Types of Business Loans
Find out about the different types of business loans available in Australia and how they work.
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In this day and age, the Australian loan market has plenty of options to choose from, particularly when it comes to business financing. It's important to understand the differences between these loans to help you choose the right one for your business' needs, which you can do with Savvy today in our helpful guide.
How do different the types of business loan compare to one another?
In Australia, we have a wide variety of business lenders and loan types available, from standard banks and online lenders to newer sources of funding like peer-to-peer finance, each of which has different advantages and disadvantages. So how do some of the more common types of business loans compare to others on the market?
Unsecured loans
An unsecured business loan is a loan with no security or collateral, and it’s one of the more common types of loan on the Australian market. They’re fast to access and easy to get approved for, and they’re handy if your business doesn’t have many resources yet (they don’t require a deposit either). They do have higher fees than a secured business loan, however, and they’re normally short to medium term – up to around five years.
Secured Loans
Secured business loans have some asset offered as security or collateral on the loan. They’ll generally have the lowest rates you can get on a business loan, and they’re normally fairly long term – starting at around 5 years for a short loan, and often going much longer. You do need to have a significant asset to offer as security though – something the lender could potentially sell if you were unable to pay off the loan (although this very rarely happens).
Equipment Finance
Equipment finance is a type of business loan built specifically to give your business access to certain business equipment. The lender retains ownership of the equipment, but you keep it on your business premises and can use it freely – and the equipment can be as specialised and niche as you need (the lender is more interested in its value than its purpose). In practice, it’s a little like you’re leasing the equipment, but from a lender rather than a vendor. They’re normally a specialised kind of unsecured loan, but often have higher interest rates.
Hire Purchase
Hire purchase is another loan for obtaining business equipment. The main difference between this and equipment finance is that you pay higher rates, but end up owning the equipment at the end – like a high-end version of rent-to-own.
Chattel Mortgage
A chattel mortgage is another kind of equipment loan. In this case, you own the equipment, but you also offer the same piece of equipment as security on the loan – making it a little like a small-scale version of a home-loan.
Invoice Finance
Invoice finance is an alternative approach to lending that’s suited for a business with lots of outstanding invoices (owed to your business rather than by your business). You transfer a number of these invoices over to your lender, who then pays you the majority of the value and collects the debts themselves. Unlike traditional loans, there’s no repayments to make, and no security or collateral needed – technically the invoices are the collateral. Not every business is eligible, though, so you may need to look to an alternative source of finance.
Merchant Cash Advance
Suited for a business with a low reserves and high cash flow, a merchant cash advance involves a lender loaning you money, and then taking their repayments as a percentage of your everyday profits – rather than as a set repayment. They’re normally very short term however – 12 months at maximum – and can be very expensive compared to other types of business loan.
There are other types of loan on the market of course, including fit-out finance, startup loans & franchise loans. There’s also various types of business credit on the market, including lines of credit, overdraft facilities, and business credit cards.
Are there types of loans available if my business doesn't meet the criteria for standard loans?
If your business falls a little outside the criteria for a standard small business loan – such as it you’re struggling with bad credit, or don’t have much paperwork available for your business, there are alternative types of loan which could help.
For businesses struggling with a less than perfect credit rating, many standard types of loan also come with a bad credit option. These loans are the most credit-tolerant types of loan on the market, and are often an option when your credit rating would rule you out of any normal loan. They don’t come cheap though – bad credit loans always come at higher interest rates than their normal counterparts.
Alternatively, if your business struggles with providing enough supporting documentation for a lender (perhaps because you’re a sole trader who hasn’t needed a lot of paperwork until now), then a low doc loan might be the solution you’re looking for. These have much lower requirements for supporting documentation (hence the name), and will often place a fair bit of weight on a signed legal statement officially declaring your business income. But again – they generally come with higher rates than a standard loan in Australia.
Top tips for deciding what type of loan suits your business
Confirm how much you'll need
 If you’re looking for a very large amount, you possibly want to consider a secured loan – which can be paid off over a longer term and at a lower interest rate.
Decide how long you'll need the money for
Different business loans have different possible terms. Longer than 12 months, for example, generally rules out a merchant cash advance as an option (and invoice financing, although that doesn’t have a loan term in the normal sense). Longer than 5 years puts you firmly in Secured business loan territory (where the lower interest makes a long term loan less expensive). But a short term loan of less than 5 years is generally better suited to some type of unsecured business loan.
Examine what assets you have available
If your business has assets you can use for security, or cash reserves for a deposit it opens up options you couldn’t otherwise access. You might also have other less obvious resources, such as a reserve of unpaid invoices for invoice finance, or a benefactor willing to act as guarantor on the loan.
Determine how specific your needs are
Depending on your needs, there might be specialised loans optimised to fill that role – such as fit-out finance, or a hire purchase loan. Alternatively, more general product like an unsecured loan might give you the flexibility to address multiple business needs with the same loan.
Consider what special circumstances apply to your business
Consider if there are any circumstances that apply to your business that make certain loans more or less suitable. If you have low cash reserves, but a steady cash flow using a lot of EFTPOS or credit transactions, a Merchant Cash Advance might be ideal. If you have seasonal brief periods of financial shortfall, a business overdraft might be a better option than a conventional business loan.
