What are Business Loans Used for?

There are a range of business loans available to suit those requiring finance for business working capital, purchasing a business or franchise, buying or investing in commercial property, residential and commercial property development, and equipment purchase.

As with all loans, you need to be aware of the risks, talk through the pros and cons with your mortgage broker.

There may be any number of vastly different reasons you need to source business or commercial finance. Some of the more common scenarios are listed below.

Business working capital

Working capital is used to cover everyday business expenses such as rent, utilities and wages. It indicates the liquidity of a business and is usually represented as a ratio:

Working capitalratio (Current ratio) = Current Assets : Current Liabilities

A working capital ratio of 2:1 is generally considered desirable however you should take into account the type of business you run and how variable your cash flow is when deciding on the most appropriate working capital ratio for you.

Your working capital usually comes from your business cash flow. If you have a new business, or if your business operates in a seasonal industry, you may need some assistance covering the day-to-day costs of your business. Cash flow finance or a business overdraft may assist you to cover your working capital requirements.

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Purchasing a business or franchise

When buying an existing business or well-known or successful franchise, there are a number of factors that need to be taken into consideration, including the business history, value of tangible assets, estimated value of intangible assets and the ability to earn a reasonable return on funds. You may also need to consider the goodwill associated with the business.

A good history can be a positive factor when applying for finance. Generally, when purchasing an existing business a business loan or term loan will be utilised.

You will need to work with your residential and commercial finance broker to ascertain your exact finance requirements and determine what is available to you, plus with your accountant and legal adviser to determine the worth of the business and all financial and legal obligations relating to your purchase.

Some common types of business that most major lenders will consider financing include: real estate agencies, pharmacies, accounting and financial planning practices, independent supermarkets such as IGA and news agencies. A list of acceptable franchises

Buying or investing in commercial property

If it is of strategic importance to your business to be located in a specific area, you may choose to purchase commercial premises rather than lease your office, warehouse or factory space. Owning your own premises allows you full control over your location and fit-out, and also provides an ongoing investment.

You may also choose to invest in commercial property as part of your business strategy. Investing in commercial property works in a similar way to purchasing property for your own use.

Residential and commercial property development

Property development covers everything from buying a block of land and building a house on it, to renovating a property, to building a major CBD office building. Successful property development, no matter how big or small, involves good research and a certain element of calculated risk.

As with property investment, a good property development will target the right place and the right type of building for that area. Look out for what is needed, and then develop your building to suit. Knowing the development plans and regulations of the local Council will also assist you.

Funding failure is one of the most common causes of failed developments, so it is crucial to get your property development finance right. Your commercial finance broker and lender should be involved with the project right from the beginning, and it’s important to be aware that, particularly if you are first-time developer, you are likely to need some personal equity to use as security for your loan.

Equipment purchase

You may require a range of equipment to successfully run your business, from a car to office furniture and factory machinery. Depending on the type of business you run, there are a range of finance options available to ensure you secure the equipment you need, including hire purchase, chattel mortgages and leasing finance.