Business Loan Process – Your Simple Guide

Improve your chance of being approved for a business loan by being prepared. Understand what a business loan is and the type of business loan you need, before applying.

What is a business loan?

A business loan is a financial arrangement designed to support Australian entrepreneurs and businesses of all sizes. It provides necessary finds for various purposes, such as:

  • expanding operations
  • purchasing equipment
  • managing cash flow

Business loans empower businesses to invest in growth opportunities and meet their financial goals.

Who is eligible for a business loan?

Eligibility requirements for business loans vary between lenders. Often lenders will have specific requirements for:

  • minimum turnover
  • minimum business trading history
  • security (such as equipment, vehicles or other assets)

The minimums depend on the amount you want to borrow. For example, loans less than $150,000 may not require asset security.

To approve a business loan, most lenders will require your ABN (Australian Business Number) or Australian Company Number (ACN). They use these to assess your ability to repay the loan and your creditworthiness.

  • Established business owners – Business owners with a good track record can apply for a loan.
  • New business owners – Startup businesses may find it more difficult to get a business loan because they don't have good credit history or proof of income. Loans designed specifically for startups do exist. Talk to a broker to find the best solution for your business situation.
  • Sole traders and self-employed small business owners – Your loan approval chance improves if you have been in business more than a few years and have a good business credit score.
What can be financed with a business loan?

You can use a business loan to finance business-related expenses such as:

  • commercial property purchase
  • office fit out
  • equipment
  • commercial vehicle/s
  • refinancing other lending
  • cash flow

Equipment can include small items like computers and cameras, to large items like fork lifts, tractors and medical equipment.

Different types of business loans

A few different types of business loans are available to help businesses.

  1. Equipment financing – Use equipment financing to purchase equipment and machinery. The equipment itself often serves as collateral.
  2. Vehicle loans – A vehicle loan can help you acquire a fleet of vehicles, such as trucks or delivery vans. These loans come with competitive interest rates and flexible repayment terms.
  3. Business line of credit – A line of credit works similar to a credit card. It offers you the flexibility to draw funds as needed, making it ideal for short-term working capital.
  4. Invoice financing – Suits businesses expecting incoming funds, but needing a little help with cash flow management in the short-term. This type of loan advances money based on your outstanding invoices. Interest rate for invoice financing is often high, similar to a credit card.
  5. Merchant cash advance – Suited to businesses that accept debit and credit card payments. The lender takes a percentage of all EFTPOS and credit card sales until you repay the total. The interest rate is usually high, around 20% or more.
  6. Traditional loans – You should be able to access an attractive term loan if you've been in business a number of years, and have a good business credit score and financial history.
  7. Short-term loans – Targeted at businesses needing quick access to funds. These loans have a short repayment period (usually three months to two years).
  8. Small business loans – A lump sum useful for new businesses needing funds for launch.
  9. Low doc loans – Suited to those who don't have financial statements of proof of income for the past two years.

Getting a business loan – step-by-step guide

Getting a business loan in Australia involves a few steps. Use these steps as a guide, but engage an expert broker if you have any questions.

  1. Assess your finances – Lenders will want to see documents such as tax returns, bank statements and profit-and-loss statements. Know your finances before getting a loan; decide if you really need it and if you'll probably get approved. Look at your income, net profit, expenses and future projections. Talk to a broker if you're unsure or don't have this information yet.
  2. Understand the loan purpose – This one sounds obvious, but it's a critical step worth noting. Be clear about why you need a loan. Is it to fund growth? Is it to purchase equipment or machinery? Is it to manage short-term cash flow issue? Your business plan may hold the answers, so have that handy when you state your loan purpose to your lender or broker.
  3. Determine loan amount – Work out how much you need to borrow by getting quotes for your intended purchases. Only apply for what you can afford to repay. When considering your repayments, also calculate interest over the loan term. This will give you an idea of whether you can afford the loan for your business.
  4. Choose the correct loan type – When choosing which loan you need, look at the loan purpose, costs, interest rates and any hidden charges or terms. Some business loan types like merchant cash advances and invoice financing can come with high interest rates. Also consider whether you need a secured or unsecured business loan, a fixed or variable interest rate.
  5. Shop for lenders – The best way to start researching what loans and lenders are out there is a Google search. The next best way is to have an expert business finance broker analyse and compare loans that fit your requirements. Look for fees, including hidden fees in the fine print.
  6. Collect the necessary documentation – Lenders will require financial documents, such as your business plan, credit history, financial statements, financial forecasts. Have these ready to streamline the application process. for any loan application, you will also need proof of identification and personal financial information.
  7. Loan approval process – How long it takes to get your business loan approved depends on your situation, the type of loan and the lender. It can vary from days to months. If the loan approval is granted, both the business owner (borrower) and the lender must sign the paperwork.
  8. Loan disbursement – Once all essential paperwork is signed, the funds are disbursed to your business. Use the money for its intended purpose.
  9. Repay the loan –You're committed to honouring your loan agreement. Protect your credit score and prioritise your repayments in your business budget.