We all want our enterprise to flourish, increase turnover, enhance productivity, introduce effective advertising campaigns, expand the range of products, and someone wants to launch a new product, or even start a business. But it is difficult to imagine the implementation of these goals without the involvement of external funds. Even the most successful companies use loans - because it allows you to accelerate growth, even if you have your funds. At the same time, obtaining a commercial loan is not an easy task. This is essentially a separate project. The responsible manager must solve a challenging task. It is necessary to correctly assess the need for financing, choose a reputable organization, analyze a lot of price and non-price parameters, successfully apply for a loan, etc. Which loan program to choose from an extensive list offered by credit organizations? Should it be a secured or unsecured loan in the form of business term loans, business lines of credit, business overdrafts or business credit cards? Should you apply for invoice crediting or factoring, business vehicle financing, business loans for equipment purchasing, cash flow lending, fully-drawn advance, hire purchase, business bill of exchange, trade finance. What a bank to choose? Should it be Commonwealth Bank, ANZ, NAB, Westpac Bank or another one? What documents to prepare together with a credit application? Bankchart.com.au helps you to take the right steps in this article.
Step one. What is a business loan? What kinds of such loans are offered in Australia?
A business loan is credit line or an amount of money, lent by a financial organization to a company or an entrepreneur for business goals: purchasing vehicles or equipment, increase in working capital, buying an estate, etc.
According to our research business loans in Australia can be provided for the term from 1 to 30 years by interest rate from 4,19% to 19,75% annually depending on the loan type, the credit score of the company and other factors. Repayment of the loan can be presented in the form of fixed repayments or a flexible schedule with fixed or variable percentage rates. The maximum sum of financing can range from 5 000 to 1 000 000 AUD.
There are a lot of kinds of business loans depending on the comparing criterion. Thus, depending on a pledge providing, the business credits can be:
Secured (amount: depending on the collateral value, terms: to 30 years, rates: 4% - 12 %, applying speed: low) – a company must pledge collateral, like a car or a property. Banks offer the largest sums against the security, but not more than its value
Unsecured (amount: to 500 000 AUD, terms: to 3 years, rates: 6% - 20 %, applying speed: high) – a firm is not to provide collateral for a loan to a financial organization. It is convenient, but it is harder to obtain such loans and they have the highest interest rate. The application for such credits usually can be applied online. Also, banks can require a personal guarantee in this case, so you will have to repay all the debts if the business fails.
Depending on the form of the loan providing, there such kinds of business loans:
Business/ commercial term loans (amount: to 10 000 000 AUD, terms: to ten years, interest rates: 3% - 13 %, applying speed: slow) – are granted on a current account of a firm or directly are sent to the provider (for example, of equipment) account. They are offered for a certain period (from 1 year (short-term) to 30 years). The borrower usually repays the debt periodically (for example, monthly) according to the schedule, and interests are charged on the outstanding amount
Business lines of credit for small businesses (amount: to 250 000 AUD, terms: to one year, credit rates: 5% - 14%, applying speed: one-two days) – are a credit limit within which a firm can take funds when it needs. Repayments of the debt are flexible, but such conveniences are not cheap, the interest rates here are higher compared to term loans. The company can be required to repay the whole debt during particular periods of time, for example, per quarter. Administrative fees can be charged by a financial organization even if you don’t use the loan limit
Business overdrafts (amount: to 100 000 AUD, terms: to one year, rates: 5% - 20%, applying speed: one-two days) – are similar to credit lines and are linked to a firm’s current account. Such credits are very useful to meet short-term funding needs, but they usually have additional commissions like servicing and administrative fees.
Business credit card (amount: to 100 000 AUD, terms: ongoing, rates: 6% - 20%, applying speed: to one week) – works as an individual credit card, but for business purposes. Enjoy discounts from a bank’s partners and grace periods. But the interest rates are high and can reach 20% yearly.
Depending on the loan purpose, business credit can be:
Invoice crediting or factoring definition (amount: to 100 000 AUD, terms: 30-180 days, rates: 3% – 5% , applying speed: one-three days) – financing of outstanding invoices. You can receive up to 85% of the invoice amount but will have to pay a fee - a percentage of the invoice sum. Requirements to the turnovers and the business experience can be set
Business vehicle financing (amount: to 1 000 000 AUD, terms: to five years, rates: 4% - 12% , applying speed: one-two weeks) – is a secured loan provided for purchasing new or used cars. Some banks can also offer a lease scheme of financing.
Business loans for equipment purchasing (amount: to 2 000 000 AUD, terms: to five years, rates: 4% - 10% , applying speed: one-two weeks) – you can use one from a large variety of business loans proposals for buying equipment
Commercial property loan - for buying a real estate is provided for the maximum term – 30 years under the lowest interest rates within 4-5% annually
Cash flow lending amount: to 250 000 AUD, terms: to one year, rates: 5% - 10% , applying speed: to one week) – a type of financing, when the company’s cash flows act as collateral against the loan funds. The interest rate is usually charged on the outstanding balance
Fully-drawn advance – is a long-term loan up to 10 years with pre-determined repayments for purchasing real estate, equipment, business, etc. The financing repayments are usually done on a monthly basis
Hire purchase (amount: to 2 000 000 AUD, terms: to 7 years, rates: 4.5% - 15% , applying speed: one-two weeks) – is a type of financing for buying assets, which will be owned by an obligee till the maturity date
Business bill of exchange (amount: to 500 000 AUD, terms: to two years, rates: 1.7% - 1,8% , applying speed: to one week) – assists you to cover short-term and seasonal lacks of cash flows with a low rate. Such financing can be provided in the form of a term loan or a line of credit. But the interest expenses must be paid in advance and the variable percentage rate is sensitive to fluctuations in the financial markets
Trade finance allows you to purchase commodities on domestic and foreign markets. There are a lot of types of trade financing, like bank guarantees or letter of credit
Step two. How to compare commercial credits?
Before applying to a financial organization for a commercial loan it is important to determine your firm’s opportunities to repay the loan. For this the authorized staff should analyze the company’s revenues and outgoings to calculate what a loan sum, term, and a frequency of repayment to choose.
To select the best credit proposal it is important to analyze all price and non-price parameters of a business loan, like:
- The size of percentages rates: by our research their level vary from 4,19% to 16,83% annually and can depend on the providing of collateral, the kind of the credit product, its term and initial advance and also the firm’s credit score.
- The size of fees:
- One-time commissions – by our investigation their size vary from 150 to 595 AUD and from 0,4% to 0,75% of a loan amount. Such fees can consist of 2 and more tariffs, like approval and administrative commissions. As you see above the fee can be established in the form of a percent of the loan size or a fixed sum in AUD
Periodical fees – for example, credit facility fee ranges from 5 to 400 AUD and also can be set in the form of a sum in AUD or a rate
- Renegotiation commission – usually applies for mortgage loans, for example, in cases if you desire to shorten or lengthen the loan term.
- Missed payment penalty – if your firm breaks the credit repayment schedule the bank will charge fines
- Insurance fee – if you chose a secured commercial loan, the financial organization will require to insurance the collateral
- Early pay out commissions – some lenders may charge a fine if your firm will repay the loan early the due date
- Loan amount –it is important to find out whether the financial organization can fit your loan
requirements. To get a higher sum, your company should take a secured loan
- Maximal term – by our investigation vary from one (short-term) to thirty years (purchasing of real estate) and is greater for financing with a pledge, than for unsecured loans
- Collateral – financial organizations can require a pledge, such collateral, for example, can be the purchased vehicle, equipment or real estate
- The frequency of repayment – Australian financial organizations generally can offer you a weekly, fortnightly, monthly, quarterly, half-yearly, yearly or seasonally frequency of the business loan redemption
- Percentage type – the rate can be variable or fixed. The last one usually is lower, but with a flexible rate, you will be better prepared for the fluctuations in the financial markets. Often it is linked to the prime rate and you will benefit if its level will decrease in the future and will suffer otherwise
- Additional conditions like requirements to a company’s profits and experience of business activity, credit holidays possibility, the level of a lump sum, extra funds ability are also essential in choosing of a commercial credit product
Step three. What is a credit score and how does it affect your chances to get a business loan?
In contrast to the credit rating for individuals, a similar indicator for businesses is used less frequently. Statistics show that less than 10% of enterprises in Australia are interested in this indicator. And in vain, because a good rating allows you to get a lower rate and save thousands of AUD to your company.
So, what is a business credit score? It is a number (appraisal) from 0 (or D-grade) to 1 200 (AAA), which shows your company’s credit file and evaluates how risky it is to submit a loan to your company. In Australia this indicator is calculated considering the following factors:
Good collateral and experience in raising funds - successful obtaining and timely repayment of commercial credits earlier or inquiry for a secured loan - increase the indicator
The experience of business activity - the more your business operates, the more practice you have and the fewer risks of the operational activity are, so the higher will be the firm's credit score
Business credit information - judgments and defaults, administrations and court orders against the company and its director/owners decreases your score
Financial information about your firm like the size of capital, proceeds, the level of incomes, profitability, cash flows and tax returns - influences the indicator greatly
Any information about your company PPSR (Personal Property Securities Register) registrations can influence your file
General data about a company, like its name, structure, address, data about the owners and the key managers, etc.
At the same time, the following indicators may adversely affect your credit rating:
- Missed payments on previous loans
- Business defaults
- Simultaneous application for a business loan in several financial institutions
If a financial organization refuses to provide a loan, you should order a copy of the business credit report at Equifax, Experian, Dunn & Bradstreet OnDeck or another bureau. So you will be able to find a reason of such a refusal and to take the right steps to increase the score.
You can also take the following steps to improve your company's credit rating:
- Pay your bills on schedule or earlier
- Keep increased balances on your corporate cards as overdue payments (for example, for servicing fees) lower your credit score
- Check your company’s credit history periodically, for example, every year
- Be honest when filing a credit application, because financial organizations easily can check the provided data
- Separate your personal and commercial credits, as it can interfere with your business to build its own credit score
- Issue a small amount on credit, for example, secured by goods and use it, at least a small part in time, to build a credit rating
At the same time, remember that improving credit score is not a quick process and can take at least several months, so be patient and do not leave the intended course.
Step four. How to apply for a business loan?
Most Australian banks accept commercial loans applications at their branches, but you can set an appointment online or by phone. The authorized staff of your company must provide the following documents to get a loan:
- government-issued photo ID
- the last tax slips
- trade name registration and licenses (if you use them)
for limited liabilities also:
- partnership certificate
- partnership declaration
- application for registration
for corporations also:
- articles of incorporation
- letters patent/company charter
- articles of amendment
- corporate profile report
But, not every firm can take commercial loans. The banks usually set requirements, like:
- not more, than 2 partners or 5 directors in a company, for example
- to be a resident of Australia and have a valid ABN/CAN number
- to have a particular volume of cash flows, for example, not less than 100 000 AUD yearly
- to a have a business activity experience 12 months and more
- to be 18 years old or older (for entrepreneurs)
Note that when making a loan decision, Australian banks take into account the following parameters:
- the credit score of the company and its directors/owners
- the experience of activity and turnover of the business
- your firm must be profitable
- the company mustn’t have large current debts
- your company’s structure should be stable for a recent period of time
- other factors
After providing all the documents the bank makes a decision within a few days, after which it provides you with funding. But if your business loan application was rejected - do not despair. Check with the bank the reason for such a refusal and take the necessary steps to try to apply after a few months. Just do not try to immediately apply to other banks, because it is very likely that you will get the refusal again. But, this will only worsen your company's credit rating.
If your company is a start-up or has a bad credit score, the most chances you will have to get a small secured loan, for example, a credit line with security in the form of commodities or equipment.
Before applying to an Australian bank for a business loan it is essential to consider your company’s opportunities to repay the credit. For this, the responsible managers should analyze the firm’s incomes and outgoings to calculate what a loan sum, term, and a frequency of repayment to select.
Selecting a bank, It is important to analyze all price and non-price parameters of a business loan, like the level of interest rates, the size of different commissions, the credit amount, the maximum term, collateral, the frequency of repayment, the interest type, and additional conditions.
Most Australian banks accept business credit applications at their branches, but usually, you can set an appointment online or by phone. Keep in mind, that making a credit decision, Australian banks take into account the following parameters: the credit score of the company and its directors/owners, the experience of activity and turnover of the business, your firm must be profitable, receivables, your company mustn’t have large current debts and its structure should be stable for a recent period of time, etc.