Navigating the world of business loans can be daunting, especially for small business owners in Australia.
Regardless of whether you’re planning for expansion, bridging a cash flow gap, or investing in new equipment, it’s critical that you understand the nuances of applying for a business loan.
PRO TIP: In today’s environment – where insolvencies are increasing as business costs rise – even the application process itself has potential “unexpected consequences: Every application will include a formal credit check – which will show up on your business’s credit history. Multiple applications will show up – and in today’s high-insolvency environment that could leave a question mark on your reliability.
To help you on this journey, here are ten vital questions to ponder BEFORE you apply for a loan. They will guide you in making an informed decision, ensuring that the loan is a stepping stone to success rather than a financial burden.
- Will My Business Qualify? 📊Assess your eligibility before applying – or get expert help to help you do that assessment. Make sure you understand the lenders’ information requirements – including your cash flow, your collateral, and your credit history. Understanding these criteria can save you from unnecessary credit inquiries that might impact your credit score.
- How Much Do I Really Need? 💰Determine the exact amount you need to borrow – especially if you’re applying for a term loan rather than a line of credit. Overborrowing can lead to increased financial strain, while under-borrowing may mean you have enough to solve the problem you’re tackling. Conduct detailed cash flow projections to gauge the ideal loan amount that aligns with your business objectives and your repayment capacity.
- Do I Need Collateral? 🔒For secured loans, evaluate the assets you can offer as collateral. Banks often value assets lower than their market value, so estimate conservatively. Alternatively, non-bank lenders offer unsecured loans, eliminating the need for you to put assets on the line.
- Can I Afford the Repayments? 🔄Assess your cash flow to ensure you can comfortably meet the loan repayments. Applying for a loan that outstrips your revenue can lead to financial distress. Some FinTech providers can evaluate you’re business’s accounting data to determine a manageable repayment plan.
- Will the Loan Fuel Business Growth? 🚀Identify how the loan will contribute to your business growth. Ensure that the purpose of the loan aligns with your business plan and has the potential for a positive return on investment. Avoid loans for mere operational costs unless they are critical to business continuity. (Remember the first rule of holes?)
- Is Your Business Credit Rating Accurate? 📈A healthy credit score enhances loan approval chances. Obtain your business credit report from credit bureaus to understand your standing. Rectify any inaccuracies and take steps to improve your credit score ias much as possible.
- Are My Personal Finances in Check? 🏦For smaller businesses, lenders often consider the owner’s personal finances. Ensure your personal financial statements and credit ratings are in order, including credit card debts, loans, and mortgage repayments.
- Is My Documentation Complete? 📄Prepare all required documentation such as business plans, bank statements, and tax returns in advance. Incomplete or delayed paperwork can hinder the loan process. If you don’t have a written business plan, and a well-documented business plan, they your credibility will suffer.
- Any Hidden Fees or Penalties? 🚨Investigate for any hidden fees associated with the loan. Clarify any terms you don’t understand, and make sure you know all the costs including: establishment fees, ongoing charges, and penalties for early or late repayments.
- What Type of Loan Suits My Business Needs? 🤔 Evaluate different loan types offered by both banks and ALSO the growing range of smart products offered by today’s non-bank FinTech lenders. Consider whether you need a term loan, line of credit, or other financing options based on your specific business needs.
Apply early and take your time
Taking out a business loan is a significant decision that requires careful consideration.
By asking these ten questions, you can ensure that you choose the right loan for your business – a loan that supports your goals and fits your financial capabilities. Remember, a well-informed decision today can lead to a prosperous and stable business tomorrow.
If you want your business to thrive and grow, then having a robust Cash Flow strategy is critical – and for most SMEs, the right business financing enables their operations. However, the WRONG load can cripple a high-potential operation.
Do your homework – and make sure you get expert advice BEFORE you “need” it.
Book a call with our Working Capital Strategist Martin Cattch today.
