Most business finance problems are matching problems: a sound business uses the wrong product and ends up with repayments that squeeze cash flow. This guide sets out the main types of business finance available in Australia, what each is designed for, what it really costs, and how Tasmanian small-business owners can choose the right one.
Key takeaways
- Match the finance to the purpose: fund long-life assets with longer-term finance and short-term needs with short-term facilities.
- Working-capital tools (overdrafts, lines of credit, invoice finance) smooth cash flow; term loans and equipment finance fund investment.
- Merchant cash advances and some revenue-based products can carry an effective annual cost far higher than the headline "factor rate" suggests.
- Credit used mainly for business purposes is generally outside the consumer protections of the National Consumer Credit Protection Act, so read every contract and guarantee carefully.
- Check business.gov.au and Business Tasmania for current government support before assuming you need to borrow.
Debt vs equity: the first decision
Every type of business finance is ultimately either debt, equity or a grant. Understanding the difference shapes everything else.
Debt finance
With debt, you borrow money and repay it with interest, usually on a set schedule. You keep full ownership of the business, and interest on business borrowings is generally tax-deductible (check with your accountant). The cost is the obligation: repayments are due whether trading is strong or weak, and many lenders will want security or a personal guarantee.
Equity finance
With equity, you sell part of the business to investors in exchange for capital. There are no repayments, which suits businesses with uncertain early cash flow, but you give up a share of future profits and often some control. Equity is usually the most expensive capital in the long run if the business succeeds.
Secured vs unsecured
Secured debt is backed by an asset such as property, equipment or receivables, so it is generally cheaper and available in larger amounts. Unsecured debt is faster but costs more, and lenders often require a director's personal guarantee, which can put your home at risk in practice even though the loan is "unsecured".
Business term loans and asset-based lending
A term loan is a lump sum repaid over a fixed period, used for fit-outs, expansion, buying a business or refinancing.
Secured term loans
Secured term loans are usually backed by real estate (commercial or residential) or business assets. Because the lender holds security, terms can be longer and rates lower than unsecured lending. Many small-business owners use their home as security; that can unlock better pricing, but it ties your household to the business's fortunes.
Unsecured term loans
Unsecured business loans are commonly offered for shorter terms, often from a few months to a few years, by banks and non-bank lenders. Approval can be quick, especially with online lenders that assess bank-statement data, but rates and fees are higher. Establishment fees, early repayment fees and weekly or daily repayments all change the true cost; our glossary explains the terms.
Asset-based lending
With asset-based lending, the amount you can draw is linked to the value of business assets such as receivables, inventory and plant, so the limit grows with the asset base. It suits established, asset-rich businesses in areas like wholesale, manufacturing or distribution, and usually involves regular reporting to the lender.
To understand how lenders weigh up these applications, read our guide to how lenders assess loan applications, and for the effect of loan length on cost see long-term loans explained.
Working-capital finance: overdrafts, credit lines, invoice and trade finance
Working capital is the money tied up between paying suppliers and staff and being paid by customers. These facilities are designed to bridge that gap, not to fund long-term assets.
Business overdraft
An overdraft lets your business transaction account go below zero up to an agreed limit. You pay interest only on the amount drawn, plus a limit or line fee. Overdrafts suit businesses with uneven cash flow, such as tourism operators managing the gap between a busy Tasmanian summer and a quiet winter. They are typically reviewed periodically and some are repayable on demand, so they are not a substitute for long-term capital.
Line of credit
A business line of credit is a revolving facility: you draw, repay and draw again up to a limit. It works like an overdraft but sits in a separate account, and can be secured or unsecured.
Invoice finance: factoring vs discounting
Invoice finance releases cash tied up in unpaid invoices from business customers. The lender advances a percentage of each approved invoice, then pays the balance, less fees, when the customer pays.
- Factoring: you effectively sell your invoices to the financier, which usually manages collections. Your customers know a financier is involved.
- Discounting: you keep control of collections and the arrangement can often be confidential. Lenders usually expect stronger credit controls.
Facilities can be "recourse", where you carry the loss if a customer does not pay, or "non-recourse", where the financier takes some of that risk for a higher fee. Example: you finance a $20,000 invoice with an 80% advance ($16,000) and total fees of an illustrative $600, and the customer pays in 45 days. That fee is 3.75% of the money advanced for 45 days, which works out to roughly 30% a year on a simple annualised basis. Fee structures vary widely, so convert them to an annual figure before comparing.
Trade finance
Trade finance funds stock purchases and the movement of goods, commonly for importers and exporters. Trade lines pay your supplier now while you repay later; letters of credit give overseas suppliers payment assurance. Exporters can also look at Export Finance Australia, the Australian Government's export credit agency.
Equipment finance: chattel mortgage, hire purchase and leases
Equipment finance funds vehicles, machinery, technology and other business assets, with the asset itself usually acting as security. The structure you choose affects ownership, GST and tax treatment, so involve your accountant before you sign.
| Structure | Who owns the asset | End of term | General notes |
|---|---|---|---|
| Chattel mortgage | You, from the start; the lender holds a mortgage over it | Security released once the loan (and any balloon) is repaid | Popular for vehicles and equipment; you generally claim depreciation and interest |
| Hire purchase | The financier, until the final payment | Ownership passes to you on the final payment | Similar outcome to a chattel mortgage with a different legal structure |
| Finance lease | The financier | Pay the residual, refinance or return the asset, as agreed | Lease payments are generally deductible to the extent the asset is used for business |
| Operating lease | The financier | Return or upgrade the asset | Shorter terms; financier carries residual value risk; maintenance is sometimes bundled |
GST treatment differs between these structures. With a chattel mortgage, a GST-registered business can generally claim the GST credit on the purchase price in its activity statement, while with leases GST is usually included in each payment. Confirm the treatment for your circumstances with your accountant or the ATO.
Balloon payments: lower repayments, larger bill
Example: a $80,000 chattel mortgage over five years at an illustrative 8% p.a. With no balloon, the monthly repayment is $1,622.11 and total interest is $17,326.69. With a 30% balloon ($24,000) due at the end, the repayment drops to $1,295.48 a month, but total interest rises to $21,728.68 and you still owe $24,000 in five years. A balloon can make sense if the asset will hold value and you plan to trade it in, but budget for it from day one. For help weighing up options, see our Car & Equipment Finance Guidance or run the numbers in the loan calculator.
Merchant cash advances and revenue-based finance
A merchant cash advance (MCA) provides a lump sum in exchange for a share of your future card sales, repaid through a fixed percentage of daily takings or fixed daily or weekly debits. Revenue-based finance works similarly, with repayments set as a share of monthly revenue until an agreed total has been repaid. Both are marketed as fast and flexible, and they can be, but the cost is often expressed in a way that is hard to compare.
Why the factor rate misleads
MCAs are typically priced with a "factor rate" rather than an interest rate. Example: a $50,000 advance with an illustrative factor rate of 1.3 means you repay $65,000. That looks like 30% interest, but because repayments start almost immediately, you have the full $50,000 for only a short time.
Weekly repayments of $1,857.14 over 35 weeks equate to a nominal annual rate of roughly 80%. Repaid in 26 weeks ($2,500 a week), the same fixed cost works out to around 107% a year.
Government support, grants and equity funding
Before borrowing, check whether non-repayable support or outside investment could fund part of your plan.
Grants and government support
Grants are competitive, usually tied to specific outcomes, and rarely fund the whole cost of a project. Programs open and close regularly, so look for current offerings rather than relying on old lists. The Australian Government's business.gov.au has a grants and programs finder covering federal, state and territory support. For Tasmania-specific help, Business Tasmania, part of the Tasmanian Government, offers information, advice and details of current state programs and events. Tax incentives such as the Research and Development Tax Incentive may also be relevant for eligible businesses; your accountant can confirm eligibility.
Angel investors and venture capital
Angel investors put their own money into early-stage businesses, often bringing experience and contacts; venture capital funds invest larger sums for a significant stake and an eventual exit. Both suit scalable businesses more than a typical cafe, trade business or consultancy.
Equity crowdfunding
Crowd-sourced equity funding lets eligible companies raise money from many small investors through an online platform. In Australia it is regulated by ASIC under the Corporations Act, and offers must be made through a licensed crowd-sourced funding intermediary. There are limits on who can raise, how much and how much retail investors can contribute, so check current rules on asic.gov.au.
Business finance comparison table
The table below summarises the main types of business finance. Terms and speeds are general and vary between lenders.
| Type | Best for | Typical term | Security | Speed | Pros | Cons |
|---|---|---|---|---|---|---|
| Secured term loan | Expansion, fit-outs, buying a business | Several years or longer | Property or business assets | Weeks | Lower rates, larger amounts | Security at risk; more paperwork |
| Unsecured term loan | Smaller projects, quick needs | Months to a few years | Usually a personal guarantee | Days | Fast, no property security | Higher cost; frequent repayments |
| Overdraft | Day-to-day cash flow gaps | Ongoing, reviewed periodically | Often secured | Days to weeks | Pay interest only on use | Can be reduced or called; limit fees |
| Line of credit | Recurring working-capital needs | Ongoing, revolving | Secured or unsecured | Days to weeks | Draw and repay flexibly | Easy to leave balances outstanding |
| Invoice finance | B2B businesses waiting on customers | Revolving with your invoices | Your receivables | Days to weeks | Grows with sales | Fees add up; customer involvement |
| Equipment finance | Vehicles, machinery, technology | Matched to asset life | The asset itself | Days | Preserves cash; asset is security | Balloons; tied to one asset |
| Trade finance | Inventory and imports/exports | Short, per transaction | Goods, receivables, other | Days to weeks | Funds stock ahead of sales | Complex; mainly for traders |
| Asset-based lending | Asset-rich established firms | Ongoing facility | Receivables, stock, plant | Weeks | Limit grows with assets | Regular reporting required |
| Merchant cash advance | Urgent needs for card-heavy businesses | Months | Future sales | Very fast | Fast; repayments flex with sales (some) | Very high effective cost |
| Grants | Specific eligible projects | Non-repayable | None (conditions apply) | Slow; competitive | No repayments | Uncertain; reporting obligations |
| Equity | High-growth, scalable ventures | Permanent | Ownership share | Months | No repayments; investor expertise | Dilution; loss of some control |
How to match finance to purpose
Do not fund long-term assets with short-term debt, and do not fund day-to-day costs with long-term debt.
A short, expensive facility used for a long-life asset forces you to repay it before it has earned its keep; a long-term loan used for recurring expenses leaves you paying for last year's costs for years.
Define the purpose and amount
Write down exactly what the money is for, the total cost including GST and installation, and how much you can contribute from cash reserves.
Estimate the life or cycle of the need
A delivery van may last several years; a seasonal stock purchase converts back to cash within months. The finance term should broadly match.
Model the cash flow
Build a monthly cash flow forecast showing repayments alongside your seasonal income. In Tasmania, many tourism, hospitality and agricultural businesses have pronounced peaks and troughs.
Test the return
Ask whether the investment will generate more than its after-tax finance cost. Our framework for borrowing to grow walks through this.
Compare at least two structures
For example, compare a chattel mortgage with a finance lease, or an overdraft with invoice finance, using the total cost over the expected term.
Plan the exit
Know how the finance will be repaid or refinanced, including any balloon, review date or facility expiry.
Applying: documents lenders want and the protections you have
Documents lenders commonly ask for
Requirements vary by lender, product and loan size, but having these ready speeds up any application.
- ABN and, for companies, ACN and company extract
- Two years of financial statements and business tax returns
- Year-to-date management accounts (profit and loss, balance sheet)
- Recent Business Activity Statements (BAS)
- Business bank statements, often for the last three to twelve months
- ATO account statement showing any tax debts and payment arrangements
- Aged debtors and creditors reports
- Cash flow forecast and a short business plan or funding proposal
- Schedule of existing debts and leases
- Quotes or invoices for equipment or assets being financed
- Personal identification and asset and liability statements for directors or guarantors
Business credit is generally outside consumer protections
Credit provided wholly or predominantly for business purposes is generally not regulated by the National Consumer Credit Protection Act 2009 or the National Credit Code. That means responsible lending obligations and the Code's hardship provisions usually do not apply. Some protections remain: the ASIC Act prohibits misleading and unconscionable conduct in financial services, unfair contract terms laws can apply to standard-form small business contracts, and banks that subscribe to the Banking Code of Practice make commitments to small business customers. AFCA can also consider many complaints from small businesses, subject to its eligibility rules.
If you would like help organising your documents and understanding your options, our free Business Loan Matching service works with Hobart and Tasmanian businesses. Hobart Loans is not a lender; where you want credit we may refer you to a licensed broker or lender and will disclose any referral fee first. You can also contact us with questions.
Frequently asked questions
What are the main types of business finance?
The main types are debt (term loans, overdrafts, lines of credit, invoice finance, equipment finance, trade finance and asset-based lending), equity (angel, venture capital and crowd-sourced equity funding) and non-repayable support such as grants. Each suits a different purpose and time frame.
What is the difference between invoice factoring and invoice discounting?
With factoring, the financier usually takes over collecting your invoices and customers know it is involved. With discounting, you keep control of collections and the arrangement is often confidential. Discounting typically requires stronger credit control processes.
Is a chattel mortgage better than a lease?
Neither is better in every case. A chattel mortgage gives you ownership from the start and suits assets you intend to keep. A lease can suit assets you want to upgrade regularly. GST and tax treatment differ, so compare both with your accountant.
Do I need a personal guarantee for a business loan?
Many lenders ask company directors for a personal guarantee, especially for unsecured loans or newer businesses. A guarantee makes you personally liable if the business cannot pay, so get independent legal advice before signing.
Where can Tasmanian businesses find grants?
Start with the grants and programs finder on business.gov.au, then check Business Tasmania for current state programs. Programs change regularly, so confirm eligibility and closing dates directly with the provider.
Are consumer credit protections available for business loans?
Generally not. Credit that is wholly or predominantly for business purposes usually falls outside the NCCP Act and National Credit Code. Other protections, such as unfair contract terms laws and AFCA's small business jurisdiction, may still apply.
