A small business loan can help you manage a tricky financial period, buy equipment and supplies, or it could be used as the catalyst to fund growth. In short, their uses are many and varied. To help you learn more, Monzi’s here. We’ve assembled this guide covering all the information you might need to know. Let’s go!
Please note, certain ideas and products presented in this article may not be offered by Monzi nor the lenders we work with. This article presents only general information. Consider seeking professional financial, taxation, legal or other advice to check how the information and ideas presented on this website relate to your unique circumstances.
What’s a small business loan?
As you might expect, a small business loan is a loan designed specifically for small businesses. Typically, these are lump-sum amounts which business owners may then use to help fund their day-to-day operations, purchase additional equipment or fund new projects.
These loans may vary in amounts ranging from just a few hundred dollars all the way into the hundreds of thousands. As part of the loan agreement however, you’ll have to make a number of fixed, regular repayments until the balance of the loan has been paid off.
If you apply with Monzi’s lender-finder service, however, we may be able to match you with a lender potentially offering personal loans up to $10,000. Moreover, you could put your funds towards your business.
While this is a basic summary, there’s so much more to know. So, let’s get into it.
What is the best loan for my business?
When it comes to business loans Australia, there’s no one-size-fits-all. Businesses vary greatly in their size, cash needs and profitability. In short, the best loan for your business will depend on a range of factors.
As a guide, these factors may include:
- How much you need to borrow.
- The structure and financial situation (cash flow etc.) of your business.
- The type of cash injection you required: lump sum vs small, periodic injections.
- What is the purpose of the loan?
- The profitability/revenue of the business and the repayments you could afford.
Secured vs unsecured business loan
First of all, an unsecured business loan means there’s no need to guarantee the loan. Just apply and be approved and once you get your cash, you’ll just need to make your scheduled repayments.
On the other hand, with a secured loan you are required to attach an asset as security. This acts to guarantee the loan. In the event that you fail to make your repayments, the lender may take steps to repossess the asset in order to recover their losses.
What can I use a small business loan for?
You can cover a range of expenses with a business loan. While by no means an extensive list, common reasons for applying can be seen below:
- Purchasing supplies, inventory or equipment.
- Debt consolidation.
- Additional capital to allow for business growth and expansion.
- Marketing, promotions and advertising expenses.
- A range of other possible business expenses.
- Purchasing a car for your business.
How do I get a loan for small businesses?
First things first, you need to work out how much you need to borrow and what you can afford to repay.
Once you’ve done that, it’s time to start researching. Compare a range of lenders to find one willing to offer a loan to suit your needs. Then apply and, if you’re approved, you’ll receive the cash you need.
What is a good credit score for a small business loan?
There’s no doubt that a poor credit score may make it more difficult to access credit. However, it is difficult to say what a reasonable credit score may be.
This is due to the fact that different credit providers will have different minimum requirements.
On a positive note, if you do have bad credit, it may still be possible to access the credit you need. Some lenders may be willing to work with you and will assess your suitability for a loan.
If your business is in a secure financial position then you may still be offered the loan you need, in spite of your credit history.
How much can I borrow?
Organisational factors may determine the maximum amount that you can borrow. In other words, the size, cashflow, nature and age of your business may determine your credit limit.
If you are a small business then you may be able to apply for loans of as little as a few thousand dollars. However, as you grow, you may be able to access credit ranging into the hundreds of thousands and above.
In short, the amount you can borrow will vary.
In general, lenders offering personal loans will assess your personal financial situation.
How do lenders assess applications?
Lenders will have a number of boxes to check before they are comfortable offering you a loan. Typically, they’ll centre their assessment around the following factors:
- The age of your business: it’s usually easier for an established business. Often, start-up businesses can find it difficult to find willing lenders.
- Turnover: this gives lenders an idea of what repayments you may be able to afford.
- Credit history: this will determine your risk as a borrower.
- Organisational structure: lenders typically view stable organisations more favourably.
- Accounts receivable
- Outstanding debt
How much does a small business loan cost?
The total cost of a business loan can be calculated from three factors:
- The loan amount: how much you borrow.
- Interest rate: this will determine the amount you are required to repay on top of the principal amount that you borrow. Typically, the higher your interest rate, the higher the cost will be.
- Fees and charges: lenders will vary on the fees and charges they apply. Examples include late, early-exit or establishment fees.
What information will I need to provide?
In order to assess your application, lenders will require some key information related to your business and financial situation.
While exact requirements may vary from lender to lender, you may be required to provide the following:
- The reason for your loan.
- Your credit history.
- Revenue, cash flow, income and assets.
- Bank statements
- Australian Business Number (ABN)
Are small business loans a good idea?
A business loan may be an effective finance option for your business provided that you take the necessary precautions.
Before you apply, have a clear understanding of the amount you need to borrow, the purpose of the loan and what repayments would suit your budget. Do this and you will give yourself the best chance to manage your loan effectively.
However, remember that the appropriateness of a loan is context-dependent. Whether it is a good idea will depend on specific information related to your organisation.
Does a business loan affect personal credit?
In short, it can. However, it will depend on the type of loan and your business.
For instance, if you are a small business owner and personally guarantee a business loan then your personal credit score may be impacted. In this case, the guarantee is that if your business cannot repay the loan then lenders may seek to collect payment from you personally.
Ultimately though, whether your personal credit score is impacted or not will depend on your business and credit-type.
Finally, please note all loans available through our network are personal loans.
Compare business loans
Don’t just settle for any loan, put in the time and effort to find the best loan for your business. It can potentially save you a lot of money.
Not sure what to compare? Consider the following:
- How much can you borrow from this lender?
- What’s the repayment term of the loan?
- What is the interest rate and what fees will be applied?
- Are the repayment terms flexible?
- What will the total cost to the business be?
- Can I pay off the loan early?
Small business loan calculators
Keen to get an idea of what your repayments will be? Using a loan calculator can be extremely helpful. Do a quick search in google and you’ll find plenty of free, online resources.
Just enter the loan amount, repayment period, interest rate and any additional fees. From there, you’ll receive an estimate of what your repayments and total cost will be.
However, these figures are only a guide. Your final repayments will be determined by your lender if your loan application is approved.
Some calculators will also let you compare two loans side-by-side. This is particularly useful when you’re trying to decide which loan is right for your business.
Small business loans from the Government
Governments love supporting and encouraging small businesses. So, before applying with a lender, do some research.
There are a range of government grants available across a wide-range of categories. If you’re lucky, there may be one that fits your needs.
While the applications are often long, it is absolutely worth it. Grant categories may include:
- Commercialising a product
- Research and development
- Employment and training
- Green business (e.g. renewable energy)
For further details and to find grants for your business, the Grants & Programs search page on the Australian Government Business website is the place to go.
Common mistakes to avoid
There’s no doubt that, at times, loans can be a useful financial tool for many businesses. However, they are not without their issues.
There are a number of common mistakes that businesses often make which can lead to loans being unmanageable or unavailable.
These mistakes can include:
- Incomplete applications: if you fail to provide all the required information when you apply then your application may be delayed or possibly even denied.
- Selecting the wrong credit-type: business loans come in a number of forms. All have their positives and negatives. As a result, selecting the wrong one may have ramifications for your business.
- Choosing unsuitable repayment terms: only borrow what you need. Moreover, have a clear idea of what repayments would work for your budget.
Is a small business loan right for me?
In short, evaluate your financial situation. Determine if the pros outweigh the cons. If, through your investigation, you decide that it is right for your business then go ahead and apply. Just make sure you don’t rush into anything.
If you aren’t sure where to start, consider seeking professional financial advice. Financial advisers can get an understanding of your unique situation and provide a recommendation.
Monzi Personal Loans
As mentioned, Monzi is a lender-finder service. Therefore, we try to match your application with a potential lender offering personal loans. Moreover, the types of personal loans that may be on offer include:
|Personal loan||Term||Amount (AUD)|
|Small personal loan||Up to 12 months||$300 to $2,000|
|Medium personal loan||13 to 24 months||$2,001 to $4,600|
|Large personal loan||13 to 24 months||$5,000 to $10,000|
Note: the above table is just a guide. In short, the actual terms of your loan may vary to what is presented above.
Ready to apply?
Finally, for more information, investigate Monzi’s guide to starting a business in Australia today.