Key Takeaways
- Business loans are made to meet the needs of businesses. They can be obtained from both banks and non-bank lenders, with varying requirements and terms. Business loans can help businesses stay afloat and give them the money they need to grow.
- You can use business loans to pay for things like starting up, running your business every day, emergencies, buying new technology, growing your business, making improvements, and more.
- The principal is the total amount of the loan, and the interest rate is the cost of borrowing money, which is usually shown as a percentage of the principal.
- The term refers to how long the loan will last, while the repayment schedule tells you how much and how often you need to pay. Fees are any extra costs. Security is usually the property or assets that back up the loan, while a deposit is a one-time payment.
- Requirements can include showing tax returns and other legal and financial documents, maintaining a good credit score, and showing a trading history.
- Lenders also look at whether you have a good cash flow forecast, can offer security, and can show that you can pay back the loan. But not all lenders will ask for all of these things.
- Before you apply for a business loan, think about how much money you need and look into different lenders and products. Prepare necessary documentation like financial statements and tax returns.
What is a Business Loan?
A business loan is a type of financing specifically used for business purposes. A business owner will borrow an amount from a lender, which they will repay with interest over the life of the loan. You can get business loans from various sources, including banks and private lenders. For business owners, loans can provide much-needed funds to support and grow their companies.
Uses for a Business Loan
Here are some ways you can use business loans as a business owner:
Starting Your Business
The costs of starting a business are some of the biggest ones you’ll face as a business owner. You can use loans to rent or purchase a business space, buy your first inventory, hire and train employees, buy business equipment, and more.
Helping with Daily Operations
You can keep your business going with working capital from a business loan. You can handle any cash flow problems and pay for important things like bills and payroll if you have cash on hand.
Paying for Emergency Costs
You will always have to deal with emergencies, whether in life or at work. Even though you do your best to get ready, there are times when you just can’t afford unexpected costs. Loans can help you pay for repairs, new equipment, medical bills, legal fees, and other things that come up in an emergency.
Investing in Equipment and Technology
Loans can help you buy new equipment or technology that will help your business run better and make better products. You can also put money into new technologies that are coming out in your field.
Growing the Business
Once your business is stable and making money, you might start to think about adding more services or opening new locations. Business loans can help your business grow by making these expansions possible.
Understanding Business Loan Features
To better understand business loans, it’s important to know what loan features are. These are the specific terms and conditions that come with a loan. These may be different based on the lender, the kind of loan, and the borrower’s qualifications. You should know these basic things about loans:
- Loan Amount/Principal: The principal is the total amount of money that is being borrowed. This is the set credit limit for lines of credit.
- Interest Rate: The interest rate is basically the amount you have to pay to borrow money. Lenders charge borrowers interest, which is usually shown as a percentage of the loan amount. In addition to the principal, borrowers must also pay interest.
- Repayment Schedule: This is the schedule and amount of payments that the borrower must make to pay back the loan. This could be every month, every three months, etc.
- Repayment Amount: The repayment amount is the total amount that the borrower must pay back on a regular basis. The amount to be paid back includes the principal, the interest rate, and any extra fees that the lender may charge.
- Loan Term: The loan term is the amount of time you have to pay back the loan. Short-term loans are due in less than a year, while long-term loans can last for many years. The longer the loan is for, the less you will have to pay back each month.
- Fees: These are extra costs that the lender may charge for the loan.
- Security: Some loans require the borrower to put up assets as security for the loan. Real estate, cars, tools, and other important property are all examples of these assets. If the borrower doesn’t pay back the loan, the lender can legally take the asset to get their money back.
- Deposit: Some lenders may ask for a deposit, especially for bigger loans or certain kinds of financing. This is a part of the total amount that the borrower must pay up front.
Types of Business Loans Available in Australia
- Term Loans: These are a way for businesses to borrow money in a lump sum and pay it back over time, which can be anywhere from a few months to several years. Term loans are good for big purchases or investments that will last a long time.
- Overdraft Facilities: These are a way for businesses to get cash quickly. Borrowers can take out funds up to a certain amount that has been pre approved. The limit is reset after the borrowed amount is paid back, and interest is only charged on that amount.
- Invoice Finance: This is a kind of financing that lets businesses get funds that are tied up in unpaid invoices. A lender will give a business up to 85% of its invoices right away after the application is approved. This gives the business cash flow right away to cover its costs.
- Trade and Import Finance: Trade and import finance offer funding options that are specifically designed to make it easier to buy materials, whether those materials come from suppliers in other countries or in Australia.
- Equipment Finance: A type of loan that is specifically designed to help you buy business equipment and other important assets. The equipment itself serves as security for the loan.
- Fitout Finance: Fitout finance provides funding for businesses to design or renovate their business space, covering expenses like interior construction, furniture, fixtures, and fittings.
- Tax Debt Consolidation: A way to combine several tax debts into one loan or payment plan, usually with better terms, to make it easier to pay them off and improve cash flow.
General Requirements for Securing a Business Loan
- Financial Statements: Some lenders, typically banks, require up-to-date financial statements including balance sheets, income statements, and cash flow statements. These documents provide a snapshot of your business’s financial health.
- Credit Score: Your personal and business credit scores can both play a big role in whether or not you get approved. Having a good credit score can help you get a loan and may even get you better loan terms.
- Trading History: Some lenders want to know how long your business has been running, usually between 6 months and 2 years, to see how stable and profitable it is. Even so, there are still lenders who provide funding to new businesses.
- Legal and Financial Documentation: These can include your business registration details, leases, contracts, and any other legal documents that affect your business.
- Tax Returns: Many lenders want to see your most recent business and personal tax returns to make sure you can pay your taxes and make your payments. Traditional lenders may not give you a loan if you don’t have tax documents or if you owe a lot of money in taxes. There will still be other non bank lenders who will lend to you, though.
- Business Plan: Although lenders don’t usually ask for one, a detailed business plan can help borrowers get loans. Write down your business plan, including your market research, financial projections, and the reason you need the loan. This proves to lenders that you can pay back the loan.
- Security: Some loans, especially those with lower interest rates, may require security. This could include business or personal assets.
- Purpose of the Loan: You will need to state your loan purpose or why you’re requesting funds. Loan purposes could include working capital needs like purchasing inventory, funding WIP, entering a new market or acquiring assets like commercial property or more commonly plant and equipment.
- Ability to Repay: Lenders will typically assess some or all the provided information above, including analysing your business’s cash flow to ensure you can make regular loan payments. It’s most common to do this by looking at historical performance but cash flow forecasts are also taken into consideration by a number of lenders.
Lender Options
If you’re looking for a business loan, you can apply to both banks and non-bank lenders.
- Banks: This category includes both major banks and smaller banks. Banks have a significant presence nationwide and offer a wide range of financial products, including business loans, lines of credit, equipment finance, and more.
- Non-Bank Lenders: These are lenders that do not hold a banking license but still offer financial products similar to banks. They may offer competitive rates and terms for business loans and can be a good alternative to traditional banks. Non-bank lenders often tailor their product offerings in a way that seeks to fill the gaps left by the banks lending policy. A good example of this is loans to pay tax debt, which is normally an unacceptable loan purpose for a bank.
The Application Process for Business Loans
Before You Apply
Before applying, businesses should figure out how much money they need to borrow, what they will use it for, and how long they want to pay it back. Businesses should also look into different lenders and loan products to find the one that works best for them. Interest rates, loan terms, fees, and eligibility criteria are all things to think about. At this point, businesses should get the paperwork ready, such as financial statements, tax returns, and proof of ownership of assets for security.
How to Apply
You can often start the actual application online, over the phone, or in person at a bank branch. Companies can also apply through their trusted mortgage brokers, who can help them with every step of the process.
After you send in your application, the lender will check your credit and figure out how risky it is to lend money to your business. This process can include looking at the business’s finances, the state of the industry it works in, and how well it can pay back its debts.
Approval and Starting Repayments
If the application is approved, the lender will make a loan offer. This offer will include the loan amount, interest rate, repayment schedule, and other terms and conditions. Businesses should read these terms very carefully before agreeing to the loan.
The loan settlement process starts after you accept the offer. Depending on the type of loan, the money may be given all at once or made available for drawdown up to a certain limit. This is how business lines of credit work.
The loan agreement usually says when repayment will begin. For term loans, this could mean making monthly payments of both the principal and the interest. With lines of credit, the business only has to pay back the amount it borrowed plus interest.
Drive Your Business Forward with Business Loans
Business loans can help you bring your business dreams to life. From starting, improving, and expanding your business, business loans can help you achieve your goals. Consult experts like Dark Horse Financial to find out more about business financing.
Disclaimer: Loans and the benefits associated with them are only available to those who have been approved. The information provided on this page is general and does not consider your individual circumstances. It is not meant to serve as a substitute for professional advice, and you should not rely on it for any decisions. Always consult with a professional regarding finance, tax, and accounting matters before making any choices or taking action.
