Apply for a business loan

It’s important to have a basic understanding of your business finances before you apply for a loan. This includes your:

• income
• expenses
• debts
• cash flow.

A cash flow statement provides a good snapshot of the money coming in and going out of your business. If you’re just starting your business, do a cash flow forecast to estimate your future sales and costs.

Use this information to decide how much money you need and make sure you’ll be able to repay it.

Work out:

• the maximum repayment you can afford
• if you need all the money upfront or want it to draw on only when needed
• what assets you can offer as collateral (if you need it)
• who will guarantee your loan if you need a guarantor.

Talk to an accountant or business adviser if you need help understanding your finances and how much you can borrow.

Lenders usually want to see your business plan before they approve a loan. This gives them an overview of your financial situation and shows you have a clear plan for success.

If you don’t have a business plan, create one before you seek any funding. If you’ve already got a business plan, make sure it’s up to date with your latest goals and financial information.

Choose the right type of loan or financial product to meet your needs

Each product has different tax implications. It's a good idea to discuss these with a business adviser or accountant.

Loans

Loans are the most common type of finance. A bank or other lender loans you money, and you pay it back over time with interest.

Loans vary a lot in their costs and conditions, including:

• the amount you can borrow
• loan term (how long you will take to repay the loan)
• interest rate
• whether the interest rate is fixed (stays the same for the whole loan term) or variable
• set-up costs and ongoing fees.

Loans can either be secured or unsecured. A secured loan is backed up by collateral or security – something of value you have, such as property or your business inventory. If you don’t repay the loan, the lender can take the security to cover their losses.

If you’re borrowing money to buy an asset (like a vehicle or equipment) you can often use that asset as security for the loan.

An unsecured loan doesn’t put any of your assets at risk. Instead, the lender will usually look at your business’s financial health to make sure you can pay off the loan.

Line of credit

A line of credit is a ‘revolving’ loan that lets you quickly borrow money up to a pre-approved limit.

You can borrow funds as often as you need to, as long as you stay below your credit limit. You only pay interest on the amount you’ve borrowed, not your whole credit limit.

Overdraft

An overdraft facility is a line of credit attached to your business bank account. It lets you take money out of your account even when it’s empty.

There’s a limit to how much extra money you can withdraw. You’ll also pay interest on these funds.

An overdraft can be useful for bridging short-term cash flow gaps. But you shouldn’t rely on it for capital purchases or long-term financing.

Hire purchase agreement

A hire purchase agreement lets you get an asset for your business and pay it off in instalments with interest. Once you’ve made all the repayments, you own the asset outright.

You might be able to reduce your instalments by choosing a larger final payment (also called a 'balloon' payment).

Invoice finance

Invoice finance lets you borrow money against invoices you’ve sent that haven’t been paid yet. It can help you manage your cash flow until those invoices are paid.

Invoice factoring is a type of invoice finance where you sell your unpaid invoices to another business at a discount. You get the cash up front and the buyer becomes responsible for chasing up the debt.

Trade finance

Trade finance helps you manage cash flow when buying or selling goods, especially when there’s a gap between paying suppliers and getting paid by customers.

For example, you could borrow money to buy the supplies you need to fulfil an order. You pay it back when the customer pays for the delivered order.

Trade finance is most useful for importers and exporters.

It’s a good idea to compare loan products from multiple lenders before applying.

Your current bank might offer discounts for existing customers, but you might find a cheaper or more flexible loan somewhere else. Check for loans from non-bank lenders as well as traditional banks.

Read each loan’s terms and conditions carefully to compare:

• upfront and ongoing charges
• interest rates (and whether they are fixed or variable)
• minimum and maximum loan amounts
• term lengths available
• whether you need to provide security
• any restrictions or other conditions.

You can use a business loan broker to help you find the right loan. A good broker will understand your business needs, recommend some loan options and handle most of the paperwork for you. Some brokers charge for their services, while others are free and get a commission from the lender.

Once you’ve chosen a lender to apply to, make sure they’re legitimate. Well-known banks can be trusted, but it’s a good idea to research any finance companies you haven’t heard of.

To make sure it’s a real company, search for the name or ABN on the Australian Securities and Investments Commission (ASIC) register. Then check this list of companies you shouldn’t deal with.

You can also read online reviews to make sure the business is a trustworthy lender.

Documentation requirements vary between loans, but you may need to provide:

• proof of identification
• your business plan
• financial reports, including cash flow statements (if available)
• financial forecasts
• lease agreements
• your personal financial information.

Compile these details into a professional-looking report to give lenders an overview of your finances.

With your financial paperwork in order, it’s time to apply for your loan. Follow the process the lender specifies and make sure you don’t leave anything out.

Depending on the lender, loan type and amount, you might have a loan interview to provide more details. If you aren't confident answering financial questions yourself, consider bringing along a business adviser or accountant. This is also an opportunity to ask the lender any questions you have for them.

If your loan application isn’t successful, ask the lender for feedback. Then see what you can change to increase your chances next time.