How to apply for a business loan
By Julian Harlow
All businesses require funding in one form or another to grow, and it's likely that at some point you will need to at least consider a business loan. The key to seeking finance from a lender is preparation. And taking the time to lay the groundwork for your application can not only help secure the loan, but ensure that your business makes the most of those funds.
Is a loan your best option?
The first question you should ask is whether you should go into debt to pursue your business plans. A good exercise is to work out whether you can cut costs to create the additional funds you need - not only could this help you avoid the costs of credit, it will also be a valuable demonstration of your prudence to any lender you later approach.
Consider if you should be looking at bringing in an investor or think about alternatives to a loan such as making the most of existing sources of credit. The exact approach you should take depends on where your business is at and what your future plans are.
What do I need in a loan?
Get advice - starting with those who know already your business. Your accountant or financial advisor will have a good overview of the fundamentals of your business and be aware of what you need in terms of documentation as you prepare to approach lenders. Speak to your existing financial institute - you already deal with them and they know you, so they will provide a good starting point.
Are the funds needed as working capital, or is the money to be used in a one-off transaction such as buying new equipment? Growing businesses may need both, and you will need to quantify both if you are seeking a mixture of at-call and upfront credit. You also need to consider how much your business can afford to repay and over what time period, and what type of security you can provide against the loan.
Make your business a good risk
Once you have decided to apply, you must understand how lenders perceive your business. In other words, how do you convince a lender that your business is a reasonable risk for them? This is a major consideration given around 20 per cent of small business loans are rejected in Australia. While there are aspects of your business you cannot change, such as the industry it is in, you do have control over how you present your business.
Now it's time to prepare the documentation needed for your application. While this will vary depending on several factors, such as how large your business is and the amount you are seeking, there are a number of documents you need to have on hand, including:
- Profit and loss account.
- Cash flow forecast.
- Balance sheet.
- Tax returns for at least the past two or three years.
- A 'statement of need' setting out how you plan to use the funds.
- A business plan showing how you intend to grow your business.
- Documents verifying the security you propose to provide against the loan.
You should have these prepared and be able to demonstrate your familiarity with their contents. Once you have lodged an application, lenders may ask additional questions based on your documentation. Being able to respond confidently will be a strong signal of how well you understand the finances of your business.
Lenders know there is always a risk in providing a loan, but by being well prepared you can have a significant impact on the level of risk your business is perceived as having - perhaps enough to make the difference in ensuring access to the funds your business needs.
*This article contains general information and commentary only, and is not financial or financial product advice, and you agree not to rely upon this article in any way.