Quick answer
A business loan is money a lender advances to a business for a business purpose, repaid over an agreed term with a cost on top. Lenders assess how the business earns money, its credit history and any security offered, then set the amount, term, repayments and price. Loans can be secured or unsecured, lump sums or revolving limits, and are usually backed by a director's guarantee.
Key points
- Every loan has five moving parts: amount, term, repayments, cost and security.
- Lenders assess capacity to repay, credit history and security.
- Term loans give a lump sum; revolving facilities give a limit to draw on.
- Most small business loans need a personal guarantee from directors.
Most people learn how loans work through a home loan or a car loan, and then discover that business finance plays by slightly different rules. The ideas are familiar, but the assessment, the security and the way costs are presented can all look unfamiliar. This guide lays out the basic mechanics so the rest of our site, and any offer you receive, makes more sense.
The five moving parts of any business loan
Every business loan, however it is marketed, comes down to five things:
- Amount. How much the lender advances, and whether any fees are deducted before you receive it.
- Term. How long you have to repay, from a few weeks to many years.
- Repayments. How much you pay, how often and whether there is a lump sum at the end.
- Cost. Interest, margin, fees or a fixed total charged for the use of the money.
- Security. What the lender can claim if the loan is not repaid, including guarantees.
Change one and the others move. A longer term lowers repayments but usually raises the total cost. Stronger security can lower the price or raise the amount. When you compare offers, compare all five, not just the repayment.
Who lends to businesses
Business finance in Australia comes from several kinds of lender. Banks offer a broad range and are often the cheapest for strong applicants, but can be slower and more rigid. Non-bank lenders fund themselves from investors rather than deposits and often specialise in particular products such as cash-flow lending, property-secured short-term loans or equipment finance. Online lenders use bank statement data to make fast decisions on smaller unsecured amounts. Private lenders usually focus on property-secured loans. Our guide to bank versus non-bank lenders explains when each tends to fit.
How lenders decide
Lenders want to answer three questions, which some people remember as capacity, character and collateral.
- Capacity: can the business repay? Lenders look at bank statements, financial statements, BAS, existing debts and the purpose of the loan.
- Character: has the business, and its owners, handled credit well? Credit files, ATO lodgements and banking conduct all count.
- Collateral: what if things go wrong? Security such as property or equipment, and personal guarantees, give the lender a fallback.
The weight given to each varies. A cash-flow lender may focus almost entirely on recent bank statements. A property-secured lender may care most about the property and the plan to repay. A bank making a large term loan will want all three in detail.
Lump sums versus limits
There are two broad shapes of business finance:
| Shape | How it works | Good for |
|---|---|---|
| Term loan | A lump sum repaid on a schedule | One-off purchases or projects |
| Revolving facility | A limit you draw and repay as needed | Recurring cash flow gaps |
| Asset finance | A loan or lease tied to a specific asset | Vehicles, machinery, equipment |
| Receivables finance | Advances against unpaid invoices | Businesses selling on terms |
Our loan types hub reviews each in detail.
Secured and unsecured
A secured loan is backed by an asset the lender can claim on default, such as property, a vehicle or equipment. An unsecured loan has no specific asset behind it, although most still require a personal guarantee and may involve a general security agreement over business assets. Security usually means larger amounts, longer terms and lower costs, at the price of putting the asset at risk. For trading businesses, unsecured finance typically ranges from $5,000 to $500,000, while property-secured business loans typically range from $20,000 to $5,000,000. Our secured versus unsecured guide goes deeper.
How the cost is presented
Business lenders do not all present costs the same way. Some quote an annual interest rate plus fees. Some quote a fixed total amount to repay. Some deduct an establishment fee from the loan amount. Some charge monthly account fees or line fees on unused limits. This is why we never compare business loans on a rate alone and why our calculators work in dollars. The true cost calculator turns any offer into total cost, cost per dollar received and cost per month.
Guarantees: the part owners forget
Most small business loans, secured or not, ask directors or owners to sign a personal guarantee. It means that if the business cannot repay, the lender can pursue the guarantor personally. It is standard, but it is serious, and it is the clause most worth understanding before you sign. See our guide to personal guarantees.
From enquiry to settlement
A typical process runs like this: you explain what you need and why; the lender or its partner reviews your basic details; you provide documents such as ID, bank statements and, for larger loans, financial statements; the lender assesses and issues an offer with conditions; you review and sign; conditions are met; and funds are released. Smaller unsecured loans can move through these steps in days. Property-secured and larger loans take longer because security must be checked and documented. Our guide to how long approval takes has more detail.
Common words you will meet
Business loan paperwork uses its own vocabulary: establishment fee, balloon, general security agreement, LVR, serviceability, payout figure, default interest. Each has a specific meaning that affects you. Our glossary explains more than sixty of them in plain English.
Next steps
If you are new to business borrowing, the logical next read is our guide on how to get a business loan, which turns these mechanics into a step-by-step plan. If you would rather talk to someone about your own situation, you can make one enquiry. There is no credit check when you first enquire, a real person reviews it and your details go to one lending partner rather than a list. Telling us accurately what the money is for and how the business earns gives you the most useful answer. Or ask a question first if you are still working out what you need.
Frequently asked questions
What is the difference between a business loan and a personal loan?
A business loan is for business purposes and is assessed on the business's income, records and security. A personal loan is for personal purposes and is assessed on personal income. Using a personal loan for business can create tax and record-keeping complications, so keep them separate.
Who can lend money to a business in Australia?
Banks, non-bank lenders, specialist finance companies, private lenders and online lenders all provide business finance. Each has different products, assessment methods and pricing.
Do I need a business plan to get a loan?
For larger loans, startups and acquisitions, a plan is often requested and always helps. For smaller unsecured loans based on bank statements, it is less common, but you should still be able to explain the purpose and how you will repay.
How is the cost of a business loan worked out?
Lenders price loans on risk, term, security and their own funding costs, then express the cost as interest, fees or a fixed total. Compare offers by the total you repay plus fees against the cash you receive.
Can I repay a business loan early?
Usually, but the saving depends on the pricing. Some loans charge little or nothing to repay early; others charge break costs or most of the remaining cost. Ask before you sign.
Sources and further reading
We are an information site, so we do not rank lenders, publish interest rates or accept payment to feature a product. Every page is written and checked by our editorial team against official sources. Read our editorial policy and how we are funded.
