How to improve your prospects of getting a business loan*/
How to improve your prospects of getting a business loan
Securing a loan for your business is not as easy as you might think.
It requires evidence and articulation on your part, you will need to outline to someone with no prior knowledge:
- What is your business,
- Your vision for the business,
- Your detailed plans to get there,
- How the funding will accelerate your plans and
- That you have the ability to repay the loan.
Bankers and private lenders have a vested interest in lending you the money but they also want confidence that their money will be utilised according to a plan which includes them being repaid in line with the loan agreement.
Understandably, most business owners are not well versed in how to market their business for lending proposals. However, when you fail to be clear about your business and can’t support your proposal with evidence (forecasts etc), the chances of securing a business loan decrease dramatically.
Getting a business loan helps take your brand to the next level by allowing you to secure better equipment, focus on hiring and training staff, increasing marketing initiatives, not having your growth constrained by insufficient working capital, among other things.
Unfortunately though, the numbers don’t lie. Small businesses are considered “high risk borrowers.” 40% of businesses in a recent survey of 1,000 small to medium enterprises (SMEs) said it was more difficult than ever to get a loan, especially after COVID-19. But even before the pandemic, there were significant dips in 2009 and 2012 where Australian SMEs failed to get funding.
Banks and brokers need to consider numerous documents and financial records when deciding whether or not to lend to a business. In most cases, business owners submit an incomplete list of these files making it challenging to make a proper assessment. Proposals submitted which include all necessary supporting documentation are considered favourably, compared to those that take weeks to collate as it speaks to a business owner’s perceived competence.
But by understating what’s required of you, you will ensure that your prospects of acquiring a business loan improve.
What documentation is required to apply for a loan?
In order to apply for a business loan, there are different requirements that need to be met. Banks want to have a comprehensive picture of directors and your business in order to make a decision.
Banks and brokers may vary a little in terms of what they ask for, but in general they will ask for:
- Your personal information and identification
- An asset and liability statement from directors
- Your last two years of financial statements (Profit & Loss and Balance Sheet)
- This year’s financial statements (year to date Profit & Loss and Balance Sheet)
- Integrated forecast financial statements for the next 12 months (Profit & Loss, Balance Sheet, and Cashflow)
- Last six months of bank statements of business accounts
- Last 12 months of ATO portal reports (Activity Statement, Income Tax and Fringe Benefits)
- A current and detailed business plan – to help a third party understand your business
- Details of the lending purpose and how it fits in with your business plan
You should also be ready for any questions about your business including any discrepancies in your history, your financial forecasts, security you will be providing, preferred repayment plan, etc.
How a business loan can benefit you
Aside from being able to access better equipment, being able to focus on hiring and training staff, increasing marketing initiatives, and not having your growth constrained by insufficient working capital, business loans come with plenty of advantages for your business.
Some of these are:
- Increased capital. You have more to invest on what your business needs—whether it’s a more sophisticated marketing plan or an expanded space—without having to resort to any emergency funds.
- Tax deductions. You get to enjoy tax deductions depending on the interest payable of your loan.
- No sharing of profit. Unlike working with an investor, securing a business loan doesn’t require any sharing of the profit, just a sum of what was owed plus interest.
- Better business credit. If you make timely repayments and are diligent with them, your credit score will improve.
- Control of the money you borrow for an overdraft. You’re free to spend it on what can benefit the business.
And while it may seem safer or easier to try and scale your business from trading profit alone, business loans can help you jump from point A to point B much faster, especially if you have the opportunity to expand quickly and want to edge out your competitors.
How are loans assessed?
Loans are assessed through what we call the five Cs:
- Character – Lenders don’t just look at your business but you as an owner and an individual, as well. This covers your integrity, reputation, and overall willingness to make good on your debts. They examine your character by looking at your personal and business credit history, as well as your ability to competently operate the business.
- Collateral – Lenders prefer secured loans as they’re considered a safer option. Collateral minimises risk and ensures the lender that, in the event that you are unable to repay the loan as per the loan agreement, they have the ability to sell the asset/s to help repay the money owed to them.
- Capacity – Make sure you provide financial information which shows that you have the financial capacity to repay the loan (e.g. your forecast should include repayments on the loan).
- Capital – Lenders want to see that you have and will continue to reinvest in your business. They want to feel comfortable that there are sufficient assets in the business to cover the liabilities (including their lending) and that they aren’t the only ones keeping the business afloat.
- Conditions – This refers to the terms and conditions under which the lender offers the loan. Your initial proposal may be rejected because the loan terms didn’t align with the lender’s. For example, the repayment period sought was too long or the lending amount sought is outside of lending policy for that class of asset or facility (known as loan to value ratio).
3 tips to improve your chances of getting a business loan
These three tips will not only improve your chances, but better educate you on how to get a business loan:
1. Think of the lender as a business investor
If you imagine the lender as an investor, you’ll have a better understanding of how to approach the situation. With investors, you’re expected to have a great pitch prepared—the same goes when talking to banks and brokers.
Use the same preparation you would with an investor with your lender and they’ll be impressed with how ready you are, how much knowledge you have about your business, and how you plan to spend the money. Change your mindset and be confident, tell them about what you do, why what you do solves a problem that people have, and why your business is unique.
2. Solidify your business plan and articulate it well
Businesses need to work towards a plan. They should be at the heart of every small business. Those who operate without them tend to become directionless and muddled with their decisions because they have no clear goals in place. Having a business plan will not only set you apart, but it will set you up for success because it’s something that your progress (whether good or bad) can be monitored by and corrected (if needed).
You also are able to articulate your business properly and be constantly reviewing and tracking it. The plan should point you towards success and help you readjust as you go.
Remember that you know your business best, a banker or broker doesn’t have a clue about it so you need to communicate it to them properly and eloquently. They can’t read your mind so it’s your responsibility to convince them.
By knowing your business plan inside out and how the money will assist on that journey the lender or loaning institution will feel more confident in giving you the money.
3. Know your numbers
Every small business owner needs to know their numbers, or at least have a dedicated person who can help them with the numbers and get a good grasp on them. A business’ numbers also tell stories, whether there were ups or downs, discrepancies, etc.
Knowing your financial history and being able to answer queries confidently provides comfort to a lender and presents your business favourably. While there are different specific requirements, between lenders, generally they will ask you to provide the information listed above and ask questions like:
- What margins do you make from each product/service?
- How concentrated are your customer and supplier mixes?
- How often do you review your financials in detail and how accurate is your management financial information?
- What are the amounts and days that make up your working capital cycle (accounts receivable, accounts payable and inventory)?
If you’re seeking a loan of $1,000,000. It has to be reflected in your financial forecasts that you need this specific amount. It can’t be $1,000,000 because you’d like to feel more comfortable, but because it’s what you require in order to scale your business and take it to the next level. It’s not about coming up with an amount and then deciding where the money goes once you’ve got the loan, it’s concretely deciding how much you’ll need where and why.
Even if the numbers of your business aren’t your strongest suit, you still need to develop some level of financial literacy in order to run your business. Passion about your business can only take you so far, you need to be able to understand where you stand with your numbers in order to run it best.
It’ll help you to know what makes you money and what doesn’t, how to manage debt, identify positive or negative cash flow, and how to make financially responsible decisions for your company.
Having to apply for a business loan can be daunting but it doesn’t have to be. As long as you’re prepared, know your business’ direction, how you will get there and how the funding helps, you can definitely improve your prospects of securing one.
Need a loan to grow your business? We’ll get you funding fit, give us a call.