Business loan requirements, Australia

Business loan requirements

The 60-second read

Is a business loan right for you?

If you are looking to start your own business, or expand your existing one, a business loan can give you the funding you need. You can use it to buy equipment, software, hardware, build an app or a platform, hire people or experts, or get a lease.

Before you apply

A bank or other lender will evaluate your application for a business loan very systematically using some kind of a grading or classification approach.

Therefore, it’s really important that your application is both complete, and comprehensive – the more strengths and justifications for the loan you can spell out, the more likely your application is to succeed via a high grading.

So, what do you need to have and write in your application?

Basically, everything that makes your business (and you) look like a lower risk for the lender. For example:

  • your experience in the industry or the business
  • the likelihood that the business you have chosen is low risk or will be successful
  • how much time this business has been running (see also how much experience you have running a similar business, above)

So, you’re a start-up?

If you’re a start-up, of course none of these apply – but do not be disheartened. First, have a look at our blog, How to Get Business Finance When the Bank Refuses You.

  • Make sure you have a basic understanding of your finances – even if you used a business planner like Small Business Plans, or your accountant to help you with them.
  • Make sure your business plan makes sense.
  • Demonstrate that you understand your financial limits – what repayments you can afford, how much of the business you are going to share or give to investors, and those all-important START-UP COSTS.
  • Be savvy in the types of business loan that you want – maybe your financial statements show that you just have a cashflow issue and need a little bit more cash from time to time. That’s a different type of loan than borrowing $100,000 to set up a restaurant.
  • Be comfy with your paperwork: your ID, your business plan, your previous financials if you are not a start-up or your projections if you are, any ratios or benchmarks you’ve used, and your personal financial information if you are kicking in some money yourself.
  • Make sure you know about what they’re going to find out about you. This is all about you getting a credit report on, for example, MoneySmart Your Credit report fact sheet.
  • Get expert advice. Okay, so we are biased because we’re experts at helping businesses get business loans from banks and investors, and venture capitalists. But even if you don’t use our advice, make sure you get some expert advice.

On the day of the interview or when they call you up.

  • Don’t let them call you up out of the blue. If you are going to be talking to a Loans Manager from a bank, you want to have your business plan and your application form that you sent in front of you. They love to call you up out of the blue.

The longer read

Before you apply

The good news here is that business loans are far more negotiable and you have a lot more power than you do when applying for a consumer loan, credit card, or something where a rigid set of criteria will be applied and you can’t influence the decision. Almost everything that follows in this blog will help you influence the decision. The only bad news is that all this influencing means that you must be very credible, know your stuff, do your homework, be comfortable fielding questions from the bank, and genuinely have a good business plan. But, hey, you’re an entrepreneur and a businessperson – so this sort of stuff is all part of the process.

So, you’re a start-up?

If you’re a start-up, of course none of these apply … but do not be disheartened. First, have a look at our blog, How to Get Business Finance When the Bank Refuses You.

  • Finance is increasingly available, and there have been some huge success stories in Australia recently for start-ups. However, if you are reading this blog in the expectation of a bank loan , you may need to cast your net a lot more widely if you don’t meet some of the criteria (such as low risk, many years in the business, putting in your own money, highly successful established business that you are going to buy or take over with your start-up idea).
    • However, there are many other forms of lending. Please refer to our blog, Finance options for start-ups, or click here. [Barbi to insert link to a new blog, at the end of this document, Barbi: How to start up business loans with no collateral ]
  • Make sure you have a basic understanding of your finances – even if you used a business planner like Small Business Plans, or your accountant to help you with them.
    • The basic three sheets that you need to be aware of are: the profit and loss, the balance sheet, and the cashflow forecast. These all look at different aspects of your business and unfortunately, you do need to spend time understanding what these do. If you’re short of time, give us a call. Once you are comfortable with this (and it will probably take you a couple of hours reading up on these and doing your own three sheets), you are a lot more bullet proof and invincible in discussing your finances with either a bank or any type of lender. It’s a puzzle to us why we don’t get taught this stuff at school here in Australia, but it is easy to learn and when it applies to your business, you will be very engaged – so in many ways, it’s better than learning it at school or college.
  • Make sure your business plan makes sense.
    • The great thing about business plans is that they include the finances. So, if you do hire someone to do your business plan, or you get your accountant to do it, or you do it yourself, it will come with the three main financial statements that you need. Most important of these (particularly if you’re a start-up) is the revenue or sales forecast. Businesses, if they are new, and are not taking over an existing business, don’t have financial statements, so generally they tend to be way too optimistic. True, this is a bit unfair – some are very pessimistic. But in our experience, having worked with hundreds of companies at the start-up or small business phase, around 80% of them tend to be overly optimistic. Keep in mind that banks and lenders, and any kind of expert who helps you, will have benchmarks and metrics. They know how much businesses just like yours turn over. They use things like the ANZSIC codes to check turnover levels, they can refer to the Australian Taxation Office metrics to see what most businesses in your type of industry turn over each year, and their costs and their profitability. If you too know this, you are very well armed and your business plan will sail through the bank’s approval process.
  • Demonstrate that you understand your financial limits – what repayments you can afford, how much of the business you are going to share or give to investors, and those all-important START-UP COSTS.
    • This is really about cashflow – see above.
    • As long as your business is making money, and you have enough cash in the business to buy stock, pay wages and so on (even over the holiday period or when you get very busy and have to buy things before you have revenue coming in), then you have what’s called positive cashflow.
    • Occasionally, some of the businesses who come to us have not thought through their finances enough and don’t actually make profit, even in the first year. Don’t panic if this is the case, there are many businesses that don’t make profit in the first year, but have fantastic profits in Year Two. As long as you are comfortable talking to the bank or investor about why this is, that shouldn’t be a problem. But make sure your revenue forecasts are completely anchored in the marketing research section of your business plan or that you have done in your pitch deck. If you can’t justify your revenue forecast based on marketing research, then it is highly likely the bank will reject you, using those pesky benchmarks and metrics we talked about before.
  • Be savvy in the types of business loan that you want – maybe your financial statements show that you just have a cashflow issue and need a little bit more cash from time to time. That’s a different type of loan than borrowing $100,000 to set up a restaurant.
    • Looking at the example above, where you are profitable but you run out of cash, you wouldn’t need to borrow a huge amount of money, and you would use something like a line or credit. Let’s be really honest here and tell you one of the true realities of being an entrepreneur – when most of us set up, we used overdrafts on our personal account, credit card limits, or personal credit card line of credits. It happens, it’s not ideal, and it can get very expensive if it gets out of control. But if you can’t get business finance, and you have a short-term need for cash that you can easily pay back in an equally short term, these are viable options. Don’t mention that at your bank interview though. 😊
  • Get expert advice. Okay, we are biased because we’re experts at helping businesses get business loans from banks and investors, and venture capitalists. But even if you don’t use our advice, make sure you get some expert advice.

On the day of the interview or when they call you up.

Don’t let them call you up out of the blue. If you are going to be talking to a Loans Manager from a bank, you want to have your business plan, and your application form that you sent in front of you. They love to call you up out of the blue.

  • Make sure that you have got a nice quiet environment where you can hear them properly, have a pen and paper handy where you can make notes as to what their questions are, and are in a calm frame of mind.
  • Make sure that you have complete mastery of your financial statements. If you don’t, schedule a time where you can be with your accountant or your business planning expert.
  • Make sure that you have looked at other banks and have entered/submitted your application to at least one other bank so that you can casually mention ‘Commonwealth Bank didn’t mention this, is this a specific criteria of ANZ?’ Sadly, some Loans Managers are much trickier to deal with than others, even in the same bank. This is why an accountant or a business plan writer will be able to help you – because they deal with these individuals or roles every day of the week.

For more information on applying for a business loan, give us a call on 1300 644853 or email us at info@smallbusinessplans.com.au (24/7 website chat and enquiry available).