How to get a business loan

June 27, 2018

Why get a business loan?

Sooner or later most small businesses need to know how to get a business loan, whether to get the operating capital for business startup or to finance an expansion. 


When applying for a business loan, it's essential to prepare a detailed business plan and fully inform the lender about your proposed business financing need. This information helps the lender to provide you with the right type of loan and advice.

Decisions to make when applying for a business loan

 

Deciding that your business needs a loan is only the first step. There are a number of things to consider before you approach a lender:

  • Decide what the money is needed for. There are good and bad reasons for business loans. Good reasons include financing a piece of equipment, real estate, long term software development or large seasonal sales variances. Bad reasons include financing ongoing losses, office build outs, or acquiring non-essential business assets.

  • how much do you need to borrow? While this may seem obvious, how much you want to borrow will direct what type of loan you should be applying for.  It certainly isn’t a great idea to go to the bank and ask “how much can I borrow?”. Most small businesses don’t ask for a large enough loan. Underestimating the amount of money can lead to problems with a lack of working capital sooner than planned. Overestimating can make lenders question the business owner’s assumptions and credibility. Have a well thought out budget that is supported by financial projections (profit & loss statement and a cash flow statement) that is reasonable and shows that the research was done.

  • what type of loan will you need? Is a traditional business loan the best option or would asset finance or debtor finance  be better? Don’t know? Feel free to contact us or call us on 1300 96 25 95.

  • how long will you need it for? The term of the loan will also effect what type of loan is best for you.

  • can the business afford to repay the loan, interest and any one-off or ongoing fees that come with the loan? The short answer should always be yes but how will you demonstrate this to the bank?

  • what security can you offer the lender and how this affects the interest rate offered.

How you apply for a business loan matters

 

Start by considering the lender's point of view. You want money. But he or she is most interested in the answers to these two questions: "What are you going to do with the money?" and "Are you a good risk?", and to make a successful business loan presentation, you need to come up with the "right" answers to these two questions.

 

Answering the first question means being fully conversant with all the details of your business plan and being able to point to the relevant financial statements, charts or graphs that will help convince the lender that you need the amount of money you're asking for to do what you want to do. Lenders will ask for a lot of in-depth information about the financial history of the business. It's also important for you to create a convincing and detailed business plan which should include a profit and loss budget and cash flow forecasts.

 

Answering the second question means having already given some thought to the credit risk you represent to the lender and being ready to address their concerns.

 

The information you use to build your business plan may also be needed by the lender to assess your project. This includes both the past and future plans for your business, the people working in it and the market itself.

 

The outcome of your application is strongly influenced by how well your proposal is researched and how well it is presented.

 

Risk assessment of a business loan

 

Banks and other lenders will look at your business's risk profile when considering your loan application. Understanding what lenders look for and what they consider risky will help you present your business in a favourable manner.

As a general rule, lenders look for:

  • the level and nature of your security (what you're offering to give them if you can't repay the loan)

  • your ability to make regular loan repayments (cash flow risk)

  • your ability to ultimately repay the debt (business risk), including any other debts you might already have.
     

You need to be able to assess the level of cash flow or business risk in your specific circumstances. A projection of the cash requirements of the business is most important to a lender, as it is the actual cash left after expenses that will repay the loan, not income. It also shows you are an effective manager.

The higher the operating cash margin, the better the chance is for a business to survive slower market conditions and ensure long term survival and growth. In the final analysis, most lenders give money based on the company’s cash flow since it measures the ability to successfully repay the loan.

For a more in-depth article on how to get the best interest rate on your business and commercial loansclick here.

 

Your expertise and experience in your chosen field greatly effects the banks perception of the risk. Because the success of your business is dependent on this to some degree, any potential lender will want to know more about you. Be prepared to talk about yourself when you apply for a small business loan - your background, your expertise, and even your aspirations.​

 

All too complicated?

Running a business is hard enough, if you want some advice on you can take advantage of this type of funding, feel free to contact us.

 

 

A lender's perception of risk

The following factors can influence your lender's perception of risk. If a number of these areas apply to you and your business you may need to consider another source of financier. At Just Business, we specialise in finding the right bank for these circumstances.

Risk factors:

  • start up businesses incorporate financial, business and management risk

  • lack of security 

  • lack of business history

  • industry sector, factors will include levels of competition, barriers to entry, profitability profile and current economic conditions

  • highly seasonal businesses, for example swimwear and agriculture. You'll need to demonstrate how you'll deal with cash flow pressures in the off season

  • lack of planning, market knowledge and finance skills

  • poor credit history.

 

Be Careful! Before entering into a payment arrangement with the Tax Office, businesses should discuss this with their current or future lenders. Many businesses are unaware that entering into a payment arrangement with the Tax Office or other government agencies may adversely affect their current and future financing arrangements. For instance, a lender may not lend to a business if it is currently in a payment arrangement.

 

 

How do you want to access the funds you borrow

If you need to access the funds on a semi regular basis to help with cash flow to keep the business operating while waiting for your customers to pay for goods, 'at call' loans such as an overdraft or line of credit are designed for this purpose. If you are an importer, then a form of trade finance  might be even more suitable. However, if you need the funds to buy a new business or equipment to expand your existing business you will need the funds 'upfront'. This is can be know as a commercial or business loan and provides you with the entire loan amount all at once.

Business Loan terms

Loans provided upfront will need a portion of the loan plus interest paid back at regular intervals. The repayment amount will depend on the term or length of the loan. To determine the loan term suitable for your business you will need to calculate how much you can afford to service the loan. Be aware that the longer the loan term the more total interest you will pay. Loans that are at call have no fixed terms.

All too complicated?

Running a business is hard enough, if you want some advice on you can take advantage of this type of funding, feel free to contact us.

 

Fixed or variable interest rate on a business loan

 

The choice of rate will affect the stability of repayments, overall cost of the loan and the loan features available. With a fixed rate loan the lender bears the risk of interest rate moves, while with a variable rate you will bear this risk. Ultimately, the choice of variable or fixed rates will depend upon how much free cash flow your business generates after you have paid all your expenses, including loan repayments. If your business has a low profit level, a variable rate loan repayment may rise beyond your ability to pay.

For more information on how are business and commercial loan interest rates calculatedclick here.

Security for a business loan

Loans can be secured or unsecured by various types of assets, including residential, commercial, rural property or business assets. Alternatively, some loans are unsecured by any asset. Lenders give unsecured working capital lines and term loans to businesses which are over 2 years old and have a reliable record of incoming accounts receivables.

Generally the less you provide for security the higher the interest rate will be. Be aware the lender has the legal right to seize any property or asset you offer as security if you can't repay a loan on time.

How much money you're personally willing to put into the business matter more than you think. It’s not just the fact that your borrow amount decreases. Being willing to risk your own money shows the lender that you're committed to the enterprise.

Fees of a Business Loan

There can be fees which can make a loan less attractive than it first seems. These include one-off fees such as establishment/application fees, exit/discharge fees and early termination fees or regular fees such as service fees or line/credit advance fees.

How to Get a Business Loan? Be Prepared

Your chances of getting a business loan will be greatly improved if you have all your documents in order and are prepared to meet the lender's concerns about loaning you the money. Think of it as a presentation to an important client or customer, and you'll have a better chance of success.

Seek advice

The information provided here will provide you with a range of possible finance options. It is important to seek advice from an expert before approaching a lender for a loan.

 

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