Securing a business loan can be a pivotal step in growing your business, whether it’s funding new equipment, expanding operations, or developing innovative products.
But with banks carefully scrutinising every application, understanding what lenders look for is key to success.
CCIWA Advantage Member Bendigo Bank explains what you need to know to boost your chances of loan approval, as originally published here.
The basics
Most businesses need a regular bank account into which they can receive funds and from which they pay for their business expenses.
An overdraft or line of credit is another popular business banking product that can help enterprises manage their cash flow. Many established businesses will also need a business loan to pay for plant and equipment, to develop new products and services and to grow the business.
If you’re applying for a bank loan, it’s important to understand what lenders are looking for to approve your application.
What information do you need to provide?
A well-thought-out and detailed business plan is one of the most important documents a borrower needs to complete before approaching a bank for a loan.
A bank wants to see a clearly articulated business case and plan detailing the loan’s purpose, as well as financial modelling to support any additional debt the business plans to take on. Any extra funding needs to deliver a net benefit to the business.
A good business plan needs:
- An outline of what makes the business unique, its history, the products and services it will produce, as well as information about the competitive landscape, key customers and suppliers.
- The corporate and ownership structure of the business.
- Details of how much money the business wants to borrow, when the funds will be needed, how the loan will be used and how it will help the business to grow or achieve its strategy.
- Trading history and financial reports as evidence of the financial health of the business, including up-to date-financial and bank statements from which the bank will assess the business’ ability to service the loan.
- Cash flow projections that show the business’ ability to service the loan.
- Evidence of personal income to support personal living expenses.
Mistakes to avoid
There are some common red flags that could prompt the bank to turn down a business loan application. It’s important to understand what these red flags are so you can avoid making these errors when you apply for a business loan.
Common red flags include:
- Poor personal or business credit history.
- No business plan, or a poorly prepared one, which lacks critical information.
- A history of financial losses, inconsistent cash flow or declining revenue trends.
- No evidence as to how the business intends to service the loan.
- An overreliance on a few key customers or suppliers.
- Insufficient collateral to secure the loan.
Poor planning and preparation could also cause a bank to reject a loan application. Banks will tread cautiously if the business owner doesn’t have sufficient funds to start a business and support its working capital requirements until it has a loyal and engaged customer base and steady trading.
Can you borrow money as a start-up?
Every situation is unique. But to approval a loan, lenders want to be confident the business is viable and able to service the loan. So, they need to understand the business’ financial history.
Banks generally want to see two to three years of financial information to approve a loan application. When applying for a loan, the business will need to produce a current balance sheet, as well as profit and loss and cash flow statements. Also be prepared to produce a forecast for the coming year.
Lenders also assess the management team’s performance and the decisions they have made to improve the business and its returns. They are also looking for a clear corporate structure and reporting lines, as well as information about the business’ other obligations such as long-term lease commitments.
Adaptability, innovation and resilience are common traits successful business owners share and these are the characteristics banks want to see their business customers display.
Bendigo Bank has a range of business banking products to suit different purposes. Check out the different options available to you today.
Any advice provided in this article is of a general nature only and does not take into account your personal needs, objectives and financial circumstances. You should assess with the help of legal, financial and taxation advice, whether it is appropriate for your situation before acting on it. Please read the applicable product disclosure statement(s) on our website before acquiring any product.
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