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small business loan

Your Five-Step Guide To Applying For A Small Business Loan

As a small business owner, applying for your first loan can be an exciting time. After all, it might give you the kickstart you need to grow your startup. But some questions are likely to come up. For example: What your loan repayments will be? How to compare business loans? And, should you choose a short-term business loan or a long-term one?

All of this can be overwhelming but securing a business loan that is appropriate for you is possible if you’re well-prepared. If a new business loan is on the horizon, follow our five-step guide below.

1. Understand your financial situation, and know your limit

Having a basic understanding of your finances is important for many aspects of running your business, not just for applying for a business loan; so it’s important to be on top of this at all times.

Even if you’re not involved in preparing your own financial statements (for example, you may have hired someone else to do this for you), you should always have a general understanding about the money coming in and going out of your business, including your current business income, net profit, expenses and future projections of your business.

Once you’re comfortable with your knowledge about the financial situation of your business, work out what your limits for finance are, and how capable you would be to repay any money that you borrow. This includes working out:

  • Whether you need the money on an ad-hoc or needs basis, or upfront
  • What level of repayment you could afford
  • What your loan to value ratio (LVR) is
  • How much equity you have
  • If you need collateral, what assets you could offer (if any)
  • If you need a guarantor for your loan, who this could be
  • What you’re willing to offer investors, in regard to shares of your business

Get your paperwork ready! Be ready to present your business plan

If you want to apply for a loan as soon as you’ve found one that works for your business, make sure that you have all the required documentation in order.

Investors will want to see documents including, but not limited to:

  • proof of identification
  • recent financial reports of your business
  • financial forecasts
  • ratio calculations
  • and possibly your personal financial information.

It might be helpful to collate some of these documents – particularly the financial ones – into a professional report, so that your lender can easily understand your financial situation (and accurately discuss what they can offer you).

You should also have a business plan ready to present to investors before they loan money. Check out our thoughts on business plans here.

3. Be aware of different loan types and select the best one for your business

Not all loans are made equal. They can vary by amount, term (i.e. the period of time to repay the loan), interest rate type (for example, fixed or variable), associated fees, and security. Once you’ve assessed your financial situation (see point two above) and the needs of your business, you can select a loan that is right for you. Make sure to take into consideration potential costs, interest payments and any hidden charges or terms. Looking for a loan repayment calculator might also be helpful.

It’s also important to keep in mind that different loan types will lead to different tax and GST implications. An accountant or business advisor may be able to help you make sense of these.

4. Before you engage, find out who you’re dealing with

This step is simple, but easy to overlook. Before engaging with a company that will potentially give you loan, search for registered companies on ASIC’s Professional Registers. If you want to go further, find out which companies in particular you shouldn’t deal with on the Money smart website.

5. Apply for the loan

The time has come! The final step in the process is to actually apply for the business loan that you want. This will likely require a loan interview with your potential investor. Keep these final tips in mind before you do so:

  • Carefully assess financial details. A cheap loan that looks like a better deal than most? It could be true, but it doesn’t hurt to be sure. Find out exactly why the loan is cheaper – for example, are the fees higher? t Is the interest rate higher? Is the financial provider a reputable one? These questions will help you to feel confident in your decision, as well as protect the interests of your business.
  • Accept that you might not be given the loan that you want. Sometimes, you won’t be successful in securing a loan. That’s ok! If you’re unsure why this happened, seek feedback and make sure to address this when you apply for another loan in the future.

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