Does the thought of applying for a business loan stress you out?
Well, you’re not alone. According to Xero’s State of Lending Report, at least 76% of small business owners believed getting a loan was difficult and 51% found it stressful.
Financiers often have set criteria for small business loans. Plus, the low dollar value of the loans themselves, relative to that of a large corporate, means they’re considered via a ‘tick and flick’ process, so if you don’t fit the template, it can be difficult to get finance.
Having worked with small businesses to collect the information to support their loan applications, it’s unsurprising to me 42% of business owners consider providing their financials to potential lenders to be the biggest hurdle.
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But with external funding essential to accelerating business growth, biting the bullet and applying for a loan is inevitable for most business owners. The key thing to remember is that financiers aren’t — in most cases — asking for information to make your life difficult. It’s the information they need to work out:
- The financial health of your business;
- What you’d be like as a borrower;
- Whether you can repay your loan; and
- How they would get that money back if you can’t repay.
To increase your chances, reduce stress and prepare yourself for the process, here are a couple of things to consider doing before seeking finance.
Improve your business credit profile
Almost all lenders will run a credit check through providers such as Dunn & Bradstreet and Equifax, because it gives them insight into the way you run your business and what you’d be like as a borrower. Specifically, they’re interested in whether you’ve got a history of late payments or have defaulted on loans before.
Knowing what your credit profile looks like means you can take the necessary action beforehand to make yourself look more ‘lendable’, which will increase your chances of getting a loan at lower interest rates.
Don’t wait until it’s too late
If you wait until you really really need cash, you might be forced to take a less-than-ideal option. For example, a loan with incredibly high-interest rates and onerous conditions.
A cash forecast should be a tool that you’re using regularly to manage your business (and no, it’s not the profit and loss statement your accountant does for you). A cash forecast is driven by timing, and you’ll be able to:
- Project likely sales and when you’ll receive the cash from customers;
- Plan expenses (including wages and suppliers) and when you have to pay cash out; and
- Always know how much you’ll need to have in your bank account to be able to pay bills, interest and loan repayments on time.
By staying on top of your cash and doing ongoing forecasts, you’ll know when you’ll experience a potential cash shortage, and it’ll give you enough time to plan ahead and seek a loan that suits your needs. Applying for a loan or overdraft while your business is in good shape greatly improves your chances of approval.
Be across your numbers and keep your accounts in order
As a rule of thumb, lenders typically ask for three years of financial statements to gauge your past business performance, how well you manage your business, and whether you’re viable enough to lend to without risk of loss.
If you’re a relatively new business, your first couple of years may show losses. But you can supplement this information to support a stronger trading position with things like:
- A cashflow forecast;
- A summary of your current and upcoming projects (how much these are worth and the likelihood of winning these new contracts);
- If you’re borrowing to support the expenses for a new contract you’ve won, a copy of this contract (if you’re allowed to); and
- Who your customers are if you’re dealing with large, well known cashed-up counterparties to reassure them you’ll be paid.
It’s also important you’re familiar with your numbers so you can answer any questions with confidence, such as how much it costs to provide your goods or services, reasons why expenses blew out one year, and so on.
Demonstrating that you’re an engaged, organised owner can only add to your chances of having your loan approved.
Have a plan and be clear on your why
Be clear on what you’re using the funds for. Is it for growth? Is it for a piece of equipment that will make your business more efficient? Most lenders would hesitate if you were using a business loan to fund lifestyle expenses.
A cashflow forecast is the easiest way to demonstrate there will be a net benefit for the business, and that you’ll have the cash to repay the loan on time.
Make sure your taxes are up-to-date
As a former lender, one of our most important checks was the tax status of any prospective small business borrower. Again, it demonstrates whether you’re on top of your business and identifies potential liabilities that aren’t shown in your financial statements.
I’ve seen numerous instances where the ATO issued wind-up orders against businesses for unpaid taxes. And while these businesses continued to trade, their wind-up status meant suppliers put them on stop supply and demanded cash on delivery for any purchases, wreaking havoc on cashflow.
If you leave your taxes to your bookkeeper or tax agent, you can ask them for access to your ATO portal to check your company tax, GST and payroll tax status yourself.
Look into different types of finance
Traditional bank loans are only one option available to you. Do some research into options such as equipment finance, invoice financing, vendor finance, operating and finance leases. These are all be potential alternatives could present less restrictive options for your business.
And above all, know what you’re signing up for. Get the advice you need to ensure you understand what assets (whether personal or business) you’ve pledged in exchange for the loan. Make sure you understand and can comply with the terms of your loan.
And communication is key. If you’re struggling to make your repayments on time, be upfront and speak with your lender early as you’re more likely to come up with an arrangement that is workable for both you and your lender.