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What are the types of business loans?

  • Residentially secured overdraft
  • Commercially secured overdraft
  • Residentially secured term loan
  • Commercially secured term loan

Overdrafts vs. Loans

CANSTAR researches and rates both business loans and business overdraft facilities. We recognise that business owners have different needs and wants when it comes to credit for their business. CANSTAR’s Business Loans star ratings are aimed to provide results that suit each of the borrowing profiles for business overdrafts and business loans.

What is a business overdraft?

A business overdraft is a facility attached to a savings, debit, or checking account. An overdraft occurs when you make a transaction (ATMs, cheques, card purchases, EFTPOS, or automatic bill payments) for an amount greater than the balance in your account. The bank then extends credit up to a maximum overdraft limit and you can make withdrawals up to that limit. Interest is charged on the fluctuating daily balance, but the overdraft balance does not need to be repaid within a set timeframe.

What is a business loan?

A business loan is a loan for business purposes, which can be used for anything from upgrading equipment or software, to purchasing a new storefront, to paying employees during a temporary cash flow shortage.

Residentially Secured Overdraft

What it is: An overdraft facility secured by the home you live in. Having your overdraft secured lowers the risk to the bank, meaning they can offer you a lower interest rate.

Popularity: 43% of business owners choose to use their own home as the security for their overdraft (CANSTAR database, 2016).

Availability: 13 out of 23 institutions offer this product.

Commercially Secured Overdraft

What it is: An overdraft facility secured by real estate property owned by the business. Having your overdraft secured lowers the risk to the bank, meaning they can offer you a lower interest rate.

Popularity: Slightly more popular. 57% of business owners choose to use their own home as the security for their overdraft (CANSTAR database, 2016).

Availability: 14 out of 23 institutions offer this product.

Residentially Secured Term Loan

What it is: A loan that must be repaid within a set period of time and is secured by the home you live in.

Popularity: 26% of business owners choose to use their own home as the security for their loan (CANSTAR database, 2016).

Availability: 14 out of 22 institutions offer this product.

Commercially Secured Term Loan

What it is: A loan that must be repaid within a set period of time and is secured by the home you live in.

Popularity: Highly popular. 74% of business owners would prefer to use commercial property as security for their loan (CANSTAR database, 2016).

Availability: 16 out of 22 institutions offer this product.

Fixed or variable interest rate?

  • Variable: 35%
  • Fixed 5-year term loan: 22%
  • Fixed 4-year term loan: 4%
  • Fixed 3-year term loan: 14%
  • Fixed 2-year term loan: 10%
  • Fixed 1-year term loan: 15%

What size of loan business owners expect to need

According to the CANSTAR database in 2016, 1 in 3 business owners expect to need a loan for more than $100k but still less than $250k. More than 1 in 10 business owners comparing loans on our site are looking for a loan of up to $1 million or more, in the “more than $750,000” category.

  • $1 – $100,000: 25%
  • $100,000 – $250,000: 33%
  • $250,000 – $500,000: 18%
  • $500,000 – $750,000: 7%
  • $750,000 or more: 15%

Source: CANSTAR

Additional repayments

What it is: Making extra repayments on top of your regular scheduled repayment is a great way to pack back your loan faster, with the bonus that you pay less interest over the life of your loan. Not all lenders offer this facility, however. And watch out for early repayment fees – there’s no point celebrating at the end of the finish line if you have to pay for the privilege.

Popularity: 31% of business owners want the ability to make additional repayments (CANSTAR database, 2016).

Redraw facility

What it is: A redraw facility lets business owners withdraw any additional repayments that they have made on top of their regular required payments. It gives a loan term a certain amount of flexibility, since you can pay more when you can afford to and then take it back later if you need to.

Popularity: 27% of business owners want a redraw facility (CANSTAR database, 2016).

Lump sum repayments

What it is: Sometimes when cash flow is good, a business owner may want to repay a big chunk of their loan all at once in a lump sum repayment. Much like making many smaller additional repayments over time, a lump sum repayment can cut down the balance of your loan faster and means you pay less in interest over the life of your loan.

Popularity: 20% of business owners want the ability to make a lump sum repayment (CANSTAR database, 2016).

Split loan facility

What it is: A split loan is when you divide your loan into two parts, with one part being charged at a fixed rate and the other part being charged at a variable rate. Technically you are taking out two loans, but most banks will only charge the fees for one loan. However, some institutions will charge a fee if you would like to split your loan.

Popularity: 10% of business owners want a split loan (CANSTAR database, 2016).

Portability

What it is: Loan portability is a feature that allows you to keep the same loan when you change properties, saving you the hassle of refinancing the loan. It means you are changing the security for the loan.

Popularity: 7% of business owners want portability for their loan (CANSTAR database, 2016).

Switching between variable and fixed

What it is: A switch facility means you are able to switch your loan from a variable to a fixed rate, or vice versa.

Popularity: 5% of business owners want the ability to switch between variable and fixed rates (CANSTAR database, 2016).

How to find an outstanding value loan

According to our database, 40% of business owners comparing business loans on our website select a 5-star rated product to provide outstanding value for the needs of their business. Another 31% find a 4-star rated product that will adequately meet their needs.

In 2016, we have researched 90 business loan products from around Australia and given them star ratings according to how much value they provide for business owners. Take a look at our comparison tables to see which business loan products would provide outstanding value for your business needs.

Where are all the entrepreneurs?

While the bulk of entrepreneurs visiting our site come to us from NSW (38%), our website also sees many money-minded business makers coming out of Victoria (21%) and Queensland (20%).

Do entrepreneurs trust big banks?

Yes! In fact, 73% of business owners comparing business loans on the CANSTAR website chose a product from a bank over a product from a building society or a credit union, which were evenly split at 13.5% each.

And it turns out that in the current market, they’re right to do so. All of the products that received CANSTAR’s 5-star rating in 2016 were banks, with Bank Australia being the only smaller institution on the list. Banks also provide 80% of the products available on the market, so they’re easy to find.

Building Societies and Mortgage Managers make up 5% of the market when combined, but they are much smaller institutions than banks or mutual banks. This means they are sometimes unable to provide interest rates and fees that are as competitive as those available from banks and mutual banks.