Applying for any type of credit is an important financial gesture that should not be taken lightly. Follow these steps when applying for a business loan to ensure that you consider all of your loan options, as well as anything that may impact your personal or business financial situation in the application process.
1. Assess your eligibility
Many factors can affect a lender’s decision to extend credit to your business. It is therefore worth assessing your eligibility before starting the application process and seeing if you can proactively resolve any issues. Some of the key considerations that may impact whether or not you qualify for a business loan include:
Annual sales : Lenders assess cash flow to ensure the business is generating enough revenue to cover loan repayments and generally require you to meet a minimum annual turnover (this varies by lender and loan). Financial statements and sales records will be used to show this data.
The purpose of the loan: Most business loans cover a range of financing purposes, from paying salaries to buying business equipment. But some lenders will specialize in specific sectors like agriculture or healthcare, so you may want to investigate options specific to your operations.
How long have you been operational: You will often need to have been in business for a while before lenders will accept a loan application. It could be as little as six months or as long as a few years.
Professional and personal files: This includes everything under the financial sun, from unpaid personal or business debts to any legal issues you or your business have been involved in.
2. Get your credit score in good shape
Your personal credit score can affect the outcome of your business loan application. While you can’t erase every overdue mortgage payment or loan application from your credit score, you can fix mistakes and make sure you’re in a good position to move forward. You can freely access your credit score every three months to check for any issues and contact the credit reporting agency to have them changed.
It would also be wise to pay off as much existing debt as possible before applying for another loan. This shows lenders that you are a responsible borrower and could also tip your credit score into a higher band.
3. Know your financial limits
There’s no point in asking for a $500,000 loan if your business can’t cover the cost of repayment. Once you’ve assessed your eligibility and personal financial situation, you should have a better idea of how much debt you can comfortably pay off.
4. Research and Compare Business Loans
You will need to assess the type of loan that best suits your business needs (secured or unsecured, fixed or variable) and the features, fees and (approximate) interest associated with it. Once you’ve identified the type of loan, it’s time to see how different banks and lenders compare on these factors.
5. Organize your documents and apply
Application processes can often be started online and are not necessarily the arduous filing task of decades past. But there are still a range of documents that lenders will need you to provide upfront. This includes:
- Your driver’s license or other ID to verify your identity
- ABN (Australian Business Number) of your company
- Financial documents such as bank account statements, tax returns, and projected cash flow for the business (and possibly documentation of your personal finances as well)
- A business plan showing how you intend to use the funds
6. Wait for a response
It may take a few days or several weeks, but be patient. It is not advisable to apply for multiple loans, as each application appears on your credit score. Many applications, especially if unsuccessful, can hurt your credit rating, which in turn affects your eligibility for business loans.
If your application is successful, it’s time to read the documents and make sure you’re happy to continue.