Find the right loan for you
Deciding that your business needs a loan is only the first step. Before you approach a lender, think about:
- how much you need to borrow
- the type of loan you'll need
- the length (term) of the loan
- if your business can afford to repay the loan, plus interest and fees
- what security you can offer the lender and how it will affect the interest rate.
Use the business loans comparison tool by Infochoice to find and compare loan options for your business.
How much do you need?
To start, work out how much money you need to lend with our cash flow forecasting template.
What funding arrangement do you need?
The type of loan you need will depend on whether you need access to money all at once or over a period of time.
At call loans
'At call' loans include overdrafts or lines of credit. These are available if you need to:
- access the funds on a semi-regular basis to help with cash flow
- keep the business operating while waiting for your customers to pay for goods.
Upfront loans provides the entire loan amount all at once. These loans are available if you need funds to:
- buy a new business
- buy equipment to expand your existing business.
An upfront loan is sometimes called a 'fully drawn advance'.
What loan terms are right for your business?
The loan term refers to the length of the loan. The longer the loan term the more total interest you'll pay:
- Loans that are 'at call' have no fixed terms.
- Loans provided upfront will need a portion of the loan plus interest paid back at regular intervals.
To work out what loan term is suitable for your business, you'll need to calculate how much you can afford to service the loan.
What level of ongoing funding do you need?
The level of ongoing funding is the average amount of an overdraft or line of credit that's used at any one time.
For example, you might want to have an overdraft limit of $20,000 to provide money for the occasional big expense. But usually you won't use more than $5000 of that credit limit on average. So in this instance, the level of ongoing funding that you'll need is $5000.
When applying for an overdraft limit, be mindful that:
- the higher the overdraft amount, the higher the fees
- there could be clauses in the contract where the lender can demand repayment of the whole loan at any time.
Is a fixed or variable interest rate better?
With a fixed rate loan, the lender bears the risk of interest rate moves. With a variable rate, you'll bear the risk of interest rate moves. So if your business has a low profit level, a variable rate loan repayment may rise beyond your ability to pay.
The choice of rate will affect:
- the stability of repayments
- overall cost of the loan
- the loan features available.
Ultimately, the choice of variable or fixed rates will depend on how much free cash flow your business generates after you've paid all your expenses – including loan repayments.
Can you offer loan security?
Loans can be secured or unsecured by various types of assets, including:
- rural property
Alternatively, some loans are unsecured by any asset.
Providing security will usually lower the interest rate on the loan because it decreases the risk for the lender. But if you can't repay a loan on time, the lender has the legal right to seize any property or asset that you offer as security.
Are there extra fees?
Look out for any extra fees, like:
- one-off fees such as establishment or application fees
- regular fees such as service fees or credit advance fees
- exit or discharge fees
- early termination fees.
Use the Infochoice small business loans tool to work out the cost of set-up and ongoing fees in the average monthly repayment. This will give you a better idea of the true cost of the loan.
Approach lenders with your business plan
When you're ready to apply, lenders will ask for a lot of in-depth information about the financial history of the business.
It's important that you have a convincing and detailed business plan so you can fully inform the lender about your proposed venture. Your business plan should include a profit and loss budget and cash flow forecast. Providing this type of information will help the lender advise the right finance for you.
The lender might also need the information you use to build your business plan to assess your project. This includes information about the:
- past and future plans for your business
- people working in your business
- broader market.
The outcome of your application will depend on how well your proposal is researched and how well it's presented – not just your financial viability.
Assess the risk
Banks and other lenders will look at your business's risk profile when considering your loan application. Understanding what lenders look for and what they consider risky will help you present your business in a favourable manner.
As a general rule, lenders look at your:
- security – what you're offering to give them if you can't repay the loan
- cash flow risk – your ability to make regular loan repayments
- business risk – your ability to repay the debt, including any other debts you have.
You need to be able to assess the level of cash flow or business risk in your circumstances. A projection of the cash requirements of the business is most important to a lender because it:
- is the cash left after expenses that will repay the loan, not your income
- demonstrates that you're an effective manager.
Lender's perception of risk
The following risk factors can influence your lender's perception of risk:
- lack of security
- lack of business history
- industry sector factors such as competition, barriers to entry, profitability and economic conditions
- lack of planning, market knowledge and finance skills
- poor credit history.
Certain types of businesses have more risk than others:
- Start-up businesses come with higher financial, business and management risk.
- Seasonal businesses such as swimwear or agriculture have cash flow pressures in the off season.
You'll need to demonstrate to the lender how you plan to mitigate these risks.
If many of these risk areas apply to you and your business, you might need to consider another source of finance.
Be cautious if you have a tax debt
A lender may not lend to a business that is currently in a payment arrangement.
Before you enter into an arrangement to pay your tax debt with the Australian Taxation Office (ATO), discuss it with your current or future lenders.
Entering into a payment arrangement with the ATO or other government agencies may negatively affect current and future financing arrangements.