How Do Business Loans Work?

Learn about what business loans are and how they work before you apply for finance.

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, updated on September 4th, 2023       

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If you’ve thought about starting your own business or in the near future or scaling up your current operations, you’ve probably considered taking out a business loan. If you're not 100% sure about how they work, though, you can read all you need to know about business finance right here with Savvy in our handy guide.

How exactly do business loans work?

Business loans work by allowing current or would-be business owners to borrow funds from a lender such as a bank, credit union or online lender, which are then used to start, continue or expand the running of the borrower’s business.

The majority of online lenders will only offer credit to businesses that have been running for at least one year and can provide proof that their annual revenue surpasses a certain amount, which is generally between $50,000 to $120,000. Larger lenders such as banks will also extend credit to newly established businesses, as well existing businesses with proven revenues. Approval and funding can be arranged as soon as the same day you apply.

The full loan amount must be repaid to the lender over an agreed-upon period of time, plus interest. This is known as the ‘loan term’ and can range from anywhere between three months to longer terms up to ten years or more depending on the lender’s policies and the borrower’s circumstances. The interest payable on these loans will vary greatly depending on a variety of factors such as the borrower’s financial situation, and projected business outcomes.

Business loans can be either secured or unsecured. A secured business loan requires you to provide an asset or guarantor that can guarantee you lender will be able to recoup any losses in the event that you are unable to make your repayments. Securing your loan can also help to get you a better interest rate and cheaper fees, as well as increasing your borrowing power. An unsecured loan requires no security and is generally much easier and quicker to get, but due to their lenient nature will typically come with smaller borrowing ranges and higher interest rates.

A range of different loan features can be incorporated into business loans, which can make certain loan options more appealing than others to some prospective borrowers. These features can include the capacity to make extra, advance repayments towards your loan, or a redraw facility, which can allow you to access funds which you have already repaid towards your loan.

What will I need to apply for a business loan?

In order to apply for a business loan, you will need to provide the necessary documentation as outlined in the following table.

Documentation Details
Official photo ID
Your government issued ID will need to be one or more of either a driver’s license, passport or adult proof of age card. Others can be accepted also, so check with your lender to ensure that these are suitable.
The Australian business number (ABN) or Australian company number (ACN) associated with your business is your unique business identifier and will need to be provided to your prospective lender.
Financial records

The financial records required of you might vary between lenders. However, different forms of financial records you should be prepared to provide include:

  • Six months of either yours or your business’ bank statements.
  • Cashflow statements showing all of your business’ revenue and costs.
  • Both personal and business tax records.
New business documents

If you are taking out a loan to start a new business you might be required to provide a business plan which outlines your projected costs, earnings and timelines.

If you are unable to provide all of the documentation listed above, you might still be eligible for a low doc or no doc business loan. In this instance, you will still need to provide official photo ID. However, in lieu of bank or cashflow statements, a letter from your accountant or a signed income declaration might suffice. Low doc business loans will typically come with a lower borrowing range, may require security and could come with higher interest rates.

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How much will I be able to borrow for a business loan?

The amount you will be eligible to borrow depends on a variety of factors including your own, or your business’ circumstances, as well as the type of lender you wish to borrow from. The lower bound for a secured business loan borrowing range is typically around $5,000 from online lenders and the upper limit can reach tens of millions of dollars with larger lenders. Unsecured loans will likely range from $1,000 to $300,000.

What can I do to try and increase how much funds I can access with my business loan?

To maximise the amount of credit you will be eligible for there are a range of things you can do including:

  • Ensure that you have a strong credit score. Paying your rent, utilities, and credit card bills on time and not missing any debt repayments will help this.
  • Show proof that your business is in a strong financial position and has been in operation with high annual revenue for more than one year.
  • Secure your loan with an asset such as your home or other property.
What can I use my business loan for?

Anything you need – from restaurants looking for finance to help buy inventory to medical professionals seeking out funds to pay their bills and help cover staff wages, a business loan is incredibly flexible to your needs.

Can I access credit for my business with a credit card instead of a business loan?

You can – business credit cards can be a good option for those who wish to access extra funds for their business but whose requirements might not justify a loan. A credit card can provide you access to credit when you need it, at a relatively low cost compared to some loans. You will be able to keep your business credit card at the ready at little to no cost, and only pay interest as you use it to cover necessary purchases. However, business credit cards can come with high interest rates and will also have spending limits.

Are there any other ways for me to access funds to start a new business?

If a business loan isn’t the right choice for you, you can consider applying for a government grant. State and territory governments offer limited grants to businesses that are perceived to add value to the local economy. While these grants can be helpful under the right circumstances, they should not be relied upon as a sure alternative to a business loan. Some examples of state-specific grants are:

  • Queensland’s small business grants schedule.
  • NSW’s small business grants and regional growth fund.
  • Victoria’s manufacturing and industry development fund.
What are some of the other types of business finance to consider?

If you’re a property investor and want to purchase a group of apartments with the tenants still living there, rent roll finance could be a strong option for you. For business owners who need a hand paying for their stock orders before they’re able to sell them, you might look at inventory or floorplan finance. There are many other types of finance available, such as merchant cash advances, invoice finance, bridging finance and more which can help you beyond a standard business loan.

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Compare business loans through Savvy today 

Whether you need a small unsecured loan to boost your cash flow or a larger, secured deal to purchase equipment, you can compare a range of competitive online offers through us before you sign on the dotted line.