Guide to Business Loans in Australia

Small to medium business owners are the backbone of the Australia economy. Business owners, take on the risk of running their own business, collect the GST for the government and employ thousands of workers. When looking to expand business opportunities, through the purchase of vehicles and equipment, business can come up against red tape and excess documentation requirements when trying to secure finance for said purchases. There are options available to businesses that can cut through this red tape, saving them both time and money.

Business Loan Options

Business loans can also be termed a ‘chattel mortgage’. The chattel is the asset being purchased and the mortgage is the loan contract outlining the periodic repayments required to pay out the loan. Terms usually range from 1 to 7 years and can include a balloon payment option. There are 3 types of business loan options – full doc, low doc loans and no doc chattel mortgage loans.

• Low doc chattel mortgage

Low doc loans are the most common form of business loan as is negates the need to up-to-date financials or current tax returns. Lenders will require some form of income proof. This may be in the form of 3 months bank statements, current BAS or profit and loss statement or an accountant’s letter. Each and every lender has different requirements that are updated on a regular basis.

• No doc chattel mortgage

If a GST registered business has been running successfully for a number of years, then lenders are willing to negate the need for formal documentation as proof of income.  However, they do ask for an estimate of gross turnover and net income in the form of a signed declaration.

• Full doc chattel mortgage

As the name suggests full documentation of proof of income is required, usually the latest business tax return. Businesses that have up-to-date financials find suppling this information to be straightforward.

How to qualify for a business loan

To be able to access the above business loan options business must firstly have a current ABN. Hence why business loans are commonly referred to as ABN finance. The other requirement is that the asset be utilized for greater than 50% business related use. Most business equipment and machinery are solely used for business related use and easily fall into this category. However, business owners need to be educated with regards to vehicle use. A trades person uses his or her Ute to carry tools to and from the work site and would predominantly use their vehicle for work. A remote worker may need a camper trailer or caravan to provide on-site accommodation and again can justify this use. On the other hand, a hairdresser cannot claim to use a vehicle for business related use for travel to and from the salon.  This is not considered business related use.  However, if this hairdresser was a mobile hairdresser and visited clients at their homes to provide their service, the vehicle would be considered business related use.  

Balloon Loan Option

A balloon option is best described as splitting the loan into 2 separate portions. The first is paid back by regular monthly repayments over a specific term, usually 5 years. The second portion is paid at the end of the loan term as a lump sum or balloon. The benefit of a balloon payment option is that the monthly loan repayments are reduced as these repayments are calculated on the first portion only. Having smaller monthly repayments can free up much needs cash flow for day-to-day business operations.

The balloon payment that is due at the end of the loan term can either be paid out or refinanced. When purchasing vehicles using a balloon payment option, many business owners choose to sell the car and use the sale proceeds to pay out the balloon. They then purchase a new car under finance to access business tax benefits and maintain cash flow whilst maintaining an up-to-date vehicle fleet operating under new car warranty.

The balloon amount can range from between 1 to 50% of the asset purchase price. Using a online calculator with balloon function can demonstrate how adjusting the balloon amount can reduce the regular monthly repayment.

What can be purchased using a business loan?

Assets can range from cars, equipment and machinery to computers and office fit outs.  Vehicles may need to be fully accessorized and/or have purpose built fit outs. For example, a trades person may purchase a new Ute and have canopy, ladder racks, bull bar, tow bar and spare battery fitted as part of the purchase price. The entire purchase amount, including all these accessories, can be included in the finance amount. Another example could be a coffee van that needs to be specifically fitted out for purpose. This again can be included in the finance amount.

Equipment and machinery can range from farming equipment, such as tractors, sprayers, harvesters, and all-terrain vehicles. Perhaps you have an earth moving business and need new excavators, bobcats, or bull dozers. Transport companies may need a fleet of trucks to cater for different loads. Manufacturers can purchase lathes and other essential machinery.  Many businesses are using computer aided machinery to increased productivity by investing in technology.

Tax Breaks for business loans

Business loans have the further advantage of tax breaks. By purchasing business equipment all GST registered business can claim the GST on the purchase price.  Additionally, any interest on business loans is a tax deduction. The most significant recent government incentive for business owners to invest in their own business is the Instant Asset Write-off, which has been relabeled as Temporary Full Expensing. This incentive allows business owners to immediately write-off the cost of the business portion of an asset up to $150,000 in the year it is first used or installed ready for use. It is important to point out that this can be used on multiple assets, each up to $150,000. This incentive has been extended and the amount increased over the last few years. But please be warned – it is due to end on the 30 June 2023. We recommend speaking with your accountant for specific taxation advice.