Applying for any type of credit is a major financial move and should not be taken lightly. Follow these steps when applying for a business loan to ensure you are investigating all loan options, as well as anything that may affect your personal financial situation or your business during the application process.
1. Assess your eligibility
There are many factors that influence a lender’s decision to provide credit to your business. Therefore, it is worth assessing your eligibility before starting the application process to see if you can proactively address any issues. Some key considerations that may affect your eligibility for a business loan include:
Annual turnover: Lenders assess cash flow to ensure the business generates enough income to repay the loan, and usually requires you to meet a minimum annual turnover (this varies by lender and loan). Financial statements and sales records will be used to display this data.
Loan purpose: Most business loans cover a range of financing purposes, from paying wages to purchasing business equipment. But some lenders will specialize in specific industries like agriculture or healthcare, so you may want to investigate options specific to your business.
How long have you been in business: You usually need to be in business for a while before a lender accepts a loan application. This may last for six months or as long as several years.
Business and personal records: This includes everything under the financial sun, from unpaid personal or business debts to any legal issues involved with you or your business.
2. Keep your credit score in good shape
Your personal credit score affects the outcome of your business loan application. While you can’t remove every delayed mortgage repayment or loan application from your credit score, you can fix mistakes and make sure you’re in good shape moving forward. You can access your credit score for free every three months to check for any problems and contact a credit reporting agency to make changes.
It’s also wise to pay off as much of your existing debt as possible before taking out another loan. This shows lenders that you are a responsible borrower and can also improve your credit score to a higher level.
3. Know your financial limits
There’s no point in applying for a $500,000 loan if your business can’t cover the repayment costs. Once you’ve assessed your eligibility and personal financial situation, you should have a better idea of how much debt you can easily pay off.
4. Research and Compare Business Loans
You need to assess which loan is best for your business needs – secured or unsecured, fixed or variable – and the features, fees and (approximately) interest that come with it. Once you’ve determined the type of loan, it’s time to see how different banks and lenders compare these factors.
5. Organize your paperwork and apply
The application process can often be initiated online, not necessarily the arduous application task of past decades. However, lenders still require you to provide a series of documents from the start. This includes:
- Your driver’s license or other ID to verify your identity
- Your company’s ABN (Australian Business Number)
- Financial documents, such as bank account statements, tax returns, and projected cash flows for the business (and possibly personal financial documents)
- A business plan on how you intend to use the funds
6. Wait for a reply
This may only take a few days or weeks, but please be patient. Applying for a large loan is not recommended as each application will appear on your credit score. Many applications, especially if they are unsuccessful, can hurt your credit rating and, in turn, your eligibility for a business loan.
If your application is successful, it’s time to read through the documents and make sure you’re happy to continue.