Australia's thriving entrepreneurial landscape demands accessible financing solutions to fuel business growth and innovation. Small business loans play a pivotal role in empowering local ventures, offering capital infusion to fund expansions, equipment purchases, and business optimisation. The most common reason for SMEs in Australia to look for small business loans is to buy equipment. Cash flow management, business expansions, inventory purchases, and invoice payments are other critical reasons why they need the funds. Loans for small businesses can help entrepreneurs manage exigencies and seize opportunities in the market. Let’s discuss everything you need to know about small business loans in Australia!
Purpose of additional finance SMEs, % Aug 2021 & 2022
What Are Small Business
Loans?
A small business loan is a financing option that allows business owners to
get a lump sum amount from lenders to manage various business expenses. They
are required to repay the loan at a fixed interest rate over a specified
period. There are many types of small business loan products that suit a
variety of enterprises. From start-up business loans to bad credit small
business loans, there are numerous options to explore. Let’s break down the
typical terms of small business finance products available in the market:
●
Loan Amount: Small
businesses can get loans in the range of $5000 to $1 million, depending on a
multitude of factors. The average loan amount for small businesses in Australia
is on the rise, growing by 15% between
2021 and 2022. Fuelled by post-pandemic recovery, many lenders are now lending
more money to small businesses than ever before.
●
Loan Term: In most
cases, lenders provide small business loans for three months to three years.
●
Interest Rate: Small
business loan rates Lenders determine the
interest rate based on factors like the firm’s financial strength, credit
history, availability of collateral, industry prospects and more. A small
business loan calculator can help you estimate your potential repayments based
on the indicative interest rates typically charged by lenders.
●
Repayment Frequency: Small
businesses can make weekly, fortnightly, or monthly repayments according to
their loan agreement with the lender. This flexibility makes it convenient for
small-scale businesses to pay back these loans.
What Can You Do with a Small
Business Loan?
A firm can use its small business loan to take care of
various business expenses. Lenders usually do not place restrictions on how you
can utilise the loan amount, provided it goes towards a legitimate business
expenditure. Here are some of the ways of using a small business loan to
maximise your firm's potential for success.
(Source: https://www.nbcbanking.com/business-banking/business-lending-guide/how-business-loans-work/)
●
Working Capital Needs: Small
loans for businesses can help these firms navigate their day-to-day expenses.
Seasonal ventures with cash flow fluctuations often rely on small business
loans to manage expenditures.
●
Equipment Purchase: Many
businesses rely on key pieces of equipment to provide their services and drive
value for customers. They may need to purchase new equipment or machinery to
scale their operations or replace an old asset. In such situations, they can
borrow money from lenders to fund this essential business expense.
●
Real Estate Investments: If you
run a small business, you may want to purchase or lease new premises for your
firm. You may want to expand and renovate your current premises or open new
branches to grow your business. A small business loan can come in handy for all
these purposes and help you take your venture to new heights.
●
Buying Inventory: Lack of
inventory can lead to the loss of sales and competitive advantage in the
market. Hence, it is essential to maintain adequate inventory stocks to meet
your demand forecasts. Many firms take out small business loans during festive
seasons or other high-demand periods to buy more inventory to cater to the
demand.
●
Start-up Costs: Often, an
entrepreneur may have an excellent business idea, but they may lack the funds
to execute their plans. In such situations, small business loans can come to
their rescue. They can borrow money to initiate their operations and lay the
foundations for growth.
Small Business Loans:
Options to Explore
If you want to explore loans for your small business,
there are numerous options to explore. Let’s discuss the various types of small
business loans available to firms:
●
Unsecured Small Business Loans: Small businesses may lack the assets or time
required to take out secured loans. In such situations, they can browse unsecured business loans to meet their
needs. Lenders provide unsecured loans without any security or collateral.
Since the risk for the lender is high, they tend to charge a slightly higher
rate of interest to compensate for the same. Unsecured loans are a hassle-free
source of funding because it takes very little time to process and approve
these loans. A firm needs to submit only their bank statements for loans up to
$250K. They can get a quick business loan within 24 hours
for a term of 3-36 months if they opt for unsecured credit.
●
Secured Small Business Loans: A secured business loan is a lump sum
amount lent against some security or collateral. The borrower must offer a real
estate property to the lender to secure this type of loan. Secured small
business loans are excellent for start-ups that have no business activity or
financial strength to show. They can pledge a residential or commercial
property as collateral to cover the lender’s risk and get favourable terms on
the loan. They can get small business start-up loans up to
80% of the value of their pledged asset. These loans are available for 3-18
months, allowing sufficient time for new firms to set up their operations.
●
Small Business Line of Credit: A business overdraft is a flexible
source of finance for small business owners. In this case, the lender approves
a credit limit, and the firm can withdraw money according to their unique
business requirements. They have to pay interest on the amount they withdraw
and not the entire credit limit. Business lines of credit in Australia help firms
navigate their working capital needs by providing an interest-free buffer.
●
Bad Credit Loans: Lenders
evaluate the credit score of applicants in detail before approving their loans.
However, this does not mean that it is impossible to get a small business loan
because of the applicant’s poor personal or business credit history. Bad credit
small business loans are available to Australian firms with some stringent
terms and conditions. These loans often carry higher rates of interest and have
more rigorous lending criteria. Typically, bad credit business loans are available for
a short-term period between three to twelve months.
●
Short-term Loans: Short-term business loans are perfect for
bridging capital needs. Firms can get short-term credit to meet urgent working
capital requirements and tackle cash flow fluctuations. These loans require
minimal documentation and are usually quick to be processed.
●
Small Business Equipment Finance: 27% of SMEs
borrow money to buy new equipment to streamline their operations. Hence,
lenders frequently offer favourable terms to secure loans for this purpose.
Firms can secure equipment loans against the value of the newly acquired asset
and pay lower interest rates compared to unsecured loans. These loans can
usually be taken for up to seven years, ensuring flexibility and convenience
for the borrowers.
Eligibility Criteria to Get
Small Business Loans in Australia
Borrowers have to meet the required criteria to be
eligible for small business loans. They are as follows:
●
Registration: The
borrowing firm must have a valid and active Australian Business Number (ABN) to
apply for business financing.
●
Trading History: Many
lenders prefer to advance small loans for business purposes to
firms that have been in operation for six months or more. However, start-up
businesses can also secure loans by pledging collateral to the lenders.
●
Monthly Turnover: Small
businesses need a monthly turnover of $5K or more to be eligible for most
business loan products.
Advantages and Disadvantages
of Taking a Small Business Loan
●
Access to Capital: Small
business loans provide a vital infusion of capital, enabling entrepreneurs to
fund startup costs, expand operations, invest in equipment, or seize growth
opportunities.
●
Smooth Cash Flow: Small
business loans can help address cash flow gaps, ensuring the continuity of
operations and providing stability during lean periods or unexpected expenses.
●
Flexibility in Use:
Business loans offer flexibility in how the funds are utilised. Entrepreneurs
have the freedom to allocate them as needed to drive their business forward.
●
Building Credit:
Responsible borrowing and timely repayments can help establish and improve your
business credit profile. Increasing your credit score can potentially open
doors to more favourable terms in the future.
●
Quick and Hassle-Free Approvals: In most cases, lenders process small business loans
very quickly. You can get unsecured loans in just 24-72 hours, while secured
loans take about 3-7 days for unconditional approval and settlement. The
experience of applying for small business loans is quite hassle-free, as
businesses have to submit just a few documents to facilitate the process. Most
small business loans are low-doc, requiring the applicants to submit their last
six months’ bank statements and identification proofs to secure approval.
● Variety of Options: Small businesses can explore various loan products to find the options that suit them the best. They can compare small business loan rates and the terms offered by lenders to fit their unique business model. There are numerous small business loans available in the market, allowing business owners to compare the loans and opt for flexible sources of funding.
Now that you know the advantages of taking a small
business loan, let’s discuss the potential disadvantages to help you make an
informed decision:
●
Small Amounts: Lenders
often consider small businesses riskier than established firms because of their
limitations in scale. As a result, they tend to approve lower amounts for small
business loans to minimise their risks.
●
Higher Rates of Interest: Small-scale
businesses may have to pay a higher interest rate than larger firms with a
demonstrated history of success. Lenders tend to charge higher interest rates
to cover their risks in case the borrowers go bankrupt and fail to repay their
loans. The higher interest rate can lead to high repayments, affecting the
firm’s cash flow situation.
●
No Guarantee of Business Growth: While small business loans are valuable tools for
growing local ventures, they do not guarantee long-term business expansions.
Success and growth depend on execution and not just the infusion of funds. A small business loan may not solve long-term
business challenges. Hence, it is crucial to carefully weigh your requirements
and business plans before taking out a loan.
You should carefully understand these advantages and
disadvantages before applying for a loan. A detailed analysis will help you
make an informed decision and avoid pitfalls in the future.
How to Apply for a Small
Business Loan?
First-time borrowers may be daunted by the idea of
applying for a small business loan. SMEs in Australia often struggle to figure
out how to
get a bank loan for small businesses, with many of them experiencing
difficulties in finding a willing lender or an affordable loan. In such cases,
firms can work with experienced finance brokers to connect with alternative
lenders who offer flexible loan terms for small-scale ventures.
If you are a small business owner looking for an affordable loan, following a structured approach can help you navigate the application process. Here are the steps you can take to simplify your loan application journey:
#1 Determine Your Funding
Needs
Before applying for a small business loan, evaluate your funding requirements. Clearly define how much capital you need, what it will be used for, and the repayment terms you can comfortably manage. You can use a small business loan calculator to ascertain the potential repayments and assess if the amount fits your business budget.
#2 Research Loan Options and
Eligibility Criteria
Thoroughly research different loan options and lenders to find the most suitable fit for your business. Understand the eligibility criteria for getting a small business loan to suit your requirements. At this stage, you can contact a financial broker to discuss your needs and explore the loan products that may be right for you. Compare the business loans and decide where you want to apply.
#3 Prepare Your Documents
Applicants must submit the required documents to
facilitate the loan approval process. If you want a loan up to $250K, a low-doc
application will suffice. You need the following documents for low-doc loan approval:
●
A valid identification document.
●
Bank statements from the
past six months.
The lenders may require some more documents based on
the nature of the loan you want. For example, if there is no ATO payments cited in the bank
statement, the lender may ask for ATO statement. Your finance broker can guide
you to prepare the necessary documents for a hassle-free application process.
If you want to apply for an unsecured loan over $250K,
you have to submit the following documents in addition to the bank statements
and identification proofs:
●
Financial statements.
●
ATO statements.
You can prepare your documents in advance before filling up your loan application.
#4 Submit the Application
Once you have gathered the required documents, submit your loan application. Ensure that all information provided is accurate and complete. Double-check the application for any mistakes or omissions that could potentially delay the approval process. You can submit your application online with all the required details. Your financial broker can go through your application and forward it to the most suitable lender to fast-track the process.
#5 Review and Accept the
Loan Offer
After submitting your application, the lender will evaluate your eligibility and provide their loan offer. Carefully review the terms, including interest rates, repayment duration, and associated fees. Once you are satisfied, you can accept it by following the lender's instructions. If you have any queries, you can consult your financial broker for clarification. Once all requirements are met, the lender will finalise the loan and transfer the funds to your designated account. In some cases, you can receive the approval and the loan amount within just twenty-four hours.
How do Lenders Evaluate Applications
for Small Business Loans?
Lenders evaluate the following factors to determine
the status of a loan application:
●
Industry and Market Factors: Lenders consider the industry in which the business
operates, examining its growth potential, market conditions, and competitive
landscape. They evaluate the risk associated with your industry's stability and
your firm's position within the industry.
●
Financial Position: Lenders
assess the firm's financial strength to determine whether they can service the
debt. Typically, a high monthly turnover is a positive indicator for lenders,
leading them to approve higher amounts.
●
Security: Lenders may
require collateral to secure the loan. They assess the value and marketability
of the offered collateral, such as real estate, inventory, or equipment, to
mitigate the risk in case of default. If you take an unsecured small business
loan, the lenders often prioritise applications where the firm or its directors
are asset-backed.
●
Credit Score: Lenders
carefully assess your creditworthiness by reviewing your personal and business
credit history. They consider factors such as your credit score, payment
history, outstanding debts, and any past bankruptcies or defaults. The credit
score is especially important for a new business, as it can minimise the
lender’s risk and make them more likely to issue an approval.
●
Trading History: Businesses
operating for more than one year often get precedence when lenders evaluate
loan applications. However, newer firms can also get start-up business loans
from several alternative lenders.
Lenders analyse these factors to determine the loan amount, interest rate, and other terms they are willing to approve. Evaluating these aspects can give you more clarity about your loan prospects.
Tips to Simplify Your Small
Business Loan Application Process
Applying for a business loan can be a complex process,
but with the right approach, you can simplify it and increase your chances of
success. By taking steps to streamline your loan application, you can save
time, reduce stress, and present an excellent application to lenders. Here are
some tips to simplify your application:
●
Strengthen Your Credit Profile: You should prioritise improving your credit profile
by paying bills on time, reducing outstanding debts, and correcting any errors
on your credit report. A strong credit profile enhances your credibility and
increases your chances of loan approval.
●
Consult a Finance Broker: Once you
identify your funding requirements, you can start exploring suitable options.
Many SMEs in Australia struggle to find bank loans to fund their business
operations. If you face this issue or do not know how to get a bank loan for your
small business, it is better to partner with a finance broker. These
brokers can connect you to a network of alternative lenders who provide
tailored financing solutions for your firm. Moreover, their expertise can help
you navigate the complexities and ensure your application is thorough and
compelling. They can guide you about various aspects of the process and provide
you with relevant information. From average loan amounts for small businesses to
typical interest rates, they have in-depth knowledge about all facets of small
business loans to help you.
●
Explore Government Schemes: You can check government small business loans to find
options that may fit your needs. The Australian government sometimes initiates
loan assistance programmes to fuel the growth of SMEs. A knowledgeable finance
broker can provide you with information about government small business loan schemes,
enabling you to make the best decision for your firm.
● Prepare a Detailed Business Plan: Although lenders do not mandate the submission of a business plan, it is better to be prepared to demonstrate your growth trajectory. Craft a detailed and professional business plan that outlines your business objectives, strategies, financial projections, and market analysis. A well-prepared plan demonstrates your preparedness and increases the lender’s confidence.
If you want guidance and support to apply for various
small business loans, you should contact Broc Finance today! Its team of financial brokers can
help you apply for working capital loans and other credit
options to help you achieve your business goals.
Source: https://www.brocfinance.com.au/blog/guide-to-understanding-small-business-loans/
Comments
Post a Comment