Capital Boost Blog: What you need to know before applying for a business loan
Published on December 06, 2019

Are you unsure how a lender will evaluate your business or the types of information needed when you apply for a new business loan in Australia?

You may have a general idea of what money lenders look for. In case you’re concerned whether you’ve missed out on any criteria, let us help you take the uncertainty away. We’ve put together this useful guide with everything you should know before applying for a business loan in Australia.

1. How do money lenders assess a business loan application?

Remember the Five Cs of Credit? Character, Capacity, Capital, Collateral, and Conditions. That’s what lenders look for.

They need to assess the nature of your business qualitatively and quantitatively, how risky it is to give money to your business, and whether you’re in a position to repay the loan. 

The following factors come into play:

  • Trading history
  • Your personal and business credit history
  • Financial history to analyze spending behavior, savings, and financial management
  • Revenues and other financials
  • Debt-to-income ratio
  • Capital
  • Assets or collaterals (in case of a secured loan)
  • Purpose of the loan, the amount involved, and interest rates.

2. What credit score do you need to get a business loan?

Different business lenders have different ballpark figures for a minimum credit score. Usually, a credit score below 550 is lower than their minimum requirements. But there are lenders who provide loans to businesses below these scores too. Obviously, a lot of factors are taken into consideration before a business loan is sanctioned. 

Check your personal and business credit history including:

  • Past defaults
  • Outstanding debts, and
  • Expenses and incomes.

3. What type of loan do you need?

There are plenty of loan types you can choose from:

  • Secured loansYou can choose to borrow against a collateral like a house, vehicle or land. This will give you the benefit of lower interest rates, but the lender can claim the asset if your loan is not paid. The collateral has to have a good market value across the loan’s lifespan so that the lenders can sell it if you’re unable to repay.

  • Unsecured loans (from $5,000 to $500,000): Here you don’t need a collateral, but the interest rates are higher than secured loans.

  • Invoice financing: You can sell your invoices to a third party in exchange of advance cash of what the invoice is worth. 

  • Equipment finance: This a loan applied to buy a piece of equipment for your business, including vehicles, machinery or technology.

  • Business credit cards: These can be enough to fund short-term cash needs if used sensibly.

  • Line of credit: You get approved to borrow a certain amount, but you pay interest only for what you use. 

  • Overdraft: This lets you to run a negative balance on your bank account upto a certain amount. You will have to pay interest on the amount you withdraw, and other fees.

  • Equity loan: This is a line of credit or loan secured against residential or commercial property. It allows you to borrow 100% of the value of the property putting your property at risk, of course.

4. What are the fees and charges for the business loan?

Business loans come with various fees including

  • Underwriting fees
  • Administration fees
  • Loan processing fees
  • Establishment or application fees
  • Exit fees
  • Early termination fees, and 
  • Other service fees

5. What are the documents that you will need to submit?

  • Financial Statements:
    • Bank statements
    • Sales and expenditure reports
    • Business income
    • Individual income (for directors and shareholders)
    • Other debts, dependents and living expenses
    • Share value and equity distribution (if public)
    • Latest tax returns
    • Business activity statements (BAS) 
    • Statements from your Australian Taxation Office (ATO) portal
    • Details on any trusts or self-managed super funds (SMSFs) related to your business
  • And if your business is less than 12 months old, you will need to submit:

    • Cash flow projections
    • A business contract of sale
    • A business plan
    • A lease agreement.
  • Personal identification card: E.g. a driver's license or passport

  • GST registration details

  • Permanent citizenship or residency details

  • Details of collateral: In case you opt for a secured loan, you’ll need to provide details of the collateral, including its purchase date, current valuation and latest photos.

  • ABN/ACN: You will also need an Australian Business Number (ABN) or Australian Company Number (ACN) to be eligible for most business loans in Australia.

Make sure that your financial details are clean and updated. Be ready to provide any other documentation such as trust deed, partnership agreement, or company registration requested by the lender at short notice.

6. Who are the money lenders you should approach?

You can approach national or regional commercial banks, peer-to-peer lending sites, direct online lenders, or even credit unions with your request.

7. What are the things a lender will ask when you need a business loan?

Here are the typical questions that all money lenders ask.

“Why do you need the business loan?”

You should be able to state your loan purpose clearly. Some of the reasons you may need the loan for are:

  • To improve cashflow
  • To consolidate debt
  • To buy equipment
  • To expand to a new geography
  • To open a new store
  • To start an eCommerce portal, and so on.

Gather as many details as you can. For instance, if you want to open a new store, be ready with details such as location, rental rates, design, cost of building materials, the timeline for the work completion, and so on.  

“How much do you need?”

Calculate the loan amount that you need. Compare with past projects or get a few vendor quotes beforehand so that you are ready with an approximate figure. 

“How much can you repay and how frequently?”

You can propose a repayment period and the amount of repayments. For instance, propose that you can repay $X every fortnight over a period of three years. Your repayment amounts will depend on how long the loan is for. 

Before you speak to the lender, work out how much you can afford to pay. Historical financials and cash flow forecasts will help a great deal in sorting this out.

8. Who can assist your business in getting a business loan?  

The final question is whether you should go the mile yourself. 

It may seem an unsurmountable task to find the right money lender, put all this information together, and apply for the business loan. You need a thorough understanding of the various lenders and their loan criteria. You also don’t want to waste time going through any unnecessary paperwork, and instead get only the right documents ready.

Your best bet is to partner with a business loan brokerage service in Australia like CapitalBoost who can assure you a quick turnaround, minimal paperwork and a personalised approach tailored to your requirements. 

Reach out to us by applying for a loan today and we will be happy to assist you. 

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