Applying for a business loan can be daunting, but if you follow these five tips you probably won’t find it as hard as you expect.
1. Prepare A Solid Business Case
One of the first questions a prospective lender will ask you is ‘Why do you need a business loan?’ Long before they do, you need to ask yourself the same question, and prepare a business case to establish:
• If, and how much, you can really afford to borrow
• Exactly how you will use the finance to improve or grow your business
• Whether the financial benefits of borrowing will actually outweigh the costs
These are crucial questions, because borrowing can be a risky strategy. If you invest borrowed funds in growing your business but don’t manage to generate the expected increase in profits, you could quickly find yourself struggling to meet your repayments.
Unfortunately, many businesses fail because they chase sales growth that doesn’t translate into greater profits or more cash in the bank.
As well as outlining your strategy for using the loan funds, it’s important to run financial projections to check the probable impact on your profitability and cash flow (and remember to factor in the impact should interest rates rise.)
2. Choose The Right Lender
If you are planning to apply to your bank for a loan, you may need to think carefully. Since the global financial crisis it has become very difficult to get a small business loan from a high-street bank in Australia.
A rejected loan application can have a negative impact on your credit rating, so it is important to check whether you are likely to qualify before you apply. Expect your bank to have very strict lending requirements, including that you’ve been in business for at least two (or even three) years, that you have assets to offer as security and that your credit rating is high.
If you don’t meet the bank’s criteria there are plenty of other lenders to choose from in Australia’s thriving alternative finance market. Take some time to check your prospective lender’s reputation – or get recommendations from other businesses or a reputable broker.
3. Compare Loan Products
Once you’ve narrowed down your potential lenders it’s time to compare costs. Be wary of advertised ‘annualised’ interest rates. To calculate the real rate you’ll pay, use this simple formula:
Annual interest rate:
Number of repayments per year x loan balance = interest paid
If you’re applying for an unsecured business loan your interest may well be calculated as a ‘factor rate’ rather than an annualised rate. A factor rate is a multiple of the loan balance (e.g. 1.15). This will be calculated at the start of your loan, on the full balance, rather than as a percentage of your reducing loan balance. Use a calculator to convert from factor rate to APR.
You also need to be aware that most loans have a lot of other fees and charges built in. To find the true comparative cost you’ll need to add in the application or facility set-up charges, as well as any fees for ongoing administration and for transactions, transfers, etc.
4. Carefully Check The Terms & Conditions
As well as being more expensive than secured bank finance, loans from alternative lenders can come with terms which could interfere with the way you do business. These lenders don’t fall under the same regulations as Australia’s banks and may seek to reduce their risks by restricting your activities. Be sure to check all the terms and conditions of the loan before you apply, so you won’t end up locked into an arrangement that could harm your business.
5. Prepare Your Supporting Documents
A successful loan application takes preparation. As well as your business case you’ll need to provide supporting documentation to enable the lender to assess your request for a loan. It’s important that you prepare these in advance, so you can submit them with your application.
If you have decided to apply to a traditional bank, expect to be asked for two or three years’ full financial statements, plus cash flow projections, copies of contracts or sales orders, and your strategic plans. You’ll need to provide details and proof of ownership of the assets you are offering as collateral, and you may also be asked for information about your business operations and management team.
For an unsecured loan from an alternative lender you’ll generally need to provide six months’ bank statements and sales records, plus identity documents for yourself and your business. You may need to provide a personal guarantee for the loan, which means you could be asked for your tax return or personal bank statements too.
Once you have your supporting documents ready you can submit your application – while your bank may require you to do this in person, most alternative lenders offer a quick online application process and a swift (often instant) response.
I hope you enjoyed this blog post about lean startup living.
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