Choosing the right financing option for your business

Commercial lending tends to be more complex than residential lending because every business has its own unique risks, challenges and opportunities. For example, the cashflow and equipment requirements of a sole trader business operating from an office will be vastly different to a manufacturing company employing hundreds of people and using complicated machinery. 

Whatever type of business you have, the best place to start is comparing your financing options so you can work out what makes the most sense for your situation. Your Mortgage Choice broker understands the ins and outs of commercial finance and can provide valuable insights, so you can spend less time worrying about financing options and more time focusing on your business. 

Types of financing 

While there’s a broad range of business financing options on offer, these are some of the most common ones you’re likely to come across.  

1. Business overdraft 

Designed to help you manage fluctuations in your cashflow, a business overdraft is generally used for small expenses and short-term working capital purposes. It gives you easy access to cash up to an approved credit limit. It’s similar to a credit card, except it usually has a lower interest rate and won’t have a minimum repayment amount as long as you stay under the credit limit. Business overdrafts are usually unsecured.  

2. Business equity line 

This line of credit can be used for larger expenses or when you need a cash injection for your business, e.g. bulk ordering or seasonal business requirements. Similar to a business overdraft, you can borrow as much as you need up to your approved limit and there are no minimum repayments until you reach your credit limit. This form of business finance usually requires security (commercial or residential). 

3. Debtor finance 

Debtor finance allows you to access the funds owing in your outstanding invoices before the debtor pays you. It ensures you’re not forced to wait for outstanding funds to be paid in order to sustain your business, such as paying wages and bills. 

4. Small business loan 

If you need to borrow money for a specific purchase, you might be suited to a business loan. Just like a home loan, you can choose between a fixed or variable rate. Most business loans are secured; however, some lenders do offer unsecured loans if you meet specific criteria. Small business loans can be structured either on an upfront basis, where the entire value of the loan is withdrawn at once and paid back in regular instalments, or ‘on call’, with payments determined by the amount of the loan that your business has drawn down. 

5. Commercial property loan 

Commercial property loans can be used by business owners, investors or trustees of a self-managed super fund. They can be used to purchase a shopfront, office space or even a warehouse. Lenders will generally require your EBITDA profit (earnings before interest, taxes, depreciation and amortisation) to be at least 1.5x the total interest costs for investment purposes and 1.25x for owner occupied. Interest rates tend to be higher than for residential loans because commercial property is seen as a riskier asset. It may be possible to secure the loan with residential property to be eligible for a lower interest rate. 

6. Equipment finance 

Equipment finance can help you purchase assets without eroding your working capital. It removes the need to spend a large amount of money on equipment, like vehicles or machinery, by enabling you to rent or lease items over a set period.  Equipment finance options include hire purchase, finance leases and equipment loans. 

The documentation you’ll need 

Just like applying for a home loan, you’ll need to gather evidence that demonstrates to the lender your ability to repay your loan or credit facility. 

This will generally include: 

• Financial statements including a balance sheet, profit & loss statement, cashflow statement and income statement 
• Tax returns and ATO notice of assessments from the last two financial years 
• Business activity statements (BAS) 
• Bank account statements 
• Personal and business identification documents. 

If you’re applying for finance to start a business, or you’ve been trading for less than 12 months, you’ll also need to supply a business plan and cashflow projections. 

How a broker can help 

The sheer variety of commercial financing products can be overwhelming, but your Mortgage Choice broker can help you navigate the various options to find the one that’s right for you. 

We can help you: 

• analyse your business goals and opportunities 
• compare different types of financing options from a panel of lenders offering hundreds of products 
• determine if you’re eligible for any government incentives for small or medium businesses 
• source the right business loan, structure and repayment options for your specific needs 
• apply for commercial loans and assist with any equipment and vehicle finance needs.  

Tapping into your broker’s commercial knowledge and experience can help you grow your business with the right financial solutions to achieve your goals. After all, no one is better placed to understand your needs than another business owner.