Whether you’re just starting out as an entrepreneur or you’ve been running your own show for over a decade, having the right business loan up your sleeve can be a key ingredient to success. When used responsibly, a business loan not only helps to keep your firm afloat during tough times, but it’s also handy when you need extra funds to seize any growth or innovation opportunities.
About the author
Katherine O’Chee is the lead business banking writer at Australian financial comparison site Mozo, where she spends her days digging through banking fine print and sharing her latest money tips with businesses to help them make smarter financial decisions.
Some businesses may not realise just how many options are available in the market, from standard business loans and lines of credit through to more specialised options for invoices or equipment. Depending on your firm’s needs and financial position, some of these business loans will work better for you than others.
Figuring out your loan purpose – whether you’re looking to purchase inventory or just want a cashflow safety net – is often the first step to finding your match. To guide you on your search, in partnership with our colleagues at Mozo.com.au we’ve unveiled six of the most popular business loan types in Australia. Read on for a snapshot of their key features.
Unsecured business loan
- No collateral required
- Suits multiple business purposes
- Fast loan approval times
This is your bread-and-butter business loan that can be used for multiple purposes, whether it’s buying stock, paying for overheads or boosting your day-to-day cashflow. As its name suggests, unsecured business loans don’t require any security, so they’re a good option to weigh up for small businesses that don’t want to put any assets on the line.
Just be mindful though that some lenders may require the business owner or board of directors to provide a personal guarantee instead (that is, they become responsible for repaying the loan if the business fails to).
Given that unsecured business loans are riskier for the lender than secured loans, you may be more restricted in terms of how much you can borrow (typically capped at AU$200,000 – AU$500,000) and for how long (ranging from months to a few years). But the smaller loan size also means this finance type can be approved faster, with non-bank lenders like Moula and Bizcap promising a decision and access to funding in 24 hours or less.
Secured business loan
- Collateral required
- Larger loan amounts available
- Can borrow over many years
Funding a major investment like a property or another business likely won’t be easy on the company wallet. Secured business loans could help you meet these more demanding funding needs, as they often come with much larger loan sizes and much longer loan terms than their unsecured counterparts.
Take one example: Heritage Bank’s Fully Drawn Loan has no maximum loan amount and allows its borrowers to make repayments over a period of up to 15 or 25 years depending on their security type.
Of course there are higher stakes with this finance type, as you will have to offer up collateral such as a family home or a company car. This makes it all the more important to have a repayment plan to ensure you don’t default on the loan and lose your asset. But the upside is that having security also makes you a lower-risk borrower, so you may be able to snag lower interest rates.
Equipment loan
- Specialised loan
- Secured against the equipment itself
- Can be used alongside tax incentives
Equipment loans are exactly as they sound – a type of business finance designed to assist with buying, repairing or leasing equipment such as agricultural machinery, a car or a coffee machine.
Just remember though that because equipment loans are a specialised type of finance, they won’t give you the flexibility to fund any other purchases besides equipment. So they’re primarily meant for businesses which are struggling to afford an equipment upgrade or replacement out of pocket. The collateral for this loan type is usually the equipment itself, which is good news if you want to avoid using an asset you already own as security.
Equipment loans have proven especially popular as of late, thanks to a boom in farm spending. In fact, between 2019 and 2020, big bank NAB saw its agri-equipment financing soar by 130%. That’s due to a range of factors: good seasonal conditions, strong commodity prices, as well as the introduction of government tax incentives like temporary full expensing where eligible businesses can claim instant tax deductions on depreciating assets including equipment.
Line of credit
- Ongoing access to finance
- Pay interest only on what you use
- Good for uneven cashflows
These are uncertain times, so it makes sense if you want a business loan that can help you manage any sudden fluctuations in your cashflow. This is where a line of credit comes in.
Similar to a credit card, lines of credit loans involve a facility from which you can withdraw any amount you want, up to an approved limit. The big advantage here is you don’t have to pay any interest on the funds you leave untouched in your drawdown facility, helping to lower your overall loan costs.
Lines of credit such as Zip’s business loan may be particularly appealing to companies with more unpredictable cashflows, as they can work as a buffer to bridge any working capital gaps and you aren’t under any obligation to use up all available funds. As your business operations grow or slow down, the lender may also give you the option to expand or shrink your facility limit to match your changing situation.
However, this flexibility isn’t without its costs. You may have to factor in additional fees, including a drawdown fee (charged each time you withdraw from the facility) and a line fee (charged to keep the facility open).
Invoice finance
- Turns unpaid invoices into funding
- Suits businesses with corporate clients
- Secured against the invoice itself
Time and time again, research has shown that slow paying customers are a major pain point for small businesses, with accounting platform MYOB revealing last year that 38% of SMEs faced financial stress due to late payments. Invoice finance is a way around this.
Invoice finance is a line of credit that gives you access to the capital tied up inside any unpaid business invoices. Typically the lender will give the business up to 85% of their invoice upfront, then send the rest (less fees and charges) through later once the customer has paid.
The good news is, invoice finance is generally secured against the invoice itself, so you won’t be putting any other assets up as collateral. But it may be more expensive than your traditional bank loan since fees are charged on top of every invoice.
Buy now, pay later
- Zero interest (fees apply)
- Fast approval times
- Pay back in instalments
Buy Now Pay Later (BNPL) services have well and truly exploded over the past year, but it’s not just consumers who are enamoured. Business owners, especially younger entrepreneurs, are the next big target market for a growing number of BNPL providers.
Like lines of credit, BNPL lets you borrow as little or as much as you need, up to a certain value. But the difference (and its major selling point) is, you won’t be charged any interest on the funds you withdraw – only fees apply. The borrowed amount is then paid back through a series of fixed instalments.
For instance, Zip has recently come out with two zero-interest BNPL accounts: the Zip Business Trade which allows you to access up to AU$3,000 for everyday expenses such as office supplies or social media ads, and the Zip Business Trade Plus which offers a much higher cap of AU$150,000 for larger purchases including stock and equipment. The only cost with the first account is a AU$12 monthly fee, while the second account has no ongoing fees but there is a 3% fee if you choose to spread your repayments over four months instead of two.
Given that these BNPL accounts are smaller cash injections than other business loans we’ve covered above, expect the approval process to be fast – as soon as 10 minutes for the Zip Business Trade or 24 business hours for the Zip Business Trade Plus.
Tips before applying for a business loan
Whichever business loan type you end up choosing, always remember:
- Check the eligibility criteria: Many lenders will require your business to have been trading for a minimum amount of time or earning above a certain amount of revenue, although sometimes this may be negotiable.
- Borrow responsibly: Just because you can borrow more, doesn’t mean you should. So unless you’re taking out a line of credit, it pays to look over your budget and do the maths on exactly how much extra finance you’ll need and how big your repayments will be (and whether you can realistically afford that).
- Understand the fees: It’s time to dig into the fine print. Besides the interest rate, check what other fees you might be hit with. Some common ones to look out for include establishment, ongoing, late payment, early repayment and exit fees. Also check whether those fees are flat or percentage-based, because if it’s the latter, then bear in mind your costs will increase as you borrow more.
- Weigh up the bells and whistles: Do you want the option to make early repayments without penalty, or the freedom to change your repayment schedule based on your cashflow? Some lenders will offer these perks to give themselves a competitive edge, so it’s worth keeping an eye out for extra features when shopping around.
- Shop around: Rather than going with the first lender you see, use business loan comparison websites like Mozo to weigh up your options. Bank interest rates can range from 2.29% p.a. to almost 10% p.a., according to the Mozo database.
Ready to apply? Check out Mozo’s list of the top Australian business loans.