Want to know how you can get a business loan? This article will help you find all your answers. I have narrowed down the five points that we will discuss:
- Important decisions to make before applying for a loan
- Preparing for a business loan
- Understand the risk profile of your business
- Understand how ATO payment arrangements can impact lending power
- Improving your chances of getting your loan approved
How to prepare for a business loan?
Let’s put it in a simpler way when you apply for a business loan, it’s very crucial to prepare a comprehensive business plan and inform the lender about your proposed project.
But why do you need to provide this kind of information? Because it will help your lender advice the most appropriate financial strategies.
Making informed decisions
Decision-making is key here. The first step is to realise and decide that your business needs a loan. In addition to this, there are various other factors that should be considered before you approach a lender:
- The kind of loan you need
- The amount you want to borrow
- For how long you will need the loan for?
- Is your business stabled enough to repay the loan, interest rates, and any ongoing fees that come along with the loan?
- What guarantee/security you can provide to the lender and its effects on the interest rate that has been offered?
Will you frequently need to access the borrowed funds?
“At call” loans
‘At call’ loans (line of credit or overdraft) are available if you need to:
- Access the borrowed funds on a regular basis. For instance, for the help in cash flow.
- Keep your business running while your clients make the payment
Upfront loans
Upfront loans can also be referred to as a ‘fully drawn advance’. It offers the complete loan amount at once. Upfront loans are obtainable if you need to:
- Purchase a brand new business
- Buy additional equipment for expanding your existing business.
The loan terms that are suitable for your business.
- Loans having no fixed terms and conditions and are ‘at call’.
- ‘Upfront’ Loans will need an interest paid back and a certain percentage of the loan at regular intervals.
The amount that needs to be repaid depends on the terms and conditions of the loan and its length.
For identifying if the loan term is right for your business, you will have to assess the amount that you are able to afford in order to service the loan.
Important to note: The longer the loan term is, the more total interest you will have to pay.
The level of ongoing funding that you need
It is said to be the average amount of a line of credit or an overdraft which is once used. While applying for an overdraft limit, keep in mind that:
- The higher the overdraft amount is, the higher the charges will be.
- There will probably be some clauses in the agreement where the lender can demand repayment of the complete loan at any time.
Is a fixed or variable interest rate better?
In a variable interest rate loan, the interest rate that is charged on the outstanding balance depends on the changes in the market interest rates. Whereas, in fixed interest rate loans, the interest charged on the loan will remain fixed, regardless of the market interest rates.
The choice of rate affects:
- The complete amount of loan
- Firmness of repayments
- Features of available loan
Ultimately, you are able to determine the choice of fixed or variable rates by the amount of cash flow generated by your business after paying your costs such as; your loan repayments. With a fixed rate loan, risk of interest rate changes will be borne by the lender. On the other hand, the risk of interest rate changes will fall on the borrower.
Loan security
A secured loan refers to a loan in which the borrower has to pledge any asset as guarantee for the loan, which will afterwards become a secured debt that is owed to the lender. Loan security is necessary and you can secure your loans by several types of assets, such as:
- Commercial
- Residential
- Business
- Rural property
However, there are some loans that remain unsecured by any asset. Mostly, the interest rates depend on the amount offered for security.
Look for expert advice
If you are still not sure and you need some more of probable finance options. Seek expert advice. Before taking any important step or approaching a lender it is crucial to consult a finance expert or your business adviser or accountant.
Plan Everything Accordingly
It is much likely that lenders will ask for a lot of in-depth information about the financial history of your business.
It is also essential for you to construct a convincing and comprehensive business plan involving a profit/loss budget and cash flow forecast.
In addition to this, the information you used for business strategy planning might also be needed for the evaluation of your project. Lenders and Banks will look at the risk profile of your business while considering the application for loan.
What lenders look for?
- The level of your guarantee/security. They are interested in knowing what you can offer in case you are unable to repay the loan
- Your capability to make regular loan repayments
- Your capability to repay the whole outstanding debt
Furthermore, one more thing that is very essential to a lender is an estimate of the cash requirements of business. It is the amount for repaying your loan which validates that you are an efficient manager.
Perception of risk from a Lender’s point of view
Here, I have narrowed down the risk factors that can influence the perception of risk of a lender. If these fall under business, you may need to consider a new source of finance:
- Start-up businesses, incorporate financial, business and management risk.
- Lack of provided security.
- Lack of business history.
- Factors including competition level, barriers to entry, current economic conditions and profitability profile.
- Seasonal business. For instance swimwear or agriculture. You will have to demonstrate the cash flows in off seasons.
- Lack of market knowledge, planning and finance expertise.
- Poor financial history.
