Business finance

Small business loans

Small business loans come in many different forms. Whether you're just starting, looking to expand, or need assistance with day-to-day cash flow, there is a type of funding for you. However, with hundreds of business lenders and at least a dozen types of financing available, it takes research to know which is the right option.

Small business loans

A small business loan is used to help you start or expand your business. Small business loans can come from various sources, including banks, non-bank lenders, the government, credit unions and other financial institutions. Types of small business financing include secured and unsecured loans, lines of credit such as overdrafts and credit cards and more specific types of funding, including invoice finance, equipment and trade finance.

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When applying for a small business loan, there are several factors involved in deciding if you'll qualify:

  • The amount of collateral you have available to use as security
  • The size of your existing credit lines compared with those being applied for; how much other debt do you have?
  • And your credit history and financials – how long have you been trading?

How to get a small business loan

Without careful research, you could end up with an ill-suited loan. That could mean poor interest rates, inflexible terms, too much capital or a loan duration not matched to its original purpose. A bad loan can force you to change your financial projections or even take out subsequent loans. That can leave you with multiple debts to service, which is never a good idea.

Make sure you go through terms and conditions with a fine-tooth comb, and not just for the charges. Find out the application process - for example, are early repayments allowed, and can you amend how much and when you pay?

Types of small business loans

A wide range of finance options is available to the Australian business market. Here are some of the most common:

Secured business loan

A fixed-term loan is secured against collateral, such as personal or commercial property, equipment, machinery, vehicles or other business assets.

The lender is often a bank. Repayments are over a set period with interest (which can be fixed or variable) and fees. Should the borrower default on payment, the collateral could be repossessed by the lender and sold to recoup the funds.

Compared to other forms of business funding, it can offer favourable rates, fees and charges; however, due to eligibility criteria and the collateral requirement, it can be difficult for small businesses to get approval.

Used for:

  • Core debt, rather than as day-to-day working capital
  • Starting or growing a business
  • Large purchases, such as equipment or vehicles
  • Business premises

Unsecured business loan

Unlike a secured loan, unsecured loans are not backed by collateral. This means a greater risk to the lender since there aren't assets to repossess in the event of default. As such, interest rates tend to be higher.

This is also a term loan with repayments at given intervals. It is usually considered a short-term business loan, as the amount and length tend to be lower.

Unsecured loans are often taken out by businesses that are unable to get a traditional secured loan from a bank due to a lack of suitable collateral or credit history. They are typically offered by non-bank lenders, although traditional banks now frequently have unsecured offerings.

Used for shorter-term expenses such as:

  • Marketing
  • Unexpected operational expenses
  • Stock opportunities

Business overdraft

A business overdraft is a line of credit attached to a business transaction account. It allows businesses to continue making transactions and draw on funds when their balance is zero. Funds may be drawn and redrawn up to an agreed credit limit without reapplication. Interest is charged at a daily rate, and fees can be fixed or based on a percentage of the limit.

Used for:

  • General working capital
  • Short-term or unexpected expenses, such as stock opportunities
  • To assist with operations or orders whilst awaiting payment

Business line of credit

Similar to a business overdraft, it is a revolving line of credit that can be drawn from, repaid and drawn from again without repeated applications. The main difference is that whilst most business transaction accounts have an overdraft, a line of credit must be applied for separately. It generally has a larger limit, is suited to more established companies, is used for greater expenses and is usually secured by some form of collateral.

Used for:

  • Operating expenses
  • Ongoing working capital needs
  • Marketing and sales expenses
  • Managing expected and regular seasonality

Disclaimer: always refer to professional advice. The information presented here is purely indicative and not intended as advice. Always consult a legal or finance professional.

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