A great place to start

How to Get Approved for a Business Loan

Shaun McGowan By Shaun McGowan Last updated 1st December 2018
I think you’ll agree with me when I say: It can be REALLY hard to get a business loan from a bank. But, getting a business loan from an alternative finance provider may be far simpler than you expect.
How to get approved for a business loan?

Most fintech lenders have easy, streamlined application processes and fast response times, so getting approved for a business loan is no longer the headache it used to be.


There are still some important steps you need to take, though, to get your application approved.


In today’s post I’m going to show you exactly how to do this!


Let’s go through the 5 steps:

1. Build your business case (to ensure a loan will help)

The first step is deciding whether borrowing is actually the right move for your business – and if so, how much you can realistically afford to borrow.


Borrowing can be an expensive process, and if you opt for a variable interest rate, the repayments can also be unpredictable.


So it’s important to build a business case that examines:


  • How you will use the funds
  • How much you can afford to repay each month
  • How much you can afford to borrow, assuming repayments at different interest rates
  • How much additional profit (not revenue) you expect to generate as result of the borrowing

How to get approved for a business loan?

Borrowing is not always the right decision for a business, especially if you plan to use it to finance ‘vanity’ purchases like bigger premises, which won’t increase your profits.


Leveraging borrowed funds to grow your business can also be a high-risk strategy, as SMEs often find that the cost of growth plus the cost of borrowing far outweighs any additional income.


If your business case for the loan is not compelling, you may decide to wait until you have the cash reserves to fund your investments. I recommend that you involve your financial advisors in preparing your business case.


2. Assess your suitability (know if you qualify)

An unsuccessful loan application could leave you with a black mark on your credit file and cause you problems getting funding down the track.


So, before you go any further, it’s a good idea to look at your business from a lender’s perspective, to assess how likely you are to qualify for finance.


Business Loans - Assess your suitability

Thankfully, online lenders tend to have far less rigorous lending criteria than the high street banks, and many SMEs with a steady income and at least six months trading history are able to secure finance from the alternative market.


Each lender will have their own system and formula for assessing your application, but all use the same basic criteria (known as the ‘five c’s of business credit’).


Business Loans - Assess your character

Evaluating yourself against these can show you any weaknesses, which you can then address before applying.

1. Collateral

Collateral means the assets you have to offer as security for your loan.If you’re applying for an unsecured business loan this won’t be a concern. Unsecured loans are riskier for the lender, though, so you can expect to pay more for finance with no collateral as security.


If you do have assets you could use, think carefully about whether you want to tie them up for the duration of your borrowings, as you won’t be free to dispose of them if you use them as security.


Business Loans - Personal Guaranty


Note that if you are applying for some forms of business finance, like an unsecured business loan, you may be asked to provide a personal guarantee in the place of collateral. This will mean that you are personally liable for repaying the loan if your business defaults, which could put your personal assets such as your home at risk.

2. Capital Goods

Having capital goods in your business such as buildings, equipment, machines, fixings and furniture, even if you are not offering them as security, lowers the risk for the lender. It shows them that, if something goes wrong and you are unable to meet your repayment obligations, you have resources you can sell in order to cover your borrowings.

3. Character

This is a broad assessment of your business, incorporating things like your credit rating, your reputation, and your prospects. High street banks are likely to consider these carefully and examine your strategic plans, market position, industry forecasts, management skills and capabilities, client diversity and detailed financial statements.


Business Loans - Character Assessment

Character is generally less important to alternative lenders – there are even several providers that specialise in offering finance to SMEs with poor credit ratings – but they will factor your character into your risk profile, which will dictate how much you have to pay for your finance.

4. Conditions

The conditions of your loan include the interest rate and other costs, plus any terms or restrictions the lender imposes on you to reduce their risk level (such as preventing you from offering credit terms to your customers, or restricting the markets /channels where you operate).


Some lenders have a very high tolerance for risk, provided that the return on the loan is high enough to justify it. If you are willing to accept their conditions, you may be able to secure finance that would otherwise be out of reach.


If the cost of borrowing is too high, it may be more prudent to wait and apply for a loan when you are in a stronger position. It’s important to discuss your options with your financial advisor if a lender offers you funding at penalty rates or seeks to impose conditions that could be harmful to your business.

5. Capacity

Whichever lender you turn to, capacity to repay is the most important of the five c’s and the one that is most likely to be a deal-breaker.


Business Loans - Capacity

Every provider needs to know you can afford to repay your loan, so unless you can show that your business generates enough clear profits to meet your repayment obligations, you won’t be able to borrow.


If you’re likely to have a problem with capacity you should have identified that while preparing your business case (step 1 above).


But even if you believe you have enough income to finance a certain level of borrowing, your lender may take a more conservative approach, especially if interest rates are on the rise. The amount they are willing to lend to you will be directly linked to your capacity.

3. Decide what kind of finance you need (which is best for you)

If you have decided that borrowing will benefit your business and you are likely to qualify for a loan, the next step is to decide what kind of loan you need.


The key is to match the term of your loan to your business needs – so, for example:


  • You should fund a major, long-term purchase such as new premises with a long-term loan secured on the property.
  • Equipment or fleet purchases could be funded with equipment or vehicle finance tied to the expected lifespan of the asset.
  • Shortfalls in working capital, or minor purchases like extra inventory, could be covered with short-term finance options like an unsecured business loan, overdraft, credit card or line of credit.

    You could also turn to invoice finance if you need to close the gap between cost of sales and receipt of payment from customers.

Business Loans - What makes a loan?

Choosing the wrong type of finance could have serious consequences:


  • Interest rates and charges on short-term finance facilities are generally higher than long-term loans, so using these to fund long-term business needs is likely to be extremely expensive.
  • Short-term finance can typically be cancelled at any time, so if you use it for major medium- or long-term purchases there is no guarantee that you’ll be able to find the funding you need to cover your outstanding borrowings once your loan expires.
  • Long-term loans have lower interest rates, but compounding and the length of time it takes to repay the principal means you’ll pay a lot of interest in total.

    There are often penalties for early termination, so if you use a long- term loan to finance a short- or medium-term need you could find yourself locked in to an expensive arrangement your business no longer needs.

Again, your financial advisor will be able to help you analyse your needs and choose the most suitable type of finance.


4. Choose a lender and loan product

Finding a lender who matches your needs and is likely to support your business goals will increase your chances of a successful loan application. Some lenders specialise in particular industries or business models, and each will have their own preferences and risk tolerance.


If you’re putting together a shortlist of potential lenders, find out if they have any specific lending criteria or requirements so you can check whether you meet them.


Business Loans - Reputable Lender

Research is key during this stage, and you may want to engage the services of a reputable loan broker to help you identify the most suitable lenders and evaluate your options. Saving you a lot of time in the process.


Comparing loan products can be very tricky, as the advertised interest rates are only a starting place – and lenders aren’t always transparent about their additional fees or the terms and conditions of their loans.


MONEY TIP Money Tip
Every provider needs to know you can afford to repay your loan, so unless you can show that your business generates enough clear profits to meet your repayment obligations, you won’t be able to borrow.

5. Prepare your supporting documents

The supporting documents you’ll need to supply with your application will depend on the type of finance you’re applying for and the specific lenders’ requirements.


Alternative lenders don’t tend to require extensive documentation like the high street banks, so this stage shouldn’t be too time-consuming. You may be asked for:


  • Personal and business identity documents
  • Bank statements (3 – 6 months)
  • Credit card / EFTPOS merchant statements
  • Accounts receivables ‘aging’ report, customer lists and copies of invoices (for invoice finance)
  • Copies of your business activity statements (BAS)

If you are working with a business loan broker, they will help you prepare your application and supporting documents.


Once you’ve done the preparation, in most cases you’ll simply need to complete an online application form, upload your documents and wait for a response.


You may get an instant decision, or the lender may want to discuss your needs in more detail. Either way you can expect an answer within days or even hours.


Conclusion

Getting a business loan can be easier than you think.


But you need to be prepared, the 5 steps above show you exactly how to prepare before applying.


Let me know how a business loan will help your business by leaving a comment below!

Add a Comment