securing a loan from a bank often requires a longer application process, with detailed due diligence and extensive documentation.  This can make bank loan applications unsuitable for business owners who need a solution fast.

Second tier business lenders:

The Australian business lending marketplace has a range of second tier lenders.  The likes of Judo Bank, Pepper, Liberty and La Trobe Financial have filled this space looking to fill the gap between banks and the specialised fintechs. While many of their products work the same as major banks there’s often subtle differences in lending policy – like accepting applications from businesses with tax debt – that make them the right solution for business owners who fall outside of major bank lending policy.

Take care of your ATO debt with a Tax Debt Loan

Fintechs and Alternative lenders:

With the rise of digital technology, the lending landscape has seen the emergence of alternative lenders. These online platforms fintech companies like unsecured lenders use offer fast loan approvals, simplified application processes, and sometimes even tailor-made loan products for niche industries. The allure of alternative lenders lies in their ability to make financing accessible, especially for business owners needing funds within a few days. However, rates and fees and lender standards vary significantly.  When looking at an alternative lending solution, including private lenders, we strongly recommend you select a lender who has a proven track record of settling the funds you need, to your industry segment and a good reputation for dealing fairly with disputes.  If you’re not confident to select the right lender you should use a finance expert with experience in alternative lenders.

Loan Eligibility and Requirements

Importance of credit scoring and its calculation:

Credit scoring essentially gauges a borrower’s likelihood to repay the loan. Lenders use credit scores, derived from past borrowing history, repayment records, and existing debts, to assess this along with a business’ financial data. An Equifax Credit Score of 600 is a benchmark of creditworthiness many lenders consider to be a good score.

Role of business revenue, age of business, and loan purpose:

Lenders prefer businesses with steady revenues as it implies stable income to repay the loan. Additionally, the longer a business has been operational, the more data lenders have to evaluate its stability. The purpose of the loan is equally vital; lenders favour loan purposes that directly contribute to business growth, but there are solutions for working capital and those businesses that need a helping hand.

Tips on preparing your business for loan eligibility checks:

• Know your credit score.
• Have your management accounts and lodgements up to date.
• Have a printout of a detailed summary of your ATO ITA and ICA tax portals with a date range covering the last 12 months.
• Provide requested information promptly as this builds confidence with the lender.
• Have a cash flow forecast for the next 12 months.

Types of Business Loans

Secured Loans

Secured loans are loans backed by security – what our American friends would call collateral.  Most people obviously think of property when they think of a secured loan but there are many more security options for a business loan.  Equipment Finance could be secured by vehicles, machinery, equipment and other assets and Invoice Finance is a line of credit secured by your invoices.  Secured loans are offered by the major banks, second tier lenders, fintechs and private lenders.  In fact private loans are almost always short term property loans with an application focussed on understanding the security value.

Pro tip: reputable private lenders, even those providing second mortgages, will also check you have a valid strategy to exit the loan.
Secured loans provide a lender an additional exit from a loan should a borrower be unable to make repayments and default on the loan.  This extra protection for the lender provided by the security makes the loan less risky for a lender.  The benefit to the borrower is this reduction in risk for the lender means secured loans typically have lower interest rates than other loans and can be offered over longer terms.

Pro tip: reputable private lenders, even those providing second mortgages, will also check you have a valid strategy to exit the loan.

Secured loans provide a lender an additional exit from a loan should a borrower be unable to make repayments and default on the loan.  This extra protection for the lender provided by the security makes the loan less risky for a lender.  The benefit to the borrower is this reduction in risk for the lender means secured loans typically have lower interest rates than other loans and can be offered over longer terms.

Unsecured Loans

Unsecured loans come in all shapes and sizes and suit borrowers who qualify for major bank unsecured loans right through to those with very bad credit.  You can even get unsecured overdrafts for business.  

The best unsecured lenders offer loan terms that can go for years with single digit rates.  At the other end of the spectrum are those that focus on bad credit unsecured loans; these lenders typically have very short loan terms of only a few months, repayments are made by daily direct debits and interest rates can be in excess of 140%.  The benefit of unsecured loans is they can settle very fast – sometimes within hours of application.  If you have an urgent need, either to solve a problem or to go after an opportunity, an unsecured loan will be the choice ahead of a secured loan.

Borrowers need to be careful to ensure they end up with the best unsecured loan option – Unsecured lenders are expert marketers so it can be easy to end up with a loan that doesn’t suit.  Start with the highest quality unsecured lenders who can settle a loan in the timeline you need or work with a finance expert who is an expert in unsecured loans to get the loan that’s right for you.

You don’t need real property to get an unsecured loan but there are some real misconceptions about what an unsecured loan is or is not.  An unsecured loan is not a ‘no recourse loan’.  In almost all circumstances in Australian business lending you will be required to give a personal guarantee and that means if you own property or other assets these could be at risk if you default on your loan – it’s one of the main reasons why property owners can borrow more from unsecured lenders.

Business Lines of Credit

A business line of credit functions as a cash flow safety net, granting business access to funds up to a predetermined limit. Unlike traditional loans, you only pay interest on the amount you withdraw, not rather than the total limit. This flexibility makes it an ideal solution for businesses with seasonal cash flow needs and can work for businesses in B2B and B2C industries as well.

Business lines of credit are offered by major banks, second tier providers and fintechs and can encompass overdrafts, trade and import lines of credit, equipment lines and invoice finance.  Before going ahead with a business line of credit it’s important to make sure you understand how the interest is calculated and what fees apply as there is significant variation in how different lenders present their fees and charges.

Equipment Finance

Equipment finance is a business loan solution that enables businesses to acquire the necessary equipment and machinery without the immediate burden of a full upfront payment. It operates as a specialized loan designed to assist businesses in obtaining the tools they need to operate efficiently and grow their operations. Through equipment finance, businesses can spread the cost of their equipment over time, preserving capital and managing cash flow.

Another benefit of equipment finance is raising capital against equipment businesses own outright.  This cost effective way of accessing equity owned in machinery and other assets can be a debt consolidation lifesaver and can be used for any legitimate purpose.

Use A Business Loan Expert To Get the Best Business Loan

The type of long term business loan that suits your needs will largely depend on your needs, the state of your credit, and the timeline for funding that matches both of these. Whether you’re seeking a line of credit for ongoing working capital needs or a term loan to fund a particular project, there are a number of options.
Each type of lender comes with their own features and benefits. To get the best outcome for your business loan or small business loan make sure you select a lender who has a track record of providing the type of loan you’re after, for your industry and with an application process that is fast enough to meet your needs.  If you’d like assistance with that process you can get in touch with us here.