The right business loan can provide the investment you need to grow your business. It can also save you money in interest and fees.

The wrong type of business loan can lock you into expensive repayment terms and stunt the growth of your business for years to come.

Whether you need a cash injection to cover short-term expenses or a long-term funding facility to fuel expansion plans, the best business loan option is the one that is right for your unique business circumstances.

In this guide, we’ll explore the best business loan options in Australia so you can find the right finance solution for your needs.

What Is a Business Loan?

A business loan is a type of financing designed to help businesses manage cash flow and fund growth.

A growing business can often encounter cash flow gaps. Lack of working capital restricts your ability to capitalise on opportunities and maintain growth.

You can use a business loan to increase liquidity for short-term cash flow needs and to spread the cost of significant purchases and expenses over a longer period.

As with a personal loan or credit card, business loans can be secured or unsecured. Interest rates and fees can also vary according to the loan type and funding provider.

The Best Business Loan Options for Australian SMEs

With the rise of alternative lenders, there is a wide range of traditional business loans and innovative funding solutions available to Australian businesses.

To help you find the financing that’s right for you, let’s explore the best business loan options and how they work.

Secured Business Loans
Over 95% of bank loans to small businesses are secured. To be approved for a secured business loan, you will need to provide collateral such as high-value business assets or residential property.

Because the financing is secured against collateral, the interest rates for a secured business loan can be lower. Funding limits are also generally higher. The risk is that you could lose your home or asset if you default on the loan.

The need for collateral means this type of funding is more suited to established businesses and homeowners. The application process for a secured loan is also longer than other types of business financing.

Because the financing is secured against collateral, the interest rates for a secured business loan can be lower. Funding limits are also generally higher. The risk is that you could lose your home or asset if you default on the loan.

The need for collateral means this type of funding is more suited to established businesses and homeowners. The application process for a secured loan is also longer than other types of business financing.

Unsecured Business Loans
As the name suggests, unsecured business loans typically do not require any collateral. While that means they can be more accessible, the lender is taking on more risk, and interest rates can be higher. Funding limits are generally smaller than secured business loans.

Unsecured business loans are suitable for new businesses that don’t have a long trading history. They can also be ideal for more established companies that don’t want to use assets as collateral for funding. Even though unsecured loans do not require collateral, you may be required to provide a personal guarantee to cover the debt if the business is unable to make repayments.

Read our guide Why Consider Unsecured Funding? to find out why this type of financing is increasingly popular with Australian SMEs.

Equipment Finance
Equipment Finance is a type of business loan that helps companies purchase the machinery, vehicles, and equipment they need without the significant upfront cost. For most Equipment Finance solutions, you do not need to provide any additional collateral, and the funding can be used to purchase new and second-hand assets.

You can spread the cost of high-ticket items over a more extended period. Your business can use the asset during the financing term. Depending on the financing terms, you will take full ownership of the asset at the end of the contract.

Invoice Finance
Insufficient cash flow is the number one cause of business failure in Australia. Invoice Finance is a funding solution that helps companies manage cash flow and avoid the stress caused by late-paying clients and extended payment terms.

With an Invoice Finance facility, you can release the capital tied up in your unpaid sales invoices. You can get an immediate cash advance of up to 95% of the invoice value upfront, rather than waiting 30+ days for your customer to pay.

New and smaller businesses can benefit most from a debt factoring facility where collections and account management is outsourced to the finance company. For more established companies with dedicated collections departments, an invoice discounting facility may be more suitable.

Read our guide on the difference between factoring and discounting to determine which is right for your business.

Line of Credit
A line of credit can be an excellent way to support cash flow over an extended period. The finance provider will agree on a credit limit, and your business can withdraw funds as needed.

Interest is only charged on the funds withdrawn, but the facility may involve a monthly line fee and transaction fees.

A line of credit is sometimes combined with an Invoice Finance facility. It can be an effective funding solution if your business regularly experiences cash flow gaps due to extended payment terms.

The credit limit is linked to your accounts receivable. As you grow your customer base and raise new invoices, the limit increases. When your customers pay the invoice, the outstanding balance is repaid.

Trade Finance
Trade Finance is a versatile form of financing that can help companies that engage in international and domestic trade. The funding facility can support the working capital requirements of both parties in a business transaction.

If you import goods from an international supplier, Trade Finance can be used to pay for the goods upfront and support cash flow needs during the period where goods are shipped, received, and sold.

For exporters, Trade Finance can provide a cash flow boost to cover working capital requirements while goods are manufactured, shipped, and paid for by the customer.

Read our guide What is Trade Finance to see how a funding facility could benefit your business.

Merchant Cash Advance
A merchant cash advance is a type of business financing that allows you to access a cash advance secured against a percentage of your future card sales. The funding provider will analyse your historical credit and debit card sales to determine how much funding you can access.

Once the funding agreement is in place, a percentage of your card sales will automatically be used to repay the cash advance and interest.

This form of funding is suitable for businesses that process a large number of credit and debit card transactions and suffer from seasonal sales fluctuations. However, merchant cash advances typically have high interest rates compared to other types of business finance.

Read our guide The Pros and Cons of a Merchant Cash Advance to see if your business could benefit from this type of funding.

What’s the Best Loan for Your Business?

It’s vital that you choose the right type of financing. Make sure you understand the repayment terms, interest rates, and funding duration to make an informed decision. You should consider the following factors:

The Amount Required
Before you start comparing loans, you should have an accurate estimate of how much you will need to borrow.

If you need to pay for a significant one-off business expense, Equipment Finance or a secured loan could be the best option to get the funding you need.

For more flexible funding to support working capital, Invoice Finance or a line of credit could be a more suitable financing option.

Your Working Capital Needs
Your current cash flow can be an important factor when considering business loan options.

If your business suffers from cash flow gaps, a line of credit or an Invoice Finance facility can be a better fit for your needs. You can access funding when you need it, and you won’t pay interest on the remaining unused balance.

For a sizable one-off expense, Equipment Finance or a business loan will provide the most affordable rates over the duration of the repayment terms.

Your Business Lifecycle
The lifecycle of your business will impact which types of funding you will be able to access. Generally, companies with a short trading history or poor credit rating will struggle to meet the strict lending criteria of traditional lenders.

If your business doesn’t qualify for a secured business loan, there are a range of affordable options that you can still access. Invoice Finance and Equipment Finance are available to start-ups and small businesses.

How Soon Do You Need Funding?
It can take up to 3 months for a traditional business loan application to be processed. An unsecured loan or alternative funding option can provide a cash advance in as little as 24 hours.

It’s always recommended that you don’t rush into a business loan. Even if you need the funding quickly, make sure you understand the financing terms and evaluate your options before entering into an agreement.

ScotPac Business Financing

Bank loans aren’t the only option when it comes to business financing. There are more funding options available to Australian businesses than ever before.

We have over 30 years of experience helping Australian businesses get the financing they need. If you’re looking to fund the growth of your business, speak to one of our team of friendly business finance advisors today. We’ll help you understand your options and find a financing solution that works for you.