Apply for a business loan
1. Understand your finances
Even if you don't prepare your own financial statements, it's important to have a basic understanding of your finances.
Preparing a cash flow statement gives you a good snapshot of your money coming in and going out such as:
- current income
- net profit
- expenses
- future projections.
2. Prepare your business plan
To get an overview of your financial situation and business goals, most lenders will want to see your business plan prior to loaning money to you.
3. Know your financial limits
Know your limits for finance and your ability to repay any money you borrow. Work out:
- if you need the money up-front or on a needs basis
- what maximum repayment you can afford
- what your loan to value ratio (LVR) is
- what assets you have to offer if you need collateral
- who will be willing to guarantee your loan if you need a guarantor
- how much equity you have
- what maximum percentage share of your business you are willing to offer to investors.
4. Choose a loan type for your business
Once you assess your needs, you should examine which financial product is the right one for your business. Analyse the different loan options for:
- costs
- interest payments
- any hidden charges or terms.
Each loan type will have different tax and GST implications. It's wise to discuss this with a business adviser or accountant.
It’s best to shop around and find out what products are on offer when seeking finance. Although there can be discounts for existing customers, you may find a cheaper option with more flexible terms elsewhere.
Common financial products and loan types
Loans can vary in the amount, loan term (the period in which you repay the loan), interest rate, interest rate type (fixed or variable), fees and security. It's best to check the product disclosure information carefully before you apply, regardless of which product you choose.
Overdraft facility links to your business account with an authorised overdraft limit. You’ll usually need a credit check of your business viability as security. The overdraft facility provides working capital for your business before you receive income. You shouldn’t use it for capital purchases or long-term financing needs.
Line of credit provides access to funds by allowing you to draw on an account balance up to an approved limit. As long as the balance does not go over the limit, you can draw funds at any time.
Fully drawn advance provides access to funds upfront for long-term investments. For example, you might need it for a new business or equipment that expands your business capacity. A fully drawn advance lets you fix the interest rate for a period. This provides certainty and stability for your repayments.
Commercial bill (also known as a bill of exchange) a commercial loan type for short-term funding needs, such as inventory. You get a fixed sum advance, with a regular interest payments. The final amount is due at the end of the term.
Rent to buy you pay an initial deposit and then lease a good until you pay it off. Consider options like lay-by – they can be cheaper.
Commercial hire-purchase you purchase a good with an initial deposit. You then lease while paying instalments plus interest charges. You may also reduce your instalments by choosing a larger final payment. This is also called a 'balloon' payment.
Chattel mortgage similar to hire-purchase except you own the asset from the start. You make regular ongoing payments. You may reduce the payments by choosing a larger final payment.
Factoring (also known as debtors finance and accounts receivable finance) – when a factor company buys your outstanding invoices at a discount. The factor company then chases up the debts. This is quick way to get access to cash. But it can be more expensive than traditional types of finance.
Invoice finance similar to factoring except that the invoices or accounts remain with your business.
5. Get your paperwork ready
Before you meet or speak to a lender, broker or investor, ensure you’re prepared. You’ll need to bring along documentation such as:
- proof of identification
- your business plan
- main financial reports for the last three years (if available)
- financial forecasts
- ratio calculations
- personal financial information.
Compiling your details into a report will look professional and give your lender an overview of your finances.
6. Check who you’re dealing with
Search for registered companies on the professional registers.
Find out what companies you should not deal.
Find out how to get a copy of your credit report on MoneySmart's Your credit report factsheet.
7. Get expert advice
If you aren't confident answering financial questions when you apply for finance, either:
- practice answering them
- bring along a business adviser or accountant who can help you.
8. Apply for a business loan
To ensure you’re prepared for your loan interview, follow these tips:
- Check the finance details carefully – if you find a much cheaper finance option that sounds too good to be true, find out why it's cheaper. Are the fees higher? Does the interest rate change at any point? Is it from a reputable finance provider? What happens if your LVR gets too high?
- Manage refusal of finance– you may not be successful when you apply for finance. If this happens, seek feedback and make changes to address any issues next time.
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