To compare business loans properly, you need to look past the headline figure and line up every offer on the same five measures: total cost, time to funds, security, flexibility and exit. This page gives you a scorecard you can fill in on paper, explains what each measure really covers and shows how a slower, cheaper loan can still be the worse choice.
What should you compare when choosing a business loan?
Compare five things, because any one of them alone can mislead. A lender can look cheap on price and cost you a contract in delay, or look fast and tie up your home for years. The five measures are:
- Total cost. The full amount you repay, including fees, over the time you will really hold the loan.
- Speed. The date money arrives, not the date of approval.
- Security. What the lender takes a claim over, and who else is liable.
- Flexibility. Early repayment, extensions, how interest is handled and whether you can draw and repay.
- Exit. How the loan ends, and what happens if the plan slips.
The business.gov.au guidance on choosing funding tells owners to compare options carefully and consider advice from an accountant or business adviser. A scorecard is a way of doing that without guesswork, and you can start an application once your priorities are set.
How do you work out the total cost of a business loan?
Work it out in dollars, over your real timeframe, by adding every charge to the repayments. A single percentage cannot tell you this, because loans charge in different ways. Build the number from these parts:
- Interest. How it is calculated and whether it is paid monthly, prepaid or added to the loan. With short-term property loans, interest can often be prepaid or added to the loan, which changes your cash flow even if it does not change the cost.
- Upfront fees. Establishment, legal and settlement charges.
- Ongoing fees. Account-keeping or monitoring charges.
- Exit costs. Early repayment or discharge fees.
- Extension costs. What it costs if the exit takes longer than planned.
Ask each lender for one figure: the total amount repayable if you clear the loan on your planned date. Then compare those figures like for like. Our guide to business loan interest rates and fees explains how pricing is built, and the business loan calculator lets you test interest-only against principal-and-interest.
How much is speed worth?
Speed is worth whatever the delay costs you, and that can easily outweigh a price difference. A loan that arrives in six weeks is no use to a contract that starts in two. Put a dollar figure on the delay: lost margin, a late-payment penalty, a deposit forfeited, a supplier discount missed.
Banks are often cheapest but slow, and they typically ask for a business plan, financial reports and forecasts. Private and unsecured lenders usually move in days, and some approved private-mortgage scenarios can fund within 24 hours once the security, documents and exit are lined up. Private money is dearer than a bank loan, which is the price of speed and flexibility.
Our page on fast business loans vs bank loans has the head-to-head view, and how fast you can get a business loan covers realistic timelines.
What does security change about a loan?
Security changes the size, the speed and your risk. A secured loan, backed by property, equipment or invoices, can be larger and quicker to assess, while an unsecured loan leaves your assets alone but is smaller and leans on bank statements. Property-secured funding reaches far larger amounts than unsecured, which is usually capped at a few hundred thousand.
Look beyond the asset to the people. A guarantee makes a person liable if the borrower cannot repay. Moneysmart explains that a guarantor can be asked to repay the entire loan with interest, may lose assets used as security, and can sometimes limit a guarantee to part of the loan. Compare how much personal exposure each offer creates, not just the loan amount. The guide on secured vs unsecured business loans goes through the trade-offs.
What is flexibility, and why does it matter?
Flexibility is how well the loan bends if your plans change. Two offers with the same cost can behave very differently when a payment arrives early or late. Check these points:
- Can you repay early without a penalty that cancels the saving?
- Is there an extension option, and what does it cost?
- Are repayments interest-only, or principal and interest?
- Is interest prepaid or added, and how does that affect your cash flow?
- Can you draw down further, as with a business line of credit?
A short-term loan designed around a known exit should let you clear it early when the money lands. A caveat loan, for instance, can later be converted to a registered second mortgage if the exit takes longer, which is a kind of built-in flexibility.
The scorecard
Fill this in for each offer, scoring one (poor) to five (excellent), then multiply by the weight for your situation. Weights should add up to 10.
| Measure | What to look at | Example weight (urgent, secured) | Offer A score | Offer B score |
|---|---|---|---|---|
| Total cost | Total repayable, all fees, in dollars | 2 | ||
| Speed | Date funds arrive | 4 | ||
| Security | Assets and guarantees required | 1 | ||
| Flexibility | Early exit, extension, interest handling | 2 | ||
| Exit | Fit with your repayment event | 1 |
Change the weights to suit you. A business with a firm deadline puts the most weight on speed. A business with spare time shifts weight to total cost. Two or three offers is usually enough to compare. Write the scores down so the decision rests on your priorities.
Illustrative example: scoring two offers
Illustrative example: a business needs $100,000 to buy stock for a contract worth $150,000, with delivery due in 21 days. Offer A is a bank loan, cheaper but quoted at six weeks to funds. Offer B is a private loan secured on the owner’s home, dearer but available in four days.
The owner weights speed 4, cost 2, flexibility 2, security 1 and exit 1. Offer A scores cost 5, speed 1, security 3, flexibility 3 and exit 3. Offer B scores cost 2, speed 5, security 2, flexibility 4 and exit 4. Weighted, A totals 10 plus 4 plus 3 plus 6 plus 3, which is 26, and B totals 4 plus 20 plus 2 plus 8 plus 4, which is 38.
Missing the delivery date would cost the owner $20,000 of margin. Any extra cost of Offer B that is less than that makes it the better deal. If the contract had started in three months, the weights would flip and the bank loan would win.
What should you ask every lender?
Ask the same questions of every lender so the answers compare. A short list:
- What is the total amount repayable if I clear the loan on my planned date?
- What fees apply, and when are they charged?
- How is interest charged, and can it be prepaid or added?
- What security and guarantees are required?
- What happens if I repay early, or if I need longer?
- On what date will funds be paid?
If anything is unclear, get it in writing. Small businesses have an independent safety net: AFCA’s service is free, and it handles small business credit complaints up to a facility size of $5 million. The Banking Code of Practice also gives bank-lending protections to businesses with total debt under $5 million, fewer than 100 employees and turnover under $10 million. Neither is a reason to skip your own checks.
Which business loan type fits which priority?
Match your top priority to the product family and you will narrow the field fast:
- Lowest cost, time to spare: a bank loan; see business finance for the full map.
- Speed and size with property: a private first or second mortgage, as covered in second mortgages.
- Speed, no property: an unsecured loan, assessed on bank statements.
- Ongoing flexibility: a line of credit.
- Smaller owner-run businesses: start at small business loans.
Ready to move?
Once you have your priorities and your questions, put them to one application rather than many. Give us the amount, purpose, deadline and any property in one application and we will help match you with options to score. It takes minutes, or call 03 4059 1829 to talk it through first.