It’s common for startups to rely on loans to get off the ground, and financing is often considered a necessary evil whenever you need to scale. On one hand, your business will receive the money it needs, but on the other, you need to pay interest on the principal each month.
However, there are several ways you can lower your interest rate on a loan. If you provide the following information, you may get a better rate if your business and credit are in good standing.
How to Apply for a Business Loan
Australians can receive an overview of their small business loan options by comparing them through iSelect. However, you can only receive the best competitive rates if you can provide the proper documents. Here’s exactly what you need to apply for a loan.
It’s essential to have a basic understanding of your finances, so you know what types of loans you’ll qualify for. At the same time, you don’t want to take out more than you need, even if you can. Remember: the more money you loan from the bank, the more interest you’ll pay over time.
Preparing a cash flow statement will give you a basic idea of your finances. Here’s how to do it:
- In the first month, write down your Opening Balance. For subsequent months, this will be your “Closing Balance” from the previous month. This number is your cash flow.
- Next, write down your Cash Incoming, which is the money that’s flowing into your business. You can forecast estimated figures as long as they’re based on previous months or invoices that haven’t been paid. Cash Incoming can include:
- Debtor Receipts
- Tax Rebates
- At the end of Cash Incoming, write your Total Incoming for the month.
- Next, write down Cash Outgoing, which includes any payments your company makes. Consider expenses required to operate your business and when they need to be paid. Estimate these figures similarly to Cash Incoming. Cash Outgoing can include:
- Marketing and Advertising
- Accounting Fees
- Rent and Rates
- At the end of Cash Outgoing, write your Total Outgoing for the month.
- Calculate your Monthly Cash Balance by subtracting Total Outgoing from Total Incoming. Place this figure at the end of your sheet as your Closing Balance.
Present this document to the loan broker, but don’t forget to include proof for your statement.
If you’re a startup, you may also need to provide a business plan along with your business contract of sale and lease agreement. Here’s what to add to your business plan:
- Key Details: Registration, contact, online and social media
- Business Details: Plan summary, your why, vision, mission, operations, and key people.
- Market Details: Target market, its problems, and your solution. Advertising and promotion, competition, pricing strategy, SWOT analysis.
- Risk Management Details: Risk assessment, succession, insurance, laws.
- Goals Details: Goals over the first year, goals over the next 3 years.
If you’re submitting a business plan, place your cash flow statement at the end.
Proof of Individual Income
The first way to show proof is by utilizing your individual income statements if you’re a company shareholder and/or director. You’ll be asked to provide an ATO Notice of Assessment and your two most recent individual tax returns.
If you aren’t a director or shareholder, you still have to provide two of your most recent tax returns to the bank. If you earn income that’s unrelated to your business, provide that as well.
The second way to show proof is via your bank statements. The lender will be able to see how much money you’re keeping in your bank account at any moment. If you’re not a sole proprietor, an LLC, or a part of any other business, you’ll need to give your personal bank statements only.
However, if you are classified as a business entity, you’ll need to provide both your personal and business bank statements. Either electronic or paper copy is acceptable.
If you’re applying for a loan from a bank you frequent, you likely only need a driver’s license to take out a loan. If you’re using a different lender, you may need your driver’s license, passport, and birth certificate.
Regardless, both parties would need to bring other business documents pertaining to their company structure, like company registration, partnership agreement, or trust deed.
Credit (Most of the Time)
Unless you’re getting a secured business loan that you have to pay into (either by offering up your mortgage, car, or capital for defaulting), you’ll need to have good credit to receive a loan from a bank lender. Otherwise, you’ll likely have to take out a high-interest, low principal loan.
In Australia, your Equifax Score will be a number between 0-1200. A good score is between 622-725, but you only have to score 510-621 to get a loan. Anything below 509, and banks won’t lend to you. To get the best rates, aim for a credit score of 726 or higher.