Step 1: Decide what kind of loan you need
Before applying for a business loan, decide what kind of finance will work best for you. Broadly speaking, this means matching the finance type to the loan purpose. The two most common categories are:
Purchasing a business asset
If you need finance for a business vehicle, or some other equipment, you may be eligible for a secured business loan. This means the asset you’re purchasing is used to secure the loan. The lender can sell the asset to recoup its costs if you can’t repay the loan. A secured business loan is often referred to as a chattel mortgage.
Working capital/cashflow
If you need an injection of capital for a one-off expense or to plug a cashflow gap, you have a couple of options. First, you could consider a short-term unsecured business loan, usually allowing you to borrow up to $150,000. Or, you could apply for an ongoing line of credit for your business, meaning you can dip in and access funds when you need them (and only pay interest on what you draw down), without needing to reapply each time.
It’s not uncommon for a business to need more than one finance type to fund a new asset acquisition or project – for example, a secured fixed-term loan to finance the purchase of a vehicle and a line of credit to cover running costs. Using a separate specialist lender for each may ultimately provide better value.
Step 2: Figure out how much you can borrow/repay
The lender will ultimately decide how much money your business is able to borrow. But it’s a good idea to have a firm idea of the loan size you’re able to service (repay) before applying.
To do this, you could simply work out how much cash you will be able to comfortably put towards the repayments each week, fortnight or month.
Alternatively, some lenders will offer finance up to a certain percentage of your revenue (e.g. 150% of monthly revenue).
When estimating how much you can borrow, err on the conservative side to give yourself a better chance of approval and keep your repayments manageable.
Phil Collard, Money's Asset Finance Expert
“Think through what you’re comfortable to spend on repayments each month. Just because a lender says you can afford $1,000 per month it doesn’t necessarily mean you’re comfortable to part with that. You should consider this when sourcing the right loan as the consequences of getting it wrong could impact your future borrowing capabilities. "
Phil Collard, Money's Asset Finance Expert
Step 3: Decide on a loan term
This is simply how long you want the loan for. A shorter loan term will save you money in interest and fees, whereas a longer term keeps your regular repayments lower. Use a business loan calculator to see the impact.
If you’re purchasing an asset, think about factors like depreciation and its life-span as an income generator for your business.
If you need ongoing access to finance, some line of credit or business overdraft options have no specific term, meaning you can always access funds (up to your credit limit) while the facility is open.
Step 4: Compare lenders
Loan amount
It’s important to quickly narrow down your search to lenders that offer loans that match your required loan size. Some lenders will only offer larger amounts, while others specialise in smaller loans.
Eligibility requirements
Check if the lenders you’re comparing actually lend to businesses like yours, based on factors like minimum trading history and revenue, credit history and the industry you operate in.
Interest rate
Interest will likely be the main cost of your finance. Bear in mind that not all lenders advertise rates publicly, and those that do may only show a reference rate. Unless you get help from a business finance broker, you’ll only learn your actual rate (this may well be higher than the reference rate) when you apply.
Fees
There are usually upfront and ongoing fees, and fees that only apply based on certain ‘triggers’, like late repayment fees or fees if you make extra repayments and pay out the loan early.
Loan features
These are the additional aspects of the loan that determine how you can use it. Two key loan features to keep an eye out for are being able to make extra repayments (minimising your interest costs) and redraw, which allows you to access the extra repayments you’ve made if you need to. Some loans also offer flexibility to temporarily pause repayments.
Using a broker will mean you can get matched with suitable business lenders based on these criteria, without needing to research multiple lenders yourself.
Step 5: Prepare your application
Applying for a business loan can often be a very fast process. Initially you may just need to provide proof of identity and your ABN, and answer some questions about your business, its revenue, trading history and operations.
Based on an initial assessment, you may be conditionally approved by the lender. At this point the lender will want to see some documents to back up what was in the initial application.
Lenders vary in terms of what they’ll ask to see, but it could include:
- Bank statements for the last three-six months
- Financial statements (profit and loss statement, cashflow statement, balance sheet)
- ATO Business Activity Statement (BAS) for the last 12 months
- Proof of individual income
- A business plan with forecasts (particularly for new businesses)
- Work contracts to demonstrate future income
Self-assess your position before applying
Andrew Beckett, Head of Broker and Third Party Distribution
"Understanding what your bank statements are going to look like to the lender is a big thing. You've got to be ready to answer questions about the incomings and outgoings. If you’re not, you could get caught out. The other thing is your credit file. Are there iddies like defaults or payday lender inquiries on there? If you understand your credit score, that's also going to set your expectations on what your rate's going to be."
Andrew Beckett, Head of Broker and Third Party Distribution
Step 6: Manage your loan
If you’re approved, the funds will be released to you (or the seller of the asset you’re purchasing). You’ll then begin making repayments on the loan. Stay on top of your loan by:
- Avoid any ‘triggers’ that will mean incurring any fees (late/missed payments or making extra repayments if the loan does not allow this without penalty).
- Repay extra to reduce your interest costs if you have spare cash flow.
- Claim any tax deductions you’re eligible for (e.g. interest and fees on the loan).
What are the requirements for a business loan in Australia?
The requirements for a business loan will depend on the type of loan you’re applying for and with which lender. Here are the business loan requirements from some of Australia’s most popular lenders to give you an idea of common policies.
| Lender | Required loan amount | Minimum eligibility criteria |
|---|---|---|
ANZ | $10k+ |
|
Banjo | $20k - $2m |
|
CommBank | $20k+ |
|
Finance One | $8k - $150k |
|
Liberty Financial | $50k - $500k |
|
Lumi | $10k - $500k |
|
Moula | $5k - $250k |
|
NAB | $5k+ |
|
Prospa | $5k - $500k |
|
Westpac | $10k - $3m |
|
Where can I get a business loan?
- Major lenders: The big four bank dominate business lending (as they do in all aspects of banking in Australia). They have branches in most major towns and cities, but aren’t always the most competitive when it comes to rates and fees..
- Other banks and mutuals: Most smaller banks and local mutuals/credit unions offer some form of business finance. In some cases, loans are only available for particular sectors that are prominent in the area the bank is located (e.g. agribusiness loans).
- Online lenders: Australia has a thriving sector of online-only business lenders that offer competitive terms and quick approvals on business loans. Some providers only offer products via a broker.
- Specialist lenders: There are also niche lenders that specialise in business loans aimed at particular industries or business types, or to certain types of borrowers. These lenders are popular for borrowers who need bad credit finance, or low doc applicants.
- Use a broker (for any of the above): A business loan broker helps borrowers understand their borrowing needs and options, and provides pricing from multiple suitable lenders. Brokers generally don’t charge borrowers a fee, but instead receive a commission from the lender if the loan is finalised.
How much deposit do I need for a business loan?
You generally don't need an upfront deposit for a business loan. But there are instances when a lender may require a 10-20% deposit. This usually applies if your business has been trading for less than 12 months or if you don't own property and want to borrow more than $150,000.
Even if it’s not mandatory, an upfront deposit may be something to consider due to the potential cost savings. For example, contributing a deposit may help you reduce your loan amount (and therefore the total overall cost) and make repayments more manageable.
It could potentially also give you the option to structure the loan over a shorter period to tie in with the expected ownership period of the asset you’re buying.
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