1. Ask yourself some questions
The first thing to ask yourself when applying for a business loan is “Would I lend the money to me?”.
This may seem like a weird question, but at the end of the day this is how a lender will look at you and the risk they’re taking lending you the money.
Then you need to ensure you can also answer the following:
- What do I need the money for?
If it’s to fund growth that’s great and you will need to demonstrate the reality of growth with plans/contracts etc. Banks are looking for intended uses such as:
- Working Capital needs e.g. to fund purchase of stock or to fund job costs
- Growth plans
- Financing the purchase of new equipment
- How much do I need?
- How long do I need it for and how do I plan to repay it?
- What type of financing do I need e.g. overdraft, line of credit, term loan etc.
It’s important to know that something banks won’t lend for is to compensate for poor financial management. If this is the case for you, you need to look into why you’ve run out of money and find operational ways to rectify the situation.
Lenders will also run credit checks on you and your business. Which means it’s a good idea to do this yourself prior to making the application, so you can deal with or explain anything negative.
It’s also a good idea to do some internet searching on yourself and your business to ensure there’s nothing untoward that could look bad to a lender. They will do the same.
2. Get your information right
The lender will want to get a really detailed picture of you and your business – particularly your financial situation. Here’s what they will want to see:
- Recent trading results
i.e. Profit and Loss and Balance Sheet for at least a couple of years.
They will use these to run diagnostics on your financials to see how the numbers stack up (i.e. they will measure your business on their own set of indicators known as covenants). These measurements are an easy way for a lender to assess the financial health of a business.
- Budget showing your future plans
- Profit and Loss
- Balance Sheet
- Cash Flow Forecast showing your future cash situation and how you will use the loan and pay it back.
- Information re-forward sales/orders (possibly signed contracts).
- Information about your personal assets and liabilities i.e. what you own and what you owe.
- Business Plan – a detailed outline and picture of your business and its overall plans including
- Product/service you offer
- Marketing and sales
- Operations and finance
- Human resources
- Customer service etc.
It’s important that you ensure all information given to the lender is accurate and properly reconciled. It’s so easy for mistakes to be made in bookkeeping and some can render your application doomed if not caught before you apply for a loan.
You will also need to ensure that:
- Your tax liabilities are up to date e.g. GST, Company Tax, PAYG etc.
- You don’t have any long overdue payments. Lenders can get access to very up to date information nowadays from current suppliers via credit check organisations.
The bank will also be interested in the level of your investment in the business, i.e. how much of your own equity have you got at stake and how confident are you in your own business.
Lenders may require collateral if there is not a strong track record of profitability or strong credit record. You should be able to list assets that can be pledged.
3. Understand the rules
Lenders won’t lend you money because you’re a nice guy/girl or because you have a fantastic new idea that you’re convinced will be a world-beater. They will assess the situation based on cold hard facts. If your loan isn’t approved do yourself a favourand don’t hold it against the poor messenger. Just learn from the experience and either find other forms of finance, or work out a way to achieve your aim without finance e.g. start smaller/leaner etc.
If your loan is approved they will want regular and timely updates on your financial situation. They will look closely at the operation of your account and usage of an overdraft. If you have an overdraft that becomes ‘hard core’ i.e. you never pay it off, but keep increasing the amount used, this will raise flags with them and you can probably expect requests for information/reasons why.
They will measure your loan performance using their covenants, so it pays for you to regularly calculate these for yourself to ensure you’re complying. Include them in your regular financial management reports.
If you regularly exceed your overdraft this will obviously raise flags and they will become very vigilant. Don’t think of an overdraft as an excuse to get slack on money management e.g. debt collection, supplier payments, overspending, stock management, job management etc.
4. Look in the right place
A traditional bank isn’t the only place to look for loan funds. There’s a myriad of options available these days including angel investors, crowd-funding etc. Do some research to find what is the best form of finance and be very careful to fully understand the true cost of each type of finance. The easier it is to get, the more expensive it will be generally. Ensure that the cost of the finance doesn’t wipe out any profit you will make from the business. With investment interest rates currently so low, it might be best to invest your own funds into your business… if you’re really confident of a good return.
In summary, when applying for a business loan you need to present your proposition to a lender in a way that gives them confidence you’re a good risk and in control of your business. It pays big dividends to seek help from those experienced in lending applications, to guide you in the right direction, present you in the very best light to a lender and ensure you get the best deal possible.