Business Loans Background

Business Loans

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What is a business loan?

Businesses are expensive to start and run, and as such they generally require a large amount of capital to pay for these expenses. To pay for this, businesses may take out a business loan. As with all loans, a business loan must be repaid with interest.

A business loan can be used to pay for expenses that the business is unable to pay for itself at that particular time, such as:

  • Purchasing an office or storefront
  • Upgrading business equipment or IT software
  • Staff wages or advertising expenses during the early life of a business or startup

A business loan can be secured by the office or storefront property owned by the business (commercially secured business loan), or by the home the business owner lives in (residentially secured business loan). Choose between the different types of business loan and business overdraft.

Business loans charge interest rates in slightly differently way to other types of loans – they charge a risk margin based on how the lender views the business’s prospects for success.

As well as interest charges, there are also fees that are charged on business loans. Find out what fees apply to business loans.

Things to look for when comparing a business loan include:

  • Fixed or variable interest rate
  • Split loan facility (part of loan on a fixed interest rate and part on a variable rate)
  • Switch facility (ability to switch interest rate between fixed and variable)
  • The loan size you need
  • Ability to make additional repayments to pay off your loan faster
  • Redraw facility (ability to withdraw additional payments)
  • Ability to make lump sum repayments to pay off your loan faster
  • Portability (ability to keep the same business loan when you switch office or store locations)

Canstar uses a unique, sophisticated star ratings methodology to rate business loans. A business loan product will be rated with 1 star up to 5 stars based on how well they provide value to consumers. Products that achieve a 5-Star Rating are recognised and awarded with our Business Loans Outstanding Value Award.

Each business loan is awarded points based on two things: price and features. We use a similar methodology for all of the other categories we rate, and we encourage you to read more of them at https://www.canstar.com.au/.

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 getting a loan or credit for their business.

A business overdraft is a line of credit that becomes available to a business when you make a withdrawal for a greater amount than the balance in your business transaction account. The bank then extends credit up to the maximum overdraft limit. Interest is charged on the fluctuating daily balance, and the overdraft balance does need to be repaid but there is no set timeframe to repay the debt.

This essentially means that a business can continue to make withdrawals when the account is empty, giving a large degree of flexibility in its cash-flow. This can be useful for paying employees or bills on time, even if your clients have not paid you yet.

As with a business loan, any debt on a business overdraft facility needs to be repaid, and interest is charged on the overdraft based on how much credit you’ve used within a certain period.

If you’re a new startup, consider our list of accelerator and incubator programs available in Australia.

Business Loan Glossary Of Terms

Please note that these are a general explanation of the meaning of terms used in relation to business loans.

The wording of loan terms and conditions may use different phrases or terms, and you should read the terms and conditions of the relevant loan to understand the features and cost of that loan. You cannot rely on these terms to the part of any loan you may purchase.

Refer to the product disclosure statement (PDS) and Canstar’s Financial Services and Credit Guide (FSCG).

Account balance: The amount of money you have in your account.

Business loan: A loan granted to fund a business and its proceedings.

Business overdraft: A line of credit that becomes available to a business when it makes a withdrawal for a greater amount than the balance in your business’s debit account.

Fixed interest rate: A fixed interest rate remains the same for the entire duration of the loan.

Loan balance: The amount of money left to be repaid on a business loan.

Loan term: The term of the loan usually refers to the length of time the borrower has to repay the loan. This is different to the loan terms and conditions, which are a full list of the lender’s conditions in agreeing to offer a loan, including the interest rate, fees and charges, and the loan term.

Risk margin: When setting the interest rates on a business loan, lenders apply a ‘risk margin’ based on how risky it is to lend to the business. Lenders consider factors including how successful the business already, and its prospects for future success such as its location, customer base, ability to service debt, and the reason for borrowing. Learn about business loan risk margins here.

Secured loan: A loan that is backed by ‘security’ (collateral) such as the property the business owns (commercially secured) or the home the business owner lives in (residentially secured).

Unsecured loan: A loan that is obtained without security (collateral).

Variable interest rate: A variable interest rate fluctuates over time based on the RBA cash rate and the lender’s business decisions.

Important information

For those that love the detail

This advice is general and has not taken into account your objectives, financial situation or needs. Consider whether this advice is right for you.

Canstar does not rate or compare every provider in the market and we may not compare all features relevant to you. Learn more about our Business Loans Methodology. In some cases, the methodology uses profiles comprising categories or bands eg. income, loan amounts, monthly spend. In other cases, a single methodology is applied. Check current product details with the product issuer. These products are not available for personal, domestic or household purposes. Advertised Interest Rates are for reference rate only and can be subject to change. Rates may not be inclusive of customer margins or applicable service fees. Please refer to product provider.

Any advice on this page is general and has not taken into account your objectives, financial situation or needs. Consider whether this general financial advice is right for your personal circumstances. Canstar provides information about credit products. We’re not suggesting or recommending a particular credit product for you. If you decide to apply for a loan, you will deal directly with the provider, not with Canstar. It’s important you check rates and product information directly with the provider. Consider the Target Market Determination (TMD) before making a purchase decision. Contact the product issuer directly for a copy of the TMD. For more information, read our Detailed Disclosure.

What is a Target Market Determination?

A Target Market Determination (‘TMD’) is a document that explains which people particular financial products may be suitable for (the target market) and sets out any conditions around how financial products can be distributed to consumers.

Why do product issuers provide Target Market Determinations?

From 5 October 2021, TMDs are compulsory for most financial products.

Issuers and distributors of financial products must take reasonable steps that are likely to result in financial products reaching consumers in the target market defined by the product issuer.

We recommend that you consider the TMD before making a purchase decision. Contact the product issuer directly for a copy of the TMD.

Canstar may earn a fee from its Online Partners for referrals from its website tables, and from sponsorship or promotion of certain products. Fees payable by product providers for referrals and sponsorship or promotion may vary between providers, website position, and revenue model. Sponsorship/promotion fees may be higher than referral fees. If a product is sponsored or promoted, it’s an ad and it is clearly marked as such. An ad might appear in different places on our website, such as in comparison tables and articles. Ads may be displayed in a fixed position in a table, regardless of the product's rating, price or other attributes. The location of an ad doesn’t indicate any ranking or rating by Canstar. Payment of fees for ads does not influence our Star Ratings. See How We Get Paid to find out more.