Whether it’s for an asset upgrade or just some extra cash to keep things moving, odds are a business is going to need a loan at some point in its life.
However, applying for a loan involves a lot more than just filling out some paperwork. There are a lot of things to consider before applying for a business loan, so it’s important to do your research. Try asking yourself these nine questions before applying for business loan:
1. Will My Business Qualify for a loan?
The last thing you want is a credit kamikaze! Applying for a loan you’re not going to get is only going to hurt your credit score and your chance at securing funds in the future. Check with your broker on lending requirements before you apply for anything. Requirements will differ a bit from lender to lender. The most common requirements will be things like positive cash flow projections, assets for collateral, business plans, good credit history etc. PMG Finance can assist in working out the requirements and even completing the paperwork! Ask us before you start your journey.
2. How Much Do I Really Need to Borrow?
This is where you need to be brutally honest. Just because a lender says your business is eligible to borrow up to a certain amount, doesn’t mean you actually need that much. You don’t want to borrow too much that you struggle with the repayments but you also don’t want to borrow too little that you won’t get the benefit of the loan. That sounds a bit obvious I know, but it’s an important thing to consider before the business loan process. Do some cash flow projections to figure out how much you can afford in repayments and some estimates on how much you’ll need in total before applying for the loan.
Learn more about business cash flow management.
3. Do I Need Collateral? (And How Much Can I Borrow Against It?)
This one’s only for secured loans. Take a look at your available assets and try to calculate their value. Low-ball it here; odds are the banks won’t value it as high as you would. In most cases, a bank will value your asset at 60-70% of what you think it’s worth (annoying but true!). Some banks may not ask for collateral, so if you are going down that route check with your broker.
4. Do I Have The Cash Flow To Repay The Loan?
Carrying on from point two, figure out exactly how much you need to borrow and how much you can afford. You only do yourself a disservice when you apply for $200,000 but only take in $50,000 annually. Lenders usually analyse your business’ accounting data when you apply for a loan, so you won’t actually borrow more than you can manage. Sometimes lenders will require you to show good financial projections. Even if they don’t, it can be a good exercise to calculate your repayments and make up some projections for yourself. It’s always good to have a roadmap, and you want a bit of wiggle room with your repayments too.
5. Will The Money Help My Business Grow?
Pretty simple; what is the loan for and how does it factor into my business plan? Applying for a business loan for operational costs and to help cash flow is fine, but make sure you consider and measure the return on your investment. You don’t want to find yourself in the same boat six months down the track, applying for another loan. It’s all about growing your business, so you want to generate as much revenue from the loan as you can. Whether that’s investing in replacement equipment or new vehicles or whatever is up to you!
6. What Is My Business’ Credit Rating?
Similar to the first point, many lenders will require a credit check. If a lender does have a minimum credit score, you can get your business’ credit report from credit reporting bureaus rather than applying directly with the lender. It’s also a good idea to go through your credit report yourself. Sometimes things will be reported incorrectly or not reported at all. These mistakes can hurt your credit score so it’s a good idea to make sure everything’s in order. Once you’ve got your credit report you can also take measures to boost your credit score before applying.
7. Are My Personal Finances In Order?
Until your business reaches a substantial size (around $5 million to $10 million annual revenue) banks are usually going to want to look at your personal financial statements. These include everything from outstanding student loans and credit card debt to mortgage repayments. Because of this, it’s good to know both your personal and business credit scores. Requiring credit scores is one of the main differences between Bank and Non-Bank lenders.
8. Do I Have All The Necessary Documentation?
A lot of business loans never settle, not because the business didn’t qualify, but because they couldn’t produce the necessary documentation. If you can’t produce the paper trail, or if you take too long to get it together, it can draw out the loan process and raise your risk of rejection. Banks are notorious for requiring a lot of documentation and this often results in a longer application process. However, most lenders will require the same kind of stuff – business plans, bank statements and the like – so it’s a good idea to talk to your broker and get on the front foot and ask questions before you start the application process. They will know what you will likely need for your situation.
Additionally, some lenders will require your business’ tax returns so it’s a good idea to know where and how to access your ATO information. Keeping your tax information up to date is more important than ever as failing to lodge tax returns and outstanding tax arrears can hurt your business’ credit rating.
9. What Type of Loan Do I Need?
Depending on whether you go to a Bank or Non-Bank lender, there can be a lot of different loan options. The standard term loan usually works for most businesses’ needs, however, it’s good to weigh up your options. In general, banks usually have more options when it comes to funding and can often lend more. That being said, non-bank lenders are a lot quicker and often have an easier loan process. It comes down to each business’s personal funding needs – do you need a lump sum of funding? A continuous line of credit? A small loan now with another small loan again in the near future? There are a plethora of business loan options to consider. If you have a unique situation, feel free to contact our team to work out a specialised loan plan for your business!
Try asking yourself the above questions when applying for a loan to minimize the complications in your application.
For more information, please feel free to reach out to one of our Finance Brokers on 07 4639 1011 or submit an enquiry.
Source: American Express
DISCLAIMER: The above content is to provide general information and does not constitute financial, legal or other advice. This means that duties and requirements imposed on people who give financial advice do not apply to this content. For advice contact your accountant or legal advisor.