Introduction: Why Consider a Business Loan?
A business loan can be a powerful tool for any business looking to grow, manage cash flow, or seize new opportunities. Whether you’re considering unsecured business loans to cover short-term expenses or exploring other loan options for expansion, the right loan can make a significant difference in your financial situation. Business loans can help you purchase equipment, hire staff, or simply keep your operations running smoothly during challenging times. Before you apply, it’s important to understand the business loan requirements and take the time to research lenders. By comparing different loan options and finding the right loan for your needs, you can set your business up for long-term success.
Understanding Types of Business Loans
When it comes to business finance, there are several types of business loans to consider. Secured loans require you to provide collateral, such as property or equipment, which can help you access lower interest rates but also puts your assets at risk if you can’t meet repayments. Unsecured loans, on the other hand, don’t require collateral, making them a popular choice for businesses without significant assets, though they may come with higher interest rates. Lines of credit offer flexible access to funds, allowing you to draw what you need, when you need it, which can be ideal for managing cash flow. Equipment finance is another option, specifically designed to help you purchase or upgrade business equipment. To choose the best loan type for your business, review your financial statements, including your income statement and balance sheet, to ensure the finance options you select align with your business’s needs and financial position.
As a business owner, you may be able to use a loan to grow your business or ease cash flow issues. But before you can do that, you must get through the application process
There are all sorts of reasons why you may want to apply for business financing, including small business loans that are specifically tailored for small enterprises.
You may have short term cash flow issues that you need to rectify.
Or, you may need to replace a broken piece of equipment that’s vital to your business.
In the case of John from Sydney, he wanted to grow the business. His story may be like yours:
Over the course of three years, John worked hard to develop his reputation as a top-quality plumber. And his efforts paid off. In fact, he developed such a stellar reputation that his business attracted more customers than he could handle.
He needed to expand. John needed to bring some new technicians on board, as well as purchase equipment for them. Unfortunately, he didn’t have the capital needed to undertake this expansion. He also needed additional capital for purchasing inventory and purchasing stock to meet the increased demand.
So, he applied for a business loan.
After getting his application approved, John could expand his plumbing business. Now, he’s able to meet the demand that comes from providing quality work.
Whatever your reasons are, you know that getting a business loan isn’t as easy as just asking for one. You need to complete a business loan application as part of the process for being approved for the loan. There are different types of loans, such as a secured loan, which requires collateral, and an unsecured loan, which does not require any collateral but may have different interest rates and terms.
The good news is, you don’t have to go through this process with no idea of what’s coming next. Regardless of the types of business loan you choose, you’ll generally follow the same set of steps. Most lenders now offer online application options to streamline the process.
Step #1 – Figure Out What You Want From the Loan
Before applying for a business loan, you need to know exactly what you’re going to use the loan for. All lenders will want to know the specific purpose of the loan. They’ll also want to see that you have plans in place for maximising the use of the loan amount that you ask for. Aligning the loan with your business goals is essential, as it can help unlock your business’s potential and ensure the funding supports your company’s growth and sustainability.
This means you need to be able to articulate your need for the loan. It may require you to compile your financial statements so that you can create a business plan that incorporates the loan and considers the appropriate loan term, ensuring the repayment period matches your business objectives.
Step #2 – Review Your Options
You’re not limited to a single financial product when applying for business finance. Beyond standard business loans, you also have a line of credit or credit cards. There are also more specific forms of loans, such as equipment finance
Each comes with its own requirements at the application stage. When comparing loan options, consider whether the loan offers a fixed or variable interest rate. A fixed interest rate provides certainty in your repayments, while a variable interest rate or variable rate can fluctuate over time, affecting your repayment amounts and overall costs. It’s crucial that you review each type of loan to figure out which one best suits your needs and seek favourable terms to ensure the loan is cost-effective and suitable for your business.
Meeting Loan Requirements: What Lenders Look For
When applying for a business loan, lenders will carefully assess your application to determine your eligibility. They typically look for a comprehensive business plan that outlines your goals and how you intend to use the loan. Your credit score and overall financial situation play a significant role, as lenders want to ensure you have the capacity to repay the loan. Financial statements, such as your cash flow statement, income statement, and balance sheet, are essential for demonstrating your business’s financial health and stability. Lenders will also consider the loan purpose, proposed repayment terms, and your business’s potential for growth. By understanding your financial position and preparing the necessary documentation, you can improve your chances of securing the business finance you need.
Step #3 – Check Your Credit History
Practically all lenders will check your credit history as part of their loan approval process.
Ideally, you’ll get ahead of them and check yours before submitting your application. This gives you a chance to spot issues that could lead to your application getting refused.
For example, you may have a couple of black marks on your report due to previous missed payments. Or, you may even have items in your report that are there in error and need to get removed.
Whatever the case may be, checking your history before applying will help. It will either give you more confidence in your application or stop you from making an application that wouldn’t get accepted.
Step #4 – Gather Your Documentation
At this point, you’re close to submitting your application. But before you do, you will need to gather any documentation that the lender will need from you.
This may include the following:
- Personal and business identification, including a valid driver’s licence.
- Your most current business plan.
- Previous tax returns.
- Your profit and loss statements.
- Any forecasts you have, particularly those that may relate to what you’ll do with the loan.
- Bank statements to verify financial stability.
Lenders may also request proof of individual income or personal income, such as recent payslips or tax assessments. Additional documents may be required for complex or new businesses, such as trust deeds or self managed super funds statements. Documentation related to the Australian Taxation Office may also be needed to verify tax compliance and outstanding obligations.
Try to gather everything that you think the lender may need from you so that you can provide it upon request.
Step #5 – Filling Out the Application
This is perhaps the simplest part of the process.
Typically, this will involve filling out a form that asks numerous questions about you and your business.
Answer these as accurately as possible as the lender will require you to sign a statement. This statement says that all of the details in the form are accurate, to the best of your knowledge.
The key at this stage is to ensure you fully understand the loan that you’re signing up for.
Read the loan terms and conditions closely to confirm that there are no unexpected surprises. Review the repayment schedule and loan term to ensure you understand your obligations and how long you will be making repayments.
It’s also worth double-checking the basics, such as the loan amount and the loan interest rate. Some loans provide a lump sum upfront, so check if this applies to your loan, and be sure to look for any early repayment fees that could apply if you pay off the loan ahead of schedule.
You should also confirm if you have a variable or fixed rate of interest. Assess your repayment capacity by considering your existing and proposed repayments, and ensure your proposed repayments fit within your business’s cash flow.
After completing the application, submit it to your lender.
Step #6 – Wait for (And Then Receive) the Verdict
After submitting, you enter a waiting period. During this time, the lender will assess your application and supporting documentation. They will also examine your credit history. Using this information, they will then come back to you with a verdict on your application.
The length of time that you have to wait will depend on the lender. Major banks and other established lenders may take several weeks to deliver their verdict. Specialised lenders may be able to provide you with a verdict within 24 hours.
During this stage, your lender may also ask for additional documentation to supplement their research. For certain products like a business overdraft, the lender will set an approved limit based on their assessment. If you are applying for invoice finance, they may review your outstanding invoices to determine your eligibility. Aim to provide this as soon as possible, if requested. Taking too long will delay the application process.
Special Considerations for Small Businesses
Small businesses often face unique hurdles when applying for a business loan, such as limited credit history or a lack of substantial collateral. Fortunately, there are still plenty of finance options available. Unsecured loans and lines of credit can provide the working capital needed to manage cash flow or invest in new equipment without requiring collateral. Online lenders are another valuable resource, often offering more flexible terms and faster approval processes than traditional banks. When exploring loan options, it’s important for small business owners to research lenders thoroughly and pay close attention to interest rates, loan terms, and repayment schedules. By understanding your options and choosing a loan that fits your business’s needs, you can access the funds necessary to support your growth and success.
Are You Ready to Apply for Your Loan?
While some financing options may have other steps involved not indicated here, this is the general business loan process.
If you follow each of these steps, you should find the application process to be a smooth and straightforward experience.
Perhaps you feel prepared to make your application after reading these steps? If so, Unsecured Finance Australia offers several business loan products that may suit your needs.
Apply online today and you’ll receive a quick verdict on your application. If you have any questions, please contact us.
