Small Business Loans

Many small businesses face a grim prospect to be rejected by lenders. Especially now, banks have lower profit margins and the bankrupt business is a bad debt to deal with. Surprisingly, most small businesses fail because of undercapitalization. This means that the entrepreneur does not have enough money to work with.

The trick is to predict within a small error how much money is really needed. If the prospective owner needs $80K for start up expenses and believes he will create $50K in revenue then $130K needs to be available to him (for the first year).

Businesses younger than 3 years will have serious difficulty to obtain commercial business loans in Australia. This is particularly true for unsecured business loans. There is also some assistance from the State Governments. Currently, Federal and The State Governments in Australia offer small business loans between $5K-$250K.

New Business Loans

The new business will have serious difficulty to convince lender about its projected profit. The reason is that banks often do not understand the product or service you sell. Even if you are well prepared with the outstanding business plan, it will be still hard to get new business loans in Australia. However, there are alternatives.

You can provide security using your existing assets. In this case home equity is the most popular option. For smaller loans, personal loans could help with the immediate finance. In some cases short term cash advance can be obtained for up to $5K.

However, if your business idea is really 'seductive' then you can obtain a high interest bridging loan. Once banks approve your new business loans in Australia, the finance is switched from the high bridging rates to the standard business loan rates in Australia.

Types of Commercial Business Loans

Whether you are looking for a small business loan in Australia or a commercial business loan the reasons for the finance are the same. There are about seven options to finance the business:

  • Start-Up Finance - this is the hardest small business loan in Australia to obtain. Here, you need to convince the bank about the unproven prospects for your future income.
  • Financing of Business Growth - applies to businesses which are established. Lenders need to see a regular increase in business growth or stability before the loan is approved.
  • Inventory Financing - applicable to a retail industry. It is designed to purchase supplies for processing or a direct sale.
  • Motor Vehicle Financing - this is a finance for company cars and trucks. Lenders are happy to provide commercial business loans for vehicles because the interest rate easily keeps up with the depreciation cost of the goods.
  • Plant Tools and Equipment Financing - this is a loan for large construction and trading companies. It often runs in millions of dollars and is not applicable to small business loans.
  • Financing Business Property - basically the rent or mortgage of the business area. Banks prefer the businesses to purchase the place because this way they have a security for the loan.
  • Trade Financing - this is applicable to small business, which requires commercial business loans for import, export and domestic trading. Here, Australian Government aids the finance and collaborates with banks. However, the approval process for this loan is demanding.

Business Loan Rates

The interest rate and the charges will be depended on the level of loan security you can provide. Thus, unsecured business loans in Australia will cost more than the secured ones.

Most entrepreneurs believe that business in its own ability should be able to finance itself. Therefore, the owners are often after the unsecured business loans.

Banks, of course, have to weigh risks and are not that optimistic about applicants' business abilities. Currently, the interest rate for residentially secured small business loans in Australia ranges between 8%-10%. Total monthly fees are within $100. The lowest is about $50.

ANZ and BankWest lead the market in interest rates for small business loans in Australia. They offer low interests (+/-8%) and relatively low charges (+/-$60).

For commercial business loans in Australia in the form of overdrafts Westpac is the favourite. However, its establishment fee is quite high ($820).