It’s no doubt that financial markets in Australia and across the world have been largely impacted by COVID-19, as it has become not just a health scare but an economic one at that. The Government has put many incentive measures in place and the RBA cash rate has remained at an all-time low. But businesses are still struggling which has proven difficult when trying to secure funding.
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. There are a number of different loan products 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 their business. To achieve this, we go through a series of questions with key management 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
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 financial institution will review your credit history and credit score. If you have any late payments or defaults on any existing loans it may be difficult to secure a new business loan. Speak to one of our Finance Executives for more information.
Know your business plan
What is your business focus, your product/service offering, the company history, management team and more broadly the organisational structure. A detailed business overview will provide a holistic view of your company which will help 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. Having the ability 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 takes a look at your business’s profit and loss, cash flow and balance sheet to provide forward predictions on the cash position of the business. Financial institutions will review your forecast to determine whether or not you will be able to meet your required repayments and other financial requirements.
Understand how COVID-19 has impacted your business’s current and future position
Many financial institutions have introduced a COVID-19 questionnaire, where the borrower is required to provide details on how the business has been impacted by COVID-19. The form generally includes (but is not limited to) questions relating to: the business’ cash flow; how the business will be able to service debt; if the business is reliant on another industry impacted by COVID-19; or if they have received/applied (or been declined) deferral assistance.
Proof of individual income and bank statements
If you are a Director and/or shareholder of your business, most lenders will 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 in the form of a driver’s licence, passport, Medicare card, etc. Other documents including 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 and where a business may have been impacted by Covid-19.
It’s important to note that the information required is not limited to the above and it can change from business to business. On some occasions you may not even be required to have all of the above. Speak to your trusted finance partner upfront to ensure you have all of the necessary details and documents to apply for your business loan.