There are various finance solutions available for businesses, and the role of commercial finance brokers has become more important now than ever before as we support these businesses and create market clarity.
What questions should you ask yourself before applying for a business loan?
The best business loan option will vary depending on the type of business and its requirements. Several different loan products are available; it’s a matter of choosing an option to achieve the best outcome.
At Ledge, we ensure businesses are fully aware of what options may be best suited to them. To achieve this, we ask key management a series of questions to better understand the business’s finance requirements.
Is it to:
Acquire new equipment to grow your business;
To purchase new commercial property to expand into new areas;
To better manage your cash flow; or
Another requirement?
Speaking to one of our Finance Executives will help you to better understand the purpose of your funding requirements.
This will depend on the purpose of the loan, the loan product you choose, your working capital position and the projected cash flow of the business.
Businesses need to be realistic about their capacity to repay as failure to meet finance commitments can cause credit rating issues. Ledge can assist you in working out your repayment figure by looking at your financials and working with your accountant where required.
Most business loans are secured by business or personal assets and directors/owners guarantees. Some loan products are unsecured but these are generally for niche products and smaller amounts and because of the higher risk to the lender, interest rates are much higher than a secured loan.
There are a number of fees that will be charged by your chosen financial institution (bank/lender) depending on the product. With commercial loans and cash flow facilities you can expect to pay an upfront fee and, in some instances, ongoing administration fees. Upfront fees don’t generally apply to equipment finance facilities (other than minor documentation fees and charges). Whatever the product, all fees and charges will be clearly disclosed to you before you commit to a facility.
Understanding any financial covenants which apply to your loan is so important and we cannot stress this enough. If a covenant is breached the bank can legally call the loan, demand repayment in full, enforce a penalty payment, increase the amount of collateral or increase the interest rate. If the bank holds a GSA (General Security Agreement), this coupled with covenants can be quite powerful as the lender has the capacity to appoint an Administrator, Receiver manager or Liquidator in the event of default. Therefore, it’s important that Covenants are appropriate and achievable before they are agreed to.
What you need when applying for a business loan
Now that you know the type of loan you are applying for, including the loan amount, the terms and what security or collateral you will offer, it’s time to approach financial institutions. But before you do, you should prepare the necessary documents and information that financial institutions will require to finalise and approve your loan application.
Know your credit history and credit score.
When applying for a business loan, the financial institution will review your credit history and score.
If you have any late payments or defaults on existing loans, securing a new business loan may be difficult. Speak to one of our Finance Executives for more information.
Know your business plan
What is your business focus, product/service offering, company history, management team, and, more broadly, organisational structure?
A detailed business overview will provide a holistic view of your company, helping financial institutions understand the purpose of your funding requirements.
Up-to-date financial statements
It’s important to ensure that your financial reporting is up-to-date and meaningful and that you understand what is in these statements.
Having high-quality financial information at your fingertips provides a lot of comfort to lenders. Speak to your accountant early before seeking finance to ensure a smooth process from application to approval.
Maintaining Key payments
It is critical that you keep key payments, including licenses, permits, insurances, taxes, etc. up to date at all times.
Being able to do so may increase your chance of securing a loan, as it demonstrates the business’s capacity to make repayments.
Forecast to demonstrate the business’s future financial position
This looks at your business’s profit and loss, cash flow and balance sheet to provide forward predictions on the business’s cash position.
Financial institutions will review your forecast to determine whether you can meet your required repayments and other financial obligations.
Proof of individual income and bank statements
If you are a Director and/or shareholder of your business, most lenders typically request two or more recent personal tax returns and an ATO Notice of Assessment.
Identification of Director/s, Shareholder/s and Trustee/s
You will be required to show identification, such as a driver’s licence, passport, Medicare card, etc. Other documents, such as your trust deed, partnership agreement, or company registration, may also be required.
Understand that processing time has increased due to added complexity
Loans to SME’s in particular take longer to assess than they once did due to increased levels of due diligence carried out by lenders, particularly where a home loan is part of the overall borrowing mix.
It’s important to note that the information required is not limited to the above and can change from business to business. You may not even be required to have all of the above on some occasions.
Speak to your trusted finance partner upfront to ensure you have all the necessary details and documents to apply for your business loan.
