Key Takeaway Table
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Definition
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Business loans are tailored specifically for business needs. They can be obtained from both banks and non-bank lenders, with varying requirements and terms. Business loans can help support enterprises and give them the right funding to help them grow.
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Uses for Business Loans
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Business loans can be used to pay for startup costs, daily operations, emergency expenses, technology investments, business expansion, improvements, and more.
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Understanding Business Loan Features
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The principal is the total loan amount, while the interest rate is the cost of borrowing money, typically expressed as a percentage of the principal. The loan term is the entire duration of the loan, and the repayment schedule is how often and how much you will pay. Fees refer to any additional charges. Security usually refers to properties or assets used to secure the loan, while a deposit is a lump sum contribution.
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Types of Business Loans
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Term loans offer lump sums repaid over time for long-term investments. Meanwhile, overdraft facilities provide quick cash access for working capital. Invoice Finance releases funds tied in accounts receivable, while trade and import finance aids in the purchase of material supplies. Equipment finance supports asset purchases, while fitout finance covers interior design or renovation. Finally, tax debt consolidation combines tax debts and can be used to pay ATO debt out completely.
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General Requirements
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Requirements can include providing financial statements, maintaining a good credit score, demonstrating a trading history, and submitting legal and financial documentation such as tax returns. Additionally, having a solid cash flow forecast, offering security, and showing the ability to repay are crucial factors considered by lenders during the approval process. However, not all lenders will ask for all of these requirements.
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Lender Options
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For business loans, applicants can apply to both banks and non-bank lenders. Banks offer diverse financial products such as term loans, unsecured loans, lines of credit, and equipment finance. Non-bank lenders may not have banking licences, but they still provide similar products with competitive rates and terms, offering a viable alternative to traditional banks.
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How to Apply for Business Loans
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Before applying for a business loan, assess your financial needs and research lenders and products. Prepare necessary documentation like financial statements and tax returns. Applications can be done online, over the phone, or through brokers. Lenders assess credit, industry health, and repayment capacity. Settlement begins with the release of funds, followed by scheduled repayments based on the loan type.
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What is a Business Loan?
Uses for a Business Loan
As a business owner, here are some ways you can use business loans:
Starting Your Business
Startup costs include some of the most significant expenses you will encounter as a business owner. Loans can help you pay for the lease or purchase of your business premises, your initial inventory, staff hiring and training, business equipment, and more.
Supporting Daily Operations
Business loans can help you keep your business afloat by providing working capital. With funds on hand, you can manage any cash flow gaps and successfully pay for essential expenses, like bills and payroll.
Covering Emergency Expenses
Whether in life or in business, you will always encounter emergencies. Although you do your best to prepare, sometimes there just isn’t any room for unexpected costs. Loans can help you deal with emergencies, like paying for repairs, equipment replacements, medical fees, legal fees, and more.
Investing in Equipment or Technology
Loans can help you improve your business operations and products by giving you the funds to invest in the latest equipment. You can also invest in technological advances in your industry.
Expanding the Business
When your business is stable and earning well, you’ll start thinking about expanding your offerings or opening new locations. Business loans can make these expansions possible, helping your business grow.
Understanding Business Loan Features
To better understand business loans, it’s crucial to know about loan features, which are the specific conditions and details related to a loan. These may vary depending on the lender, the type of loan, and the borrower’s qualifications. Here are the basic loan features you need to know about:
- Loan Amount/Principal: The principal is the total sum of money being borrowed. For lines of credit, this is the set credit limit.
- Interest Rate: The interest rate is essentially the cost of borrowing money. Lenders charge borrowers interest, usually expressed as a percentage of the loan amount. Borrowers must pay back interest in addition to the principal.
- Repayment Schedule: This is the timeline and frequency of payments that the borrower must make to repay the loan. This could be monthly, quarterly, etc.
- Repayment Amount: The repayment amount is the total the borrower must pay regularly. The repayment amount consists of the principal and interest rate, and depending on the lender, additional fees.
- Loan Term: The loan term is the length of time over which the loan must be repaid. Short-term loans might be due within a year, while long-term loans can extend over several years. The longer the loan term, the smaller the repayment amounts will be.
- Fees: These are any additional costs associated with the loan that may be charged by the lender.
- Security: Some loans require the borrower to provide assets as security for the loan. These assets can be real estate, vehicles, equipment, and any other significant property. If the borrower fails to repay the loan, the lender can legally seize the asset to recoup their losses.
- Deposit: Some lenders may require a deposit, particularly for larger loans or specific types of financing. This is a percentage of the total amount that must be paid upfront by the borrower.
Types of Business Loans Available in Australia
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A type of business financing where a lump sum is borrowed and repaid over a period, which can be a few months to several years. Term loans are suitable for long-term investments or large expenses.
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A financial tool that provides businesses with fast access to cash. Borrowers can withdraw funds up to an approved limit. Interest is only charged on the borrowed amount, and once the amount is paid back, the limit is reset.
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A type of financing that allows businesses to access funds tied up in unpaid invoices. A lender will release up to 85% of a business's invoices immediately after application, providing immediate cash flow to meet operational expenses.
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Trade and import finance provide funding solutions specifically tailored to facilitate the purchase of material supplies, irrespective of whether those materials are being sourced from overseas or domestic suppliers.
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A specific loan tailored to purchasing business equipment and other significant assets, with the equipment itself serving as collateral for the loan.
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Fitout Finance provides funding for businesses to design or renovate premises, covering expenses such as interior construction, furniture, fixtures, and fittings.
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A financial solution that involves combining multiple tax debts into a single loan or payment plan, typically with more favourable terms, to streamline repayment and improve cash flow.
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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: Both your personal and business credit scores can be significant factors in approval. A good credit score can improve your chances of loan approval and may result in more favourable loan terms.
- Trading History: Some lenders require your business to have been operational for a certain period, usually a minimum of 6 months to 2 years, to assess its stability and profitability. However, there are still lenders who will lend to newer businesses.
- Legal and Financial Documentation: This can include your business registration details, leases, contracts, and any other legal documents that affect your business.
- Tax Returns: Many lenders require recent business and personal tax returns to verify your income and tax obligations. Lack of tax documents or accumulation of tax debt may get your loan rejected in traditional lending institutions, but there will still be other lenders willing to lend to you.
- Business Plan: Although not always required by lenders, a detailed business plan can help borrowers secure loans. Prepare a plan that outlines your business strategy, financial projections, market analysis, and the purpose of the loan. This demonstrates to lenders your ability to repay 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: 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. Banks usually have a more stringent approval process, but they provide the lowest interest rates and most favourable overall terms.
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 Applying
Before applying, businesses should assess their financial needs, including how much they need to borrow, what the funds will be used for, and their preferred repayment term. Businesses should also research various lenders and loan products to find the best fit. Factors to consider include interest rates, loan terms, fees, and eligibility criteria. At this time, businesses should prepare the required documentation (if applicable), like financial statements, tax returns, and proof of ownership of assets for security.
Application Process
The actual application can often be started online, over the phone, or in person at a bank branch. Businesses can also apply through their trusted mortgage brokers, who can help with the process every step of the way. Once the application is submitted, the lender will conduct a credit check and assess the risk associated with lending to the business. This process can include evaluating the business’s financial health, the state of the industry it operates in, and its repayment capacity.
Approval and Start of Repayments
If the application is approved, the lender will make a loan offer, which includes the amount of the loan, interest rate, repayment schedule, and other terms and conditions. It’s important for businesses to review these terms carefully before accepting the loan.
After accepting the offer, the loan settlement process begins. Depending on the loan type, funds may be disbursed in a lump sum or made available for drawdown up to a certain limit, which is the case for business lines of credit.
Repayment typically starts according to the schedule outlined in the loan agreement. For term loans, this might be monthly repayments of principal and interest. For lines of credit, the business needs to make payments only on the amount drawn down plus interest.
