Most businesses at some stage will consider a business loan to assist with starting up, growth and/or when their cashflow is tight or they need some bridging finance to get them through until payments come in.
One of the first things an owner or director will think about is generally how hard will it be to get approved for a business loan. Will my business qualify? What will I need to apply for a business loan?
There are basic aspects that all lenders will look at when assessing a business for a business loan. Business revenue, business and personal credit history, bank account conduct and months trading.
If your business has low revenue, bad credit and is cashflow poor then yes, it will be harder to be approved for a business loan. Lenders want to minimise their risk and loan to businesses who are operating efficiently and have the ability to repay the loan comfortably.
Each lender has different minimum criteria a business must meet to qualify for a loan and although your business may not need to meet every one, the more boxes your business ticks the more likely your chances of approval.
Several factors go into a business loan approval and we have outlined the most coomon ones below for you so you can understand what a lender is looking for and whether your business is in the right position to apply and be approved for a business loan.
A key part of a lenders assessment is confirming whether the business applying has the revenue to successfully repay a loan. proof of your revenue will be required in the form of bank statements and possibly a financial report or profit and loss report depending on the age of your business.
If you are a startup, there is no financial history for the lender to assess so your personal bank statements and a 12-36 month cashflow forecast will be used to assess your account conduct, spending habits and your potential revenue forecast. A cashflow forecast will show your expected monthly revenue, monthly expenses and profit/loss.
If you are a business who has been cashflow poor or has had a low monthly revenue but have recently secured a new contract that will increase your revenue moving forward, a cashflow forecast to demonstrate the revenue increase is an ideal way to help the lender understand you current and forecast financial position. If you income is expected to double when servicing the new contract this will be taken into consideration for your loan approval.
Time your business has been trading
All lenders have set criteria for which businesses they will assess and time trading is one of them. Some lenders will lend to startups and some won’t. Some lenders require 6 months trading history, 10 months trading history, 12 months, 18 months. When considering a business loan it is important to research which lender will assess your business and choose one from the available options.
The longer your business has been trading and then healthier it is, the more lending options will be available to you because you will likely meet all the minimum criteria for most lenders. A healthy 24 months trading business will have all options available to them whereas a startup business won’t.
Business and personal credit history
A good personal credit score and clean business credit history will mean you are less risk to a lender and increase your chances of approval. If you have outstanding debt or court judgements most lenders will view this as high risk and decline your application. If you have debt on a payment plan or it has been paid off lenders will take this into consideration and the lending risk will be lowered.
Your credit history tells a tale of what has happened in the past so lenders can judge what can potentially happen in the future. If mistakes have been made but are rectified and your business is in reasonable health the more chances you will have of approval.
Business loan amount
The amount you are applying for will be a part of a lenders assessment. The healthier your business is and the longer it has been in business will mean you are probably approved for more than if you’re less than 6 months trading and have minimal income.
The amount of funds available to your business for an unsecured business loan will be calculated on your monthly revenue, cashflow and credit history. The larger your profits month by month the more funds will be available to you as you will show you have the means to repay a loan, and a larger amount.
A secured business loan amount will be determined by the vale of you asset you are using as security. Most lenders will lend up to 70-80% of your assets value. Your revenue will also affect the amount available to your business.
If the amount you are asking for is declined, a lender will usually offer a smaller amount based on what they thinkk you can afford to repay each month.
The type of loan
The type of loan you are applying for will also affect how hard it is for your loan to be approved. If you are applying for a cashflow loan because you are cashflow poor your chances of approval can be affected because the funds will be used to help cover the costs of your day to day operations which technically should already be paid for if your business was in a healthy position. Often a cashflow loan will be unsecured as well so there is more risk to the lender.
If you are purchasing a vehicle like a truck to service a contract that will increase your revenue, there is less risk to the lender because the truck can be used as security and your revenue should also increase with the servicing of the new contract. As mentioned above, a cashflow forecast showing a revenue increase with your new contract would be ideal to include in your application to show the lender what your business will be earning moving forward. A copy of the contract itself would also strengthen your application.
So, how hard is it to get a business loan approved?
There are many factors that come into assessing your chances of business loan approval and you will need to consider all of the above to help determine whether you are in a good position to apply and be approved for a business loan.
Doing your reasearch and finding the right lender will be critical to your approval. As a business loan broker, Compare Business Loans can help you get the right information to the right lender to increase your chances of approval. Rather than spending your time learning about your business loan options, a 5 minute phone call is all it takes for us to pre-assess your business and let you know what amount in funds could be available to your business, what will be required for your application and which lender will assess your business.
If we feel you don’t qualify for a loan at this time because of your current business situation, we can outline the best steps you can take to get your business in a better position to apply for a loan. Contact us today to arrange a quick phone call and see where your business stands.