Applying for a loan is a significant financial step that should not be taken lightly. Follow these steps when applying for a business loan to ensure that you review all of your credit options and anything that may affect your personal financial situation or the business during the application process.
1. Assess your eligibility
There are numerous factors that can influence a lender’s decision to extend credit to your business. It is therefore worth checking your suitability before starting the application process and seeing whether you can proactively eliminate any problems that may arise. Some of the key considerations that can affect whether or not you qualify for a business loan are:
Annual sales: Lenders assess cash flow to ensure the business is generating enough revenue to cover loan repayments, and usually require you to meet a minimum annual revenue (this varies between lenders and loans). Financial reports and sales records are used to display this data.
Purpose of the loan: Most business loans cover a range of financing purposes, from paying wages to purchasing business equipment. However, some lenders specialize in specific industries, such as agriculture or healthcare, so you may want to explore options specific to your operation.
How long have you been working: They often have to be in operation for some time before lenders accept a loan application. This can last as little as six months or as long as a few years.
Business and personal documents: This includes everything under the financial sun, from outstanding personal or business debts to legal matters that you or your company have been involved in.
2. Get your credit score in good shape
Your personal credit score can affect the outcome of your business loan application. While you can’t wipe every late mortgage payment or loan application off your credit score, you can fix mistakes and make sure you’re in a good position going forward. You can access your credit score for free every three months to check for problems and contact the credit bureau to have them changed.
It would also be wise to pay off as much existing debt as possible before applying for another loan. This shows lenders that you are a responsible borrower and could also tip your credit score into a higher band.
3. Know your financial limits
There’s no point in applying for a $500,000 loan if your business can’t afford the repayment costs. Once you have assessed your eligibility and personal financial situation, you should have a better idea of how much debt you can comfortably pay off.
4. Research and compare business loans
You need to assess what type of loan is best for your business needs – secured or unsecured and fixed or variable – and what features, fees and (approximate) interest rates come with it. Once you’ve determined the type of loan, it’s time to see how different banks and lenders perform on these factors.
5. Organize your paperwork and apply
Application processes can often be started online and are not necessarily the tedious filing task of past decades. But there are still a number of documents that lenders require from you to begin with. This contains:
- Your driver’s license or other form of identification to verify your identity
- Your company’s ABN (Australian Business Number).
- Financial documents such as bank statements, tax returns, and projected cash flow for the business (and possibly documentation of your personal finances as well)
- A business plan of how you intend to use the funds
6. Wait for an answer
This can take as little as a few days or many weeks, but be patient. It is not advisable to apply for multiple loans as each application will appear on your credit score. Numerous applications, especially when unsuccessful, can damage your credit score, which in turn will affect your eligibility for business credit over time.
If your application is successful, it’s time to read through the paperwork and make sure you’re happy to proceed.