How To Finance A Business In Australia: Explained

Students want to know how they can finance a business in Australia.

 

You will most likely need financial assistance to start or expand a business. Obtaining funding for a business is a real challenge that most Aussies face.

 

Fortunately, many finance solutions are helping secure capital for short-term or long-term business goals. This blog enables you to evaluate your options and find out how to get a business loan in Australia.

 

 

1. What Is A Business Loan?

 

A business loan is a loan that a bank or a private lending institution provides to a business owner. This loan is for business purposes, such as to help a business flourish, fulfil day-to-day expenses, or make big purchases.

 

Here are the common uses of a business loan:

 

  • Buy premises to run a business

  • Buy new vehicles or equipment to aid in business operation

  • Buy stock

  • Administer cash flow

  • Recruit employees

  • Pay salary to staff members

  • Pay invoices

 

 

2. What Are The Different Types Of Business Loans?

 

 

Bank Term Loan

 

It is a lump sum of money that a bank lends to a business. Bank term loans differ in loan duration, interest rate, security, and fees such as application fees, ongoing fees, early/late repayment fees, exit fees, dishonour fees, and valuation fees.

 

The loan term can vary from a few years to 30 years. The downside of this business loan is that it requires extensive paperwork and may need up to two months to obtain loan approval. Some banks require businesses to submit a business plan with their loan application.

 

A business loan can be secured, or unsecured based on the security/collateral the borrower offers to the lender if they fail to repay the loan. With an unsecured loan, the borrower doesn’t need to have collateral.

 

Due to high risks, such loans have a high-interest rate. On the other hand, with secured loans, the borrower offers the collateral in assets, such as a car or a home, that the lender can sell to recover the outstanding loan amount in case of default.

 

As collateral helps minimize lenders’ risk, secured loans are available at more competitive fees and rates and approve a higher loan amount for a longer tenure.

 

 

Overdraft / Business Line Of Credit Facility

 

Here a lender provides funds up to a specific credit limit to a business. The borrower can use some portion of the assigned limit as needed.

 

Thus, the loan allows the borrower to pay the applicable interest on the funds used, not the approved loan amount. This is a good financing option to solve short-term cash flow challenges rather than for long-term financing needs, like purchasing equipment and machinery.

 

 

Invoice Finance/ Accounts Receivable Finance

 

In this type of loan, a lender gives part of the total bill value as a line of credit or loan. When the business’ client pays the bill, the borrower repays the lender the loan amount along with interest and fees.

 

 

Factoring

 

A business sells the unsettled bills to a factoring firm at a discounted rate. The firm then takes the responsibility to follow up with the client to recover the debt.

 

 

Chattel Mortgage

 

In this type of loan, you purchase and own the asset from the start of the loan term and make regular ongoing repayments until you pay the loan in full.

 

 

Business Loans From Friends and Family

 

You don’t necessarily approach lending institutions to meet your small business finance needs. Your family or friends can also help you with funds to start, expand or run a business.

 

However, to save your relations with whom you owe funds, you should draft an agreement stating how and when you will repay the loan to them.

 

 

Equipment Finance

 

This loan is to buy specific equipment or machinery. The typical duration for the loan is between 2 and 5 years. 

 

While the borrower repays the loan, the machinery serves as security. Due to this, the interest rate is lower than the rest.

 

 

Buy Now Pay Later (BNPL)

 

This type of loan is becoming popular among consumers. It gives businesses a means to help themselves with unsecured finance to buy services and goods. 

 

Once the loan is approved, you have three months for interest-free repayment. After that, you pay the applicable interest.

 

 

Fully Drawn Advance

 

This type of business finance gives you access to funds for long-term investments. You can use this advance loan amount to set up a new business or equipment that increases your business capacity. 

 

The fixed interest rate for a period gives surety and constancy for repayments.

 

 

Bill Of Exchange

 

Also called the commercial bill, it is ideal to meet the short-term funding requirements of a business. Borrowers obtain a fixed sum up front that they can use to buy inventory and pay for other short-term needs. 

 

You repay the loan interest as regular payments, and the final debt amount is when the term ends.

 

 

Asset Finance

 

Does your business have significant assets and the potential to thrive but lack the required working capital to capitalize? Asset Finance is the perfect way to fund equipment, machinery, or other expenses.

 

Such businesses can use their assets to obtain a line of credit from a lender up to the cost of the used or new asset, such as inventory, equipment, property, or accounts receivable. Thus, this finance option enables a business to secure asset finance by using its assets as collateral.

 

 

Business Credit Cards

 

There are different types of business credit cards available on the market with benefits, rewards and a 30 days interest-free period. A business can use the credit limit to fund business purchases. 

 

This finance option can serve as a flexible line of credit to obtain short-term cash. However, if you miss a single loan repayment, it can adversely impact your credit score.

 

 

3. What Are The Business Loan Requirements In Australia?

 

Applying for a business loan is easy and can happen over the call, via an online inquiry, or by approaching a business banking agent. 

 

However, Before you apply for a loan, you need to meet the following conditions:

 

  • Above 18 years

  • Demonstrate your knowledge and experience in the business or industry.

  • You must be a director, sole trader, or entity responsible for making financial decisions for your business.

  • The lender will need to know the following: how old your business is, its annual turnover, credit score, how long it has been running, and how experienced you are in running a similar business to assess the risk. Convince the lender as to why your business is low-risk and successful.

  • Disclose any past legal issues linked to your business 

  • Your business should be registered with the ASIC and possess an Australian Business Number.

  • What is the objective of your loan?

  • You must agree to use the loan only for business objectives.

 

You would need to provide the following details to the lender along with your loan application:

 

  • Your personal financial information, such as assets and liabilities, helps lenders gain an overview of your finances

  • ID proof of loan applicant

  • Tax returns

  • Business plan

  • Financial reports for the last three years (if available)

  • Financial predictions

  • Ratio calculations

  • Proof of earnings outside of your business, like rental income.

 

NAB is the most trusted and largest business bank in Australia. It works with all sizes of businesses to support them through each stage of their business.

 

The digital bank also offers financial assistance and services for entrepreneurs planning to start a business in Australia. It takes care of the administrative tasks associated with the launch of the business, such as:

 

  • Identifying business structure (Sole trader, Partnership, or Company)

  • Obtain an ABN number

  • Register your business for taxes

 

 

4. How Can You Finance Your Small Business?

 

Small businesses usually seek capital infusions to fulfil their short-term financial needs from time to time. There are various financing options for businesses available to choose from.

 

Finding an appropriate funding model is essential. Sourcing money from the wrong place may tie you into repayment terms that could damage your business growth for several years.

 

Here we will find some of the most common funding options for small business finance:

 

  • Ask your friends or family to help you finance your business growth.

 

  • Another option could be debt financing, where you obtain a business loan from a finance provider and repay it over a fixed duration with interest on the debt and a certain fee.

 

  • Considering your needs and circumstances, consider taking out a bank term loan ranging from a few years up to 20 years.

 

  • Unsecured business loans are gaining a lot of traction in the mortgage market. It is due to the advanced technology that enables digital lenders to perform financial analyses on borrowers and make fast-lending decisions securely. These loans can help small businesses manage cash flow and enhance their working capital.

 

  • Whether you need funds to survive or to improve your business, the Australian government offers loans to businesses across various industries. It provides loans for small businesses in Australia as a one-off payment, intending to support enterprises as they grow.

 

  • Equity finance is also a way to raise your business capital. Here, you sell a share of your business to institutional or retail investors to get funds in return. You can get your shares back through “Buy Back”, wherein you pay the funds back to the investor and get your business’ share from them. This option involves fewer risks for business owners but doesn’t give you complete control over your business.

 

  • Do you want to know how to finance a business with no money? You can raise capital to fund your business by way of crowdfunding. It is an alternative financing method where the public funds your business. Crowdfunding is possible through venture capital and angel investors.

 

  • Several Small Business Administration investment programs are also available that can help improve the cash flow of your business.

 

 

5. What Are The Best Financing Options For A Business?

 

Suppose you own a small business and need financing to boost its growth. In that case, the below business financing options comparison will help.

 

Financing Methods Interest Rate Loan Repayment Period
SBA loans 5% - 10% 5 to 25 years
Online term loans 7% - 30% 3 months to 5 years
Bank loans 3% - 6% 5 to 10 years
Business lines of credit 7% - 25% Up to 2 years

 

 

6. How To Finance A Startup Business?

 

Starting a business is easier than you think, as many startup business loans are available. Below are the top ways to finance your business:

 

 

Business Grants

 

Local government agencies, private corporations, and state organizations offer Business Grants. These grants are an attractive option for startup funding because they are free. 

 

However, the availability is limited, and only a few startup businesses can qualify for it. Moreover, the grant application process is complex and lengthy. Organizations select only entrepreneurs with serious, detailed, and fail-proof business plans.

 

It takes a substantial amount of time to complete paperwork and wait for the release of funds. Entrepreneurs who wish to launch their businesses fast might have to choose another financing option.

 

 

Business Angels

 

Business angels are individuals interested in funding startups. They invest their funds (up to $2 million) into startup businesses that show a promising future and scope for growth.

 

Brand-new businesses willing to take more risk when seeking financing can opt for “Angel investments”. It is another popular option to seek business finance in Australia.  

 

Angel investors are privately-operated investors who offer business capital, contacts, and expertise. They expect a decent return within 5 to 10 years. 

 

Startups seeking funding need a good business idea and sound financials to convince any investor to invest in their business.

 

 

Startup Loans

 

Certain venture capital companies also offer startup loans. These loans are for individuals with a verified track record.

 

NAB offers a range of business finance to help startups and entrepreneurs pursue new business opportunities. They provide financial assistance to businesses with business loans, equipment, trade finance options, and overdrafts.

 

 

7. How Much Deposit Do I Need For A Business Loan In Australia?

 

Different lenders require different deposit amounts based on individual requirements. Usually, lenders need a deposit between 10% to 30% of the loan value.

 

Working capital, savings, and external finance investments can help arrange required finances. In addition to the deposit, an individual must have a good credit history to get approved for the loan.

 

 

8. How Much Can A Business Borrow From A Lender?

 

You need to consider several factors to find out how much you need to borrow from the lender, such as:

 

  • The type of business you run 

  • The business finance you choose

  • The objective of the loan

  • Do you have security/collateral against your loan?

  • The loan tenure

 

Lenders will assess the gross sales, existing loans, and business creditworthiness based on your loan request to decide how much they can lend to your business. 

 

Business loans usually range between 10% and 30% of their yearly revenue for varying loan terms ranging from 1 month to 20 years.

 

Smaller lenders offer loans up to $150,000, whereas larger banks provide business loans up to $1,000,000. Apply for 10 to 20 % more money than your loan qualification limit to accommodate additional expenses or cost increases.

 

A business loan calculator helps estimate business loan principal and loan interest repayments. Usually, a business can lend to about 75%-100% based on how much capital it has.

 

 

9. What Are The Best Business Loans In Australia?

 

To find the right type of finance, you should understand the reason for business funding, the amount you need to borrow, and the time scale. 

 

Here are some of the best business loans you can consider to meet your business goals:

 

Lender Name Minimum Loan Amount Maximum Loan Amount Loan Duration Upfront Charges/Fees
Zip Business Loan $10,000 $500,000 0.5 years to 5 years No establishment charges
CommBank SME Restarter Loan $10,000 $5,000,000 Max 10 years No loan approval or admin charges
NAB Business Recovery Loan $20,000 $5,000,000 Max 10 years No loan approval or admin charges
Max Funding Unsecured Business Loan $3,000 $30,000 1 month to 1 year No application charges
BOQ SME Recovery Loan Scheme Business Loan $20,000 $5,000,000 Max 10 years No loan approval or admin charges
Westpac Business Loan $20,000 No Max Limit 1 to 30 years Subject to Negotiation
Valiant Finance Business Loan Broker $5,000 $1,000,000 3 months to 5 years $0 application fee

 

 

10. Conclusion

 

If you need a loan to boost your cash flow or invest in growth opportunities, you have plenty of financing options available to choose from.

 

But before you decide on one, carefully assess your business needs, and read the fine print and the terms and conditions of the different financing options.

 

Also, ensure you will be capable of repaying it even if your business conditions change. Your thorough assessment and preparation will go a long way in making an informed and sustainable decision for your business.

 

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