Preparing for a Small Business Loan
Applying for a business loan can feel overwhelming and can often be put into the too hard basket. However, it is really nothing more than a lender investing money in your business.
Applying for a business loan can feel overwhelming and can often be put into the too hard basket. However, it is really nothing more than a lender investing money in your business. For you, the benefit is the money you gain to help with establishing or improving your business. For the lender, the benefit is a fair return on their investment, via the interest payments made over the life of the loan.
If we look at it from simple terms there are 4 key factors that lenders will look at:
- Sufficient ability and cash flow to repay the loan;
- Adequate security or equity in the event that you can’t repay the loan;
- The quality and management of the business applying for the loan; and
- A clean credit rating.
So, what should my application actually have in it? It is no surprise that all lenders want to know that any business they invest into offers them a solid and reliable return. You will need to have the following ready to go:
- Trading history if you own an existing business and future outlook;
- Products or services and offerings;
- Customers and suppliers;
- Actual or the potential profitability if a new business;
- How you intend to spend the funds being borrowed and how are you are going to repay the loan.
The more relevant and up-to-date the information provided, the easier and faster the approval process will be. Your application should include the following documentation:
- A comprehensive business plan which includes a precise explanation of how the loan will be used and repaid;
- A cash flow forecast for the business for the next 12 months;
- Financial statements and company returns for the business for the past two years;
- A statement of assets and liabilities for each individual borrower; and
- Personal tax returns and tax assessment notices for at least the past two years.
Why do they need so much information? When it comes to small business loans, lenders rarely distinguish between the actual business and the owner. Lenders need to fully understand the personal financial circumstances of the owner, including their net worth and cash flow, as much as it does the business. This is why it is so important to keep your personal credit history file clean and in order as most lenders make the assumption that an owner will manage their business’ debt in the same way they manage their personal debt. In addition, lenders also take into account the business owner’s character, history, skills and experience.
Which finance option and lender will suit me? Before you apply for a business loan, the decision on which is the best option will need to be assessed. There are many avenues open to you depending on your needs. Some include: an overdraft to assist you to manage your business cash flow; debtor finance – borrowing against the value of your outstanding trade debtors; term loans are an option for major business borrowings; and equipment finance for the acquisition of business equipment.
Once this has been determined it’s time to choose a lender. Deciding on a lender is more involved than finding out which institution is offering the lowest interest rate. Growing your business and choosing which lender will grow with your needs can be tricky as interest rates can differ and vary depending on how much you are borrowing, the term of the loan, the amount of security being offered and the overall risk of what the loan is being used for.
Broker Support: If it all still seems to be a bit too hard or if you prefer the personal touch of face-to-face communication when organising your finances and loans, opposed to working with the banks automated call centres, then seeking the services and support of an ‘on the same page’ finance broker is your best option.
A professional broker will assist in helping you pull all of your documentation together, research all of the lenders, present you with a range of options and explain all fees and charges that you will be paying on top of the interest so that you understand how much the loan will cost you over its full term. With their guidance, you can then make an informed decision as to which lender you wish them to place your loan with.
There is no cost to you for using a finance and mortgage broker to find you the best deal as they are reimbursed by the various banks and lenders they place your business with.
Warning: This content is not designed to replace professional advice. It has been prepared without taking into account your objectives, financial situation or needs. You should consider the appropriateness of the advice, in light of your own objectives, financial situation or needs before making any decision as to whether a credit facility is appropriate for you.