Last Updated on November 19, 2019

7 Steps to take before applying for that small business loan

Whether you’re just getting your new business idea up and running, or ready to take an established business to the next level, a small business loan can help you get where you want to be.

Realising that extra capital is essential for your business idea can be exciting but daunting. Especially since being approved for business finance can take a lot of time, energy and persistence.

Here’s a quick guide on some of the basic business planning tips necessary to get that tick of approval.

What is a small business loan?

A small business loan is a set amount of money borrowed by a business owner from a lender, such as a bank or other financial situation. It is repaid, with interest, over a predetermined period (usually between one and five years) until the loan is paid in full.

Generally, a small business owner will be able to borrow from $5,000 to $250,000, though some credit providers may offer more. The amount available to borrow is determined by looking at things like size, age, and revenue of the business.

Deciding that your business will benefit from a loan is the first step. But before you submit your application, it pays to follow these seven steps.

Know why you want to take out a loan

A business loan can be used for:

  • Purchasing necessary equipment
  • Purchasing stock
  • The costs of acquiring a physical space to work from
  • Business expansion
  • Marketing
  • Payroll
  • And more…

It’s important to know why you want to borrow money, as there are different types of small business loans to fulfill different needs. For example, if you need to purchase equipment, it makes sense in most cases to purchase an equipment loan.

If you have temporary or seasonal workers that you need to pay but are waiting on payments from clients, a business overdraft may provide the flexibility you’re after.

So, while your reasons for taking out a small business loan seem obvious to you, your lender will need to know the specific details of what you want to use the funds for.

By offering this information, it also allows the lenders to determine whether the amount you’re asking to borrow is suitable for your needs. And that takes us to step two.

Know the loan amount you need

Research thoroughly to ensure you don’t under or overestimate the amount that you need to borrow.

Underestimating could lead to financial problems in the future and overestimating could make the bank question your business plan and how well you have calculated your budget and financial projections.

Often, you won’t be able to determine the exact loan amount you need until you prepare your financial statements to include in your business plan.

Organise financial statements

Financial statements show your assets (what your business owns, including cash, inventory and buildings) owners equity (the portion of the assets that belong to the business owner), and liabilities (what your business owes, including accounts payable and other loans), as well as income and expenses. These documents are used to determine whether you can meet any existing and proposed payments.

You may be asked for a balance sheet, income statement and statement of cash flow. If yours is an established business, you may be asked to provide tax returns, business activity statements and ATO statements.

If your business is new, or in its’ early days, you may not be able to provide all or some of this information yet so a comprehensive business plan is what you should focus on.

Prepare a business plan

The vast majority of lenders will want to see a detailed business plan before they consider lending to you. You may be able to get away with a lean business plan in some situations, but typically, the more precise and well researched your business plan is, the better.

This is your chance to introduce yourself and your business by stating the business’ goals, vision and how you will run it to make sure it achieves all objectives stated.

The aim of the business plan is to show the lender that the business is going to succeed.

A solid business plan showcasing your company and team increases credibility.

Include information such as:

  • Profit and loss budget
  • Cash flow forecast
  • The past and future plans for your business
  • How it will fit into the market
  • The team behind it all (this may just be you!)
  • If you’re applying for a secured loan, you will need to provide a statement of collateral or assets that you will use to secure the loan

TIP: A well researched and developed business plan can improve your chance of obtaining finance if you are a new business. Established businesses should regularly review and update their business plan to provide direction for growth.

Arguably, developing a successful business plan is the most important step in applying for a small business loan. This steps helps you (and therefore lenders) understand how much money you need and how quickly you can repay your loan. This brings us to step five.

Know how much you can afford to repay each month

Keep in mind the full cost of the loan, which includes:

The loan amount. A larger loan will mean larger repayments.

The interest rate. The higher the interest rate means the more you will pay back in the end. Decide whether you want the stability of a fixed interest rate or the possible savings that could come with a variable interest rate.

Any applicable fees or charges. Read the terms and conditions of the loan to be aware of any upfront or ongoing costs.

Fees to look out for

  • One-off fees like application fees
  • Exit fees
  • Early termination fees
  • Ongoing fees like service fees or annual fees

Bearing these things in mind, work out what the business can realistically afford to pay each month and seek a loan that matches this amount.

NOTE: If you have a secured loan and can’t meet repayments, the lender has the legal right to seize any property or asset that you offered as security.

Review your borrowing options and read up on eligibility criteria

Reading up on eligibility criteria can stop you from wasting precious time applying for loans that will not be approved. On the other hand, if one lender turns you down, another may approve the loan with the same information and application, so keep trying.

Large, national banks aren’t the only financial institutions that are willing to lend to you, so it pays to do your research and understand the options available to you.

Review your credit history and credit score

Your personal credit history, along with your business credit history, is likely to be evaluated if your business is less than three years old.

If you’re applying for a loan to start a new business, your personal credit score and history is likely to be one of the main factors taken into account during a lender’s decision on whether to lend to you.

Before you make any applications, review your credit report and score to make sure everything is in order.

Your credit report should accurately reflect your credit history. Any information that is incorrect, out-of-date, incomplete, irrelevant, or misleading should be removed to avoid any issues.

Checking your credit report often is crucial to the health for your credit score. If inaccurate information is affecting your score, it could also be affecting your chance of being approved for lines of credit.

Managing business loan refusal

It can be disappointing if a business loan is denied. If this happens, it’s important to seek feedback and the reasons why the loan was refused.

This can allow you to evaluate:

  • What you need to improve on
  • Whether any changes need to be made to the business itself in order to make it more attractive to lenders
  • If a business loan is the best way of sourcing finance at this time
  • What you can do to make the business less of a risk to lenders
  • Whether you want to dispute the decision.

Still have questions? Let’s talk

Confused? Not sure if this applies to your situation? Phone us on 1300 190 429 for some free, no obligation advice.

Or want to compare business loans now?

About the Author

Eleanor Baxter
Eleanor Baxter

Eleanor Baxter has extensive experience writing for the Australian financial and healthcare sectors. Her portfolio includes guides that cover all aspects of both physical and financial health and wellbeing. Coming from a background in communications, fitness, and psychology, she has found a passion for demystifying personal and business finance for the everyday reader. When not at her writing desk, you’ll find Ellie walking her two dogs or practising an asana.

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