Need a loan?

What lenders look for when assessing a business loan

Looking to start or expand a small business? You're going to need funding and for most this will require a business loan.

The process can be daunting, particularly if you're just starting out, so it is a good idea to understand some key factors a potential lender will look for. Before you meet with a lender you should get these things in order. A necessity for any potential lender is a business plan. It is the blueprint for the future of your business and will provide you, and the potential lender, with a clear direction and help you stay on track. Need to write a business plan? Visit developing your business plan >>  

There are five key factors banks consider when assessing a business loan application. In addition to your business plan, it is important to have these things on hand before you meet with a potential lender.

Credit history

One of the first things the lenders will assess is your credit history, both for you and your business. The lender will be interested in both the personal and business history as the credit file for the owner of a business is reflective of how an individual manages finances and therefore how you will manage the firm. A business credit report details your payment history with credit providers, and not just financial institutions.

Before you approach a lender, order an individual and business credit report so you know what is on your credit file. This will also provide you with an opportunity to dispute any mistakes and resolve discrepancies before you start the application process. Note that a business credit report is comprehensive, including both positive and negative information whereas consumer reports only include negative history.

For more information on credit reports and how they are used by credit providers obtain a copy of your credit file >>

Credit reports for individuals and businesses are available from Dun & Bradstreet. Order yours by visiting www.dnb.com.au

Capacity to pay

Lenders will want assurance you can make the repayments if they approve your loan. They will assess your financial statements, cash flow, payment history and additional cash sources - and not just for your business. The lender will also want details of your personal assets and liabilities, and recent tax returns to establish the level of financial support you can provide the firm.

If your business is healthy and consistently returning a profit, the lender is more likely to be favourable and this will make the application process a little easier. However, if this is not the case, don't give up. Boost your chances by showing evidence your firm is not a big risk; this may include recent contracts, new opportunities or details of industry or market growth.

The best thing you can do is make sure all this information is up-to-date and in order.

Vested interest

To increase your chances of obtaining a loan, you should be able to show what you have invested in your business - and not just in terms of blood, sweat and tears. Consider how much money you have contributed to the business and what you would financially lose if the firm went under - calculate the cost and communicate this to the lender. Potential lenders want to know that you have invested a decent amount of capital into the business and your own money is at risk. Granted, this is often the case with small business start-ups but it will ultimately assure the lender that you have a vested interest and will work hard to ensure the business is a success.

Collateral

Most lenders will also require evidence of corporate collateral. Corporate collateral is basically any business asset that can be repossessed or sold, should you severely default on the loan. For the bank, collateral is simply an assurance that they can collect at least a portion of their outlay, even if it is not monetary. The assets can include property, machinery, inventory, equipment or cars. For obvious reasons, business assets are preferable collateral for lenders however if this is not possible, you should be prepared that lenders may require personal collateral and it could include your house or car. 

In most cases if you are planning to use the loan to buy assets, then this will be used as collateral.

Character

Your character is going to be very important in the success of your application, so try to present yourself as a reliable and professional individual. You should

also have experience in the industry or type of business you run or plan to operate. If not, involve a partner or employees with the appropriate experience to assure the bank the business will be run with some industry know-how.

Don't forget the importance of personal relationships so if you're applying at a bank, apply somewhere you already have a relationship and a good history. Preferably apply to the bank where you currently conduct your personal or business banking. Also try to meet face-to-face with the person assessing your application, rather than a middle man. This will enable you to create a relationship and add a personal element, rather than just being a name on the application.

Unsure what type of credit will suit you and your business? For a look at the options available read Types of credit available to small business >>

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