Five things to consider before applying for a loan

At some point in the life of a small business, it is inevitable that a loan is needed to inject additional funds for the sake of growth and expansion. However, most loan applications are foreign territory for small businesses and are often seen as a liability, particularly if interest rates are high and if a firm does not have a clear repayment plan.

Yet it is crucial to understand how to go about securing a successful loan to avoid falling into a spiral of bad debt that can harm your cash flow cycle.

You may be wondering, "But where do I begin?" and the first step is to identify the need for a business loan. According to the Small Business NSW website, run by the New South Wales Government's Trade and Investment arm, you should think about how much you need to borrow, the type of loan needed and the time period the loan is needed for.

You should also consider how much you can afford to pay and whether you are prepared to pay for one-off or ongoing fees and interest.

After identifying the need for a business loan, there are five steps you should consider before approaching a lender.

  • Create a business plan
  • Do your homework
  • Shop around
  • Seek advice
  • Have a Plan B

Create a business plan

First and foremost, a loan proposal must match up with your goals for the business, both short and long-term.

This means you must consider which type of commercial loan you need and how it will aid in the growth or operation of your business, whether it is the purchase of new equipment or increased working capital. The plan should also identify the operations and history of the business, industry information, ownership details, historical financial information, as well as forecasts.

According to the Australian Bankers' Association (ABA), when you are preparing the application, it is also important to not mistake cash flow for profit as banks and other credit providers only consider net profit, not revenue from sales or services.

You should also provide clear and concise information about the directors of your business, as will be assessed by the bank and asked for guarantees if required.

Do your homework

The ABA also notes that you should ask for the exact amount you need- no more, no less. Asking for less or more than required results in one of two outcomes: the need to revisit the bank and ask for an additional loan, or the rejection of your application.

Requesting for an overly large loan can result in a rejected application as loan decisions are based on formulas that determine how much a business can afford to borrow, hence you will be required to show proof of making payment deadlines that will fit into the bank's equation.

Dun & Bradstreet's Trade Payments Analysis revealed that for the September quarter, small businesses (1 to 20 employees) took around 52 days to pay their company accounts as compared to firms with 50 to 199 staff members, which took three days shorter to pay their accounts.

This was significantly longer than the standard 30 day repayment period and is a clear example of the consequences of not repaying on time.

It is of the utmost importance to assess the capabilities of your business for growth against company and industry forecasts. In this way you can determine how a loan will work in line with this trend and how it can be applied to aid you your loan repayments.

Shop around

As different lenders will have a suite of different loans on offer, shopping around will allow you to match up the needs of your business to the right loan products.

Lenders generally offer a range of short-term loans such as:

  • Overdrafts
  • Credit cards
  • Cash flow lending
  • Debtor finance

Long-term funding is also available, such as

  • Full drawn advance
  • Mortgage equity loans
  • Interest only loans
  • Chattel mortgages

The variety of loans on offer makes it difficult to identify the perfect product for your business. It is highly recommended that you familiarise yourself with the products that are offered by different financial institutions (including covenants) and any additional fees.

Seek advice

The breadth of loan services coupled with the complexity of loan applications makes it worthwhile to use the services of accountants, qualified business counsellors, business support groups and advisors, as well as government or non-government organisations such as AusIndustry.

Seeking advice from someone who is familiar with the loan process or has undergone it previously will also allow you to more closely analyse the appropriateness of the loan products in relation to your business needs.

Have a Plan B

No matter how well you prepare for your application and interview process, sometimes lenders will say no.

Obtaining credit, particularly as a first-time borrower, can be a difficult process. Ensure that you check your company's credit report beforehand to ensure your records are clean and that you are being accurately portrayed to creditors and business customers.

You can receive a copy and update your credit file with Dun & Bradstreet's free service here.

A comprehensive D&B credit profile can ensure your business has the ability to secure better interest rates and credit terms from banks and lending institutions .

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