Small businesses and start-ups often require small business loans to expand or maintain regular operations. Specific terms and conditions are imposed by lenders while lending money to any business person. Due to high-risk factors, lenders are stringent about approving loans for small companies. It is thus necessary for the borrowers to match with the lenders’ criteria to secure a loan successfully.
There are certain specific requirements that lenders look for in a loan application. This article will be your guide and reveal some secrets to help you secure a loan successfully.
Which things matter in a loan application?
When you apply for business finance, the following factors are significant in the application process. Although not all business finance lenders need everything listed so it is useful to match yourself with a lender that suits your needs.
1. Business Plan
The most vital element of your loan application is a business plan. You should present a constructive business plan to the lenders that require them. It provides the lender with an overview of your business and in some cases can assist with the approval process.
2. Business Duration
The chances of securing a loan are more when your business has been trading longer. It is because lenders assume such businesses to be more financially stable and hence less risky. A business requires some time to show a steady growth rate in the targeted market. Some lenders prefer giving loans to only those businesses that have been trading in the industry for at least 6 to 12 months. The operational duration of your business is a significant factor while sanctioning private business loans especially unsecured loans.
3. Purpose of borrowing money
The purpose for applying for a loan also influences the lenders’ decisions. When you borrow for purchasing machinery or equipment, your loan can be assessed quickly as you have the asset being purchased that you can use as security.
4. Credit history
Going through the background and checking the credit history of the business and the business owner is done before approving a private business loan. Lenders are at a risk when they are lending you money, and checking your background can show any issues that may affect approval. The details checked out are defaults and late payments. You will have better chances of loan approval with a good credit history.
Strong credit history is also vital to assure any lender about your worth. Make sure that there are no red flags like late payments and recently dismissed bankruptcies. Also, when you owe money to multiple lenders, your business might face an unexpected financial strain. Lenders want to lend money to business owners where their funds will help their growth and not put any added pressure.
Documents are important while applying for a loan. The documents that some lenders require are as follows.
- Tax returns
- Bank statements of at least three months.
- Financial statements
- Business revenue of at least AUD 5000 per month
- Legal documents of the business
- Active ABN or ACN with at least six months of business
6. Revenue and cash flow
Lenders check your business for previous cash flow trends, profits, and losses. A careful determination knows whether your business can return the small business loan amount in the future or not. Some lenders want to keep a check on what you spend in the business and what you earn from it. They also monitor your investments. The number of distributions of your company determines the loan amount to be approved. The lenders can approve lesser amounts for more distributions.
One of the primary indicators lenders use for understanding the health of your business is cash flow. To get your loan approved faster, show a positive cash flow of 3 to 6 months or more. A positive revenue helps you get a loan quicker with little fuss.
7. Checking Transparency
Businesses must show complete transparency in their documents and paperwork. It will not only help in building trust with the lender but will also avoid miscommunication in the future.
8. Business references
Get at least three references in your loan application. It will give authenticity and credibility to your business. If your commercial space is on rent, your landlord should be one of your references. Trade references act as a boost in your business finance application. However again not all lenders require this.
9. Identify large bank deposits and prepare supporting documents.
Large deposits to your bank may delay the finalization of the loan. However, they are not always bad. Keep all the necessary documents ready to explain large transactions. Businesses can have large swings in deposits, and that is easily explainable. If your business deals with large deposits, prepare a copy of account receivables and future contracts to expedite your private business loan application.
10. Resolve unpaid tax debts, if any
If you have any unresolved tax debts, it may hurt your ability to obtain a small business loan. If you have any outstanding tax debt, try to get a payment plan in place.. If it is possible to get a payment plan on a tax debt, it will be better than an unresolved tax debt.
Intermediaries connect small businesses and lenders. If you apply for a loan through a trusted and reputed intermediary such as a broker, there are high chances of getting your loan approved. It is because they understand the criteria set of each lender.
Running a business and establishing a position in the market is not an easy task. Business finance can be helpful. We hope after going through this content, applying for a loan will no longer be a daunting experience for you.