In 2019 the Ombudsman reported that 34% of Australia's gross commercial profit was brought in by small businesses.

As the sector responsible for employing up to 44% of the Australian workforce, small businesses are crucial to the economy. When it comes to small business growth the first thing that comes to mind is, "where do you get the money?". While being up to your eyeballs in debt is not a good idea, sometimes in the name of growth, debt is necessary.

Business growth is all about improving your ability to increase the income of your business. By expanding your range of services, stock, or geographical reach, you're increasing the value of your business.

Timing is important, you need to be sure that you can carry the cost of a business loan for the next 1-3 years at least. If your business can stand to wait for a short time, try to improve your business plan and financial situation. Lenders charge you interest based on how much of a risk lending you money will be. Show them your business is financially viable and your plan is well thought out.

There are a lot of options out there to finance business growth. The trick is to find the option that won't damage you or your business financially. This is where getting a loan tailored specifically to your business needs comes in.

Here are a few things you'll need to take into consideration before applying for a loan.

Banks vs Alternative lenders

As large financial institutions banks can offer you lower interest rates, higher loan amounts, and reasonable repayment terms. But, small businesses seldom get loan approval from banks because of the red tape and regulations that weren't designed to take small businesses into consideration.  

Alternative lenders are not as strict as the banks when it comes to lending to small businesses. The loan approval rate is much higher and tons of them are easy to access online. You'll be offered fair interest rates and loan terms, but they can't lend you as much money as banks can.

The type of loan you’ll need

Applying for a loan to suit your specific situation will always be the best option. Many loan brokers will offer you the chance to consult a professional financial advisor. This person will be able to assist you in finding the loan that best suits your needs and won't drown you in unnecessary fees and high-interest rates.

Four loans you should keep an eye out for:

#1) Traditional Small business loan

This is a long term loan that gives you up to 10 years to repay it. The minimum loan amount is usually around $500k with a maximum amount of up to $10m. The flexibility of this loan is what makes it attractive.

You can choose to pay a fixed or variable interest rate, or you can opt for a combination of both. Due to it being a long term loan you'll be charged interest rates of between 2.97% and 12.83%. The interest rate is still dependent on how much risk you pose to the lender, what kind of collateral you offer and your choice of loan terms.

These loans are more likely to be offered by major banking institutions. They have strict regulations and it may take a long time to get your loan approved if your application is successful. This loan requires security, usually in the form of the business owners residential property.

#2) Hire purchase

You can apply for up to $2m to cover an asset necessary to the running of your business.  A lender will typically pay for the asset and retain ownership of it until you have repaid the loan.  You'll have up to seven years to repay it in full and the terms are flexible enough to tailor the loan to suit your cash flow.

Interest rates charged will be between 4.6% and 15% which is higher than you would pay on a traditional business loan. You will be required to pay a deposit. While you pay off the loan amount, you will have use of the asset.

You could receive loan approval within 14 days, compared to traditional loans this is a faster turnaround time. The regulations on this loan are not as strict and because your lender holds ownership of the asset the risk you pose to them is lower.

#3) Unsecured business loans

As far as loans go, this is an attractive option. This short-term loan allows you to borrow up to $500k to be paid back within 24 months. You are not required to offer security in the form of collateral, hence the name unsecured loan.  You could use it for anything up to and including procuring equipment or stock, hiring of specialised staff, or refurbishing the office.

Unsecured loans are far easier to secure than traditional loans, but they also come with a few catches. They are considered high risk loans and for that reason come with higher interest rates. You may also be required to give a personal guarantee on larger loan amounts. Comparing offers from lenders to make sure you get the best possible rates, fees, terms, and conditions is vital with unsecured loans.

The turnaround time on these loans is fast and the application is easy and can be done entirely online. No time wasted verifying the value of your collateral. Get more competitive options by applying for your unsecured loan through a broker.

#4) Purchase order finance

This type of financing works well when it comes to business growth.  It's flexible and has a very short loan term. Using the purchase order provided to you by your customer you can apply for funding to pay your supplier and any delivery costs.

Once the lender has verified both the purchase order and supplier quotes, they will start the process.  The lender pays your supplier once delivery has been made to your customer. Your customer pays the lender. The profit is paid to you by the lender after deducting the agreed upon fees.

Each lender may have different fees and conditions attached to this kind of loan, but it's easy to access and your purchase order acts as the security. This is a low-risk loan and it has an incredibly fast turnaround time.  It's the perfect way to finance that once in a lifetime opportunity.

Small business loans will usually only be extended to small to medium-sized businesses that have been in operation for more than six months, and have a monthly turn over of $5,000.

You will need to provide lenders with certain documentation once you start the application process. Lenders need to see that you'll be able to afford to pay back whichever loan you choose.

Likely documents along with your application

  • Bank statements for the last 6 months
  • Your debtors and creditors statements for the last 6 months
  • Proof of the date your business was established, and that you meet the minimum turnover requirements
  • Identity document
  • A well structured business plan.

Lenders offering small business loans will offer you competitive pricing options and be excited to help you grow your business. With your dreams in hand, some planning, and a finely tailored financial solution you can move into the next phase of your business's growth.