What is a business loan?
Business loans are lending products designed to help business owners fund business operations, purchase stock, pay staff, manage cash flow and expand.
The right business loan can keep your business afloat when you're dealing with seasonal cash flow or just short on cash. It could also help you seize on an opportunity and grow your business to new heights.
Unlike a personal loan, a business loan must be specifically for business or investment purposes. To get a loan approved the lender considers the performance and history of your business, plus your own credit history.
No matter the purpose, you need a business loan with a competitive interest rate that lets you access funds in the best way for your business.
How do business loans work in Australia?
You can get a business loan from most Australian banks or from online business lenders.
The amount you can borrow, your interest rate and whether you need security all depend on your lender's requirements and your business's size, needs and financial position.
- Security. Secured loans have lower interest rates but require an asset as security. Some lenders accept a business asset, but it's possible to use a commercial or even residential property as security.
- Eligibility. Many lenders require your business to have been operating for 1 to 2 years, with financial records for that time. Lenders examine cash flow projections, business activity statements and conduct credit checks on company directors.
- Loan type. Some business loans provide you with a single lump sum, which you pay off over time like any loan. But there are business overdrafts that let you spend beyond what's in your bank account to cover shortfalls, or lines of credit that let you spend money flexibly.
- Interest rate. You can get business loans with fixed or variable interest rates from most lenders. Secured business loans have the most competitive rates.
Which type of business loan is best for my business?
Choosing the right business loan depends on your business and what you're trying to achieve.
Business term loans
The most straightforward business loan, where you apply for a loan and receive the funds in a lump sum. You can get secured and unsecured business loans for flexible amounts, and can receive a variable or fixed interest . These loans are useful when you're trying to cover large expenses.
Example: Samantha needs a variable rate business loan
Samantha runs a catering business. She needs to borrow $60,000 to cover a kitchen expansion. Samantha needs a single lump sum. But she also wants the ability to repay the loan quickly. She expects her revenue to increase as a result of the expansion and wants to clear the debt sooner.
She opts for a business loan with a variable interest rate, as variable rates tend to come with no early repayment fees.
Business line of credit
A business line of credit gives you a pool of money that you can withdraw and pay off whenever you want. Once you're approved for a line of credit you can spend money flexibly, up to the credit limit amount. You only pay interest on the money you withdraw, not the overall limit you're approved for.
This is useful for businesses that have to cover multiple smaller expenses over time or have seasonal spikes and dips in revenue.
Example: Glen needs a line of credit
Glen runs a landscaping business with 5 employees. He's approaching a quiet few months for the business and wants to have money on hand to cover a few expenses he has been putting off.
On top of paying his employees, he wants to renovate his office and upgrade his equipment. He takes out a line of credit, and is able to get a quote for his upgrades and withdraw that exact amount each time.
When his cash runs low during this quiet season, he also withdraws money in order to meet payroll. When business picks up, he pays off his withdrawals and is able to reuse that credit the next year.
Business vehicle finance
Loans to cover the purchase of business vehicles including cars and trucks. These come with a range of options, such as leasing the vehicles or buying the vehicles outright. They can be used to buy individual vehicles or an entire fleet.
Loans to cover the purchase of business equipment, such as computers, tools, coffee machines, or kitchen fit-outs. You can rent, lease or buy outright.
You can use outstanding invoices, which represent future payments, to get cash when you need it now. A cut of the outstanding invoice is paid to the lender in return for the upfront funds.
If you have a business bank account you can get an approved overdraft limit to borrow beyond what's in the account. This is useful to cover brief cash flow shortfalls that are not predictable enough to require a line of credit.
Business credit cards
Business credit cards let you cover business expenses now and pay them off over time. Useful for sole traders, small businesses, or to fund the business needs of trusted staff.
How to find the right loan for your business
To help find the right business loan, ask yourself these questions:
- Why does your business need the loan? Are you looking to start a new business from scratch, upgrade your equipment or overcome a cash flow shortage?
- What's the state of your business finances? The current financial performance of your business affects the type of funding you need, but also your ability to qualify for different types of loans. The stronger your performance, the easier it is to get a loan.
- What timeframe do you need the funds for? If you have to cover multiple small expenses in a short time, you might look at an overdraft, line of credit or a business credit card. Covering major renovations would require a large loan with a longer loan term.
Loans for small businesses and startups
It's easier for larger, established businesses to get finance in Australia. But startups and very small businesses might find it harder because they likely have fewer assets, less consistent cash flow or, in a startup's case, no established track record of business activity.
Finance for startups
Startups often need extra cash in order to bring their idea to life. While many rely on investors, there are business loans that cater to start ups.
In general, lenders will only lend to startups who have been in business for at least 6-12 months and meet certain revenue figures.
Note that many business loans are risk-based. This means interest rates are set depending on the financial position of you and your business. New, unproven businesses are obviously riskier customers. This means higher interest rates.
Small business loans
Small businesses will find it easier to get a business loan approved if:
- You have a good personal credit score.
- You have a clear plan for how to use the funds.
- Your business has been operating for several years and has detailed financial records.
- You can secure the loan against commercial or personal property.
Business loan interest rates
Business loan interest rates vary depending on your lender, your loan type, and your own (and your business's) financial position.
- Variable rate business loans. These rates can change at any time at the lender's discretion. Lenders move variable interest rates in response to changing market conditions and the cost of securing funds.
- Fixed rate business loans. With a fixed rate business loan your interest rate won't change during the fixed period. After that, your rate reverts to a variable one. Fixed interest rates make it easier for businesses to manage loan expenses. Most lenders won't let you make extra repayments on a fixed rate.
Common business loan fees
Before signing a business loan contract you should look at all the loan fees. Factor in the cost of loan fees along with the interest payments.
The most common business loan fees include:
- Establishment fee. Many lenders charge a one-off, upfront establishment or origination fee. This fee is often a percentage of the loan amount. A 3% establishment fee on a $300,000 business loan would cost you $9,000.
- Monthly or annual account keeping fees. Some lenders charge a smaller ongoing fee to maintain the loan account.
- Late fee. If you miss a loan repayment your lender may charge you a fee.
- Extra repayment fee. Some loans, typically fixed rate loans, don't let you make extra repayments to the loan or charge a fee for doing so.
How can I save money on a business loan?
- Compare interest rates. Don't just apply for the first business loan that suits your needs. Compare rates from multiple lenders.
- Factor in fees. Fees can really affect the cost of your loan, so add these into your cost calculations.
- Offer security. If you have a commercial or residential property to offer as security you can get a loan with a lower interest rate.
- Choose the right loan term. Longer loan terms suit larger loan amounts. Longer terms also mean smaller monthly repayments but more interest charged over time. Shorter terms increase your monthly repayments but you pay less interest.
- Look for a flexible loan. If you can repay a loan early you can save money. Flexible business loans let you redraw extra repayments in an emergency.
- Contact a business loan broker. A business loan broker can help you find a suitable loan. They can help you understand the true cost of a loan.
How do credit scores and business loans work?
Lenders assess individual borrowers along with the business itself. For larger businesses, a lender will check a company director's credit report.
Having a good credit history is even more important for sole traders and small business owners. There are also credit scores specifically for businesses.
You can improve both personal and business credit scores by establishing a good track record of repaying debts on time, not missing bills or loan repayments and avoiding applying for too many credit products at once.
How do I apply for a business loan?
- Work out what type of business loan you need.
- Compare loans and rates from multiple lenders.
- Prepare all your personal and business financial records and documents.
- Complete the application.
- Wait for the funds to reach your account.
Online business lenders can approve applications quickly. A traditional bank may take longer and you have to speak to a lending specialist from the bank first.
Documents you need for a business loan application
- A valid ABN or ACN for your business.
- Annual financial statements that include a balance sheet and income statement
- Recent individual tax returns, an ATO notice of assessment and other details.
- Credit reports for you and your business (the lender will check this).
- Information about the property or asset you're offering as security.
Compare business credit cards
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Frequently asked questions about business loans
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