Tips to improve your chances of securing a business loan
Securing funding to hire new staff, purchase necessary equipment or to pursue that once in a lifetime opportunity could mean the world to a small business looking to take things to the next level.
But it can be challenging to obtain funding so what can a small business do to prepare for the application process and improve their chances of approval?
This guide goes over some things to keep in mind before, during, and after the application process to help it go a little more smoothly.
Will I be eligible for a loan?
Every lender has its own system for assessing a loan application and will have specific eligibility criteria that need to be met before they will approve you for a loan. Some general guidelines apply, but the exact criteria vary with each lender so ensure you read them before applying with the lender.
Common eligibility criteria:
- Australian Business – You’ll need to have an Australian Business Number (ABN) or Australian Company Number (ACN) to be eligible for most business loans in Australia.
- Annual turnover of $75k+ – A certain level of turnover is required to be eligible for a loan as the lender needs to see that you are able to repay the loan. This figure can vary between lenders, but 75k is a common amount across the board.
- Trading History – Most lenders will need to see proof that you’ve been trading for at least 3+ months to be able to offer you an unsecured loan. Some lenders will be open to newer business and some will only lend to more established businesses.
- Be creditworthy – Your personal and business financial history will be used to determine your creditworthiness. Ensure all the details are up to date, and there are no mistakes on your credit reports before applying for a loan.
What information needs to be included in the application?
Your business specifics
- Business name
- Business partners (if applicable)
- Financial records
- Assets and liabilities
- Previous tax returns
- Business plan
- Credit history
- Any outstanding loans (if applicable)
- Cash flow
- Future projections
Your personal details
- Identification documents
- Salary information
- Tax return
Your asset details
If you’re applying for a secured loan, you will need to provide information about the value of the asset. This may include a valuation of the asset and other information associated with the purchase of it.
Having quick and easy access to these documents will save you time during the application. If you don’t have these details to hand, submitting an application can be a great time to get organised and implement a filing system that works for you, and one that you can maintain.
The more information you provide and the more transparency you display, the more likely you are to find a lender that suits your needs.
Four questions you will likely be asked during the application process.
Improve your chances of securing funding by preparing answers to these questions that will likely be asked.
Question 1: What is the purpose of the loan?
Lenders need to know how you intend to use the funds. The reason for the loan will help the lender to decide on whether to lend to you or not. The main thing they are looking for is that the way the loan is used will likely add value to the business.
For example, purchasing a car to use for personal use for the majority of the time is unlikely to generate more revenue for the business. But obtaining finance to move a retail store to a larger location with higher foot traffic will likely generate income and help with the repayment of the loan.
A business loan can be used for many things, including:
- Purchasing necessary equipment
- Purchasing stock
- The costs of acquiring a physical space to work from
- Business expansion
- Premises refurbishing
- Paying invoices and salaries
- And more
It’s important to know why you want to borrow money, as there are different types of small business loans to fulfil different needs.
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 question 2.
Question 2: How much do you want to borrow?
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.
Knowing the amount you need helps to determine the options available to you and how risky the loan might be for lenders.
Question 3: Can you tell me about your business?
To assess eligibility and risk, the lender will want to know as much information about your business as possible. This helps them to decide on the amount they are willing to lend and the term of the loan.
They will likely want to know things such as:
- How long has your business been operating?
- What is your average turnover?
- Have you ever defaulted on a loan?
- What industry is your business in?
- How quickly do you need the funds?
Remember that lenders will likely have multiple other applications that they are working through, maybe even some for the same industry that you’re in. Improve your chances of being approved by answering these questions to stand out and show that your business has potential and value.
Question 4: What is your preferred payment plan?
Even though you might not get the exact repayment terms that you put forward, the borrower often has some control over things like the repayment term and the size of repayments.
Presenting a realistic proposal shows the lender that you are on top of your business’s financial details. Showing that you have thought about how you will repay the loan (and interest) and in what period can help to reassure the lender that you intend to repay the loan, and when.
Other tips to keep in mind
- Apply for a loan earlier than you think you need it
It may seem counterintuitive to apply for a loan when your business is thriving, but securing that first bit of funding can come in handy in the future.
Having evidence of repaying a business loan on time and in full improves your creditworthiness and can put you in a better position to borrow more in the future. It can also be the first step in building a relationship with a lender.
- Check your personal and business credit reports.
Lenders will check your credit history before deciding whether or not to lend to you, any defaults on loans or a poor credit score will raise a red flag. For the best chances of success, check your credit score and report before applying so you can remedy any problems before applying.
Your credit history includes:
- Details of past defaults
- Information on currently outstanding debt
- Information on expenditures and income
To check your credit report, simply contact a credit reporting body like Equifax, Experian or Illion. Keep in mind you may have to pay a fee to receive your business credit file.
- Ensure you meet the eligibility criteria for the specific loan
Researching the eligibility criteria before applying for the loan will give you a good idea of whether your application will be successful or not. Knowing this could save you time and effort and help you avoid making unsuccessful applications.
The most common reasons loan applications are denied:
- Inconsistent revenue
- Insufficient trading history
- Existing debt or loan facilities
- Seasonal business
- Weakening industry
- A handful of suppliers generate the majority of revenuHigh-risk industry
- Poor credit history
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.
If you’re ready to compare business loans, our free service lets you compare loans from over 70 lenders—both big and small. You can get approval in as little as 24 hours, apply for any amount between 5K and 20M, and receive funds straight into your account once approved.
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?
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