Whether you are starting a new business or looking for financing to fuel your company's growth, find out what you need to know about qualifying for a business loan.
How Business Loans Are Different to Consumer Loans
The way business loans are assessed is different to assessments on personal loans and home loans. This is because banks aren’t regulated by the National Consumer Credit Protection Act, or NCCP, which requires lenders to take certain steps to verify your income and ability to repay the loan.
Instead of focusing on your credit history and the LVR, banks evaluate how risky lending to your business could be. They may not use the same strict credit scoring criteria or have the same universal expectations like LMI premiums for home loans. What you will find instead is that business loan applications are evaluated on a case by case basis, which means banks are more likely to overlook some issues if your application us strong in other areas.
Your loan officer may also pay attention to the reasons why something happened. For example, if you had a late payment for a reason that was beyond your control, such as late receipt of invoices from clients or a problem in your supply chain, this may be taken into account.
Ratings for Business Loan Applications
When you apply for a business loan, the bank will use its own ranking system to assess the level of risk. They will assign a rank to your loan application, such as from A to D, with D being highly risky and A being low risk.
They’ll also assign a grade to your business. Factors such as your business’s assets and liabilities, how long you’ve been in business, and your cash flow will go into determining the grade. You'll get a grade from 1 to 15, with 1 indicating high levels of business strength and 15 indicating a new or unstable business.
Then, these two figures are combined. A healthy business with years of steady profits would probably get an A or B rank with a low grade, such as a 2A or 1B. A start-up with a lot of great ideas and a lot of debt could end up with a higher ranking, such as a 12C. Usually, a 15D application wouldn’t be approved for a loan at all.
Is It Easy to Get Approved for a Business Loan?
There are so many factors that go into assessing a business loan application that it is difficult to answer this question. It really depends on your unique situation. For example, if you are applying for a small loan or you’re in a low-risk industry like dental health or crop production, it may be easier to get approved than if you were trying to get a large business loan for your software development company or a restaurant.
It also depends on your level of experience in the field. If you’ve been working for another business for 10 or 15 years and then decide to start your own, banks may be more willing to lend you money than if you have just entered the workforce and don’t have a lot of experience.
Here are some of the main factors that lenders will consider when assessing your loan:
- Whether your loan is secured or not
- Your level of experience in the field
- How many years you’ve been in business
- How risky the industry is traditionally
- The size of the loan
- How much money you have yourself, either from savings or investors, to put into your business
- Your business plan
- The current market conditions
How to Prepare for Your Business Loan Application
Because lenders are more focused on the unique details of your application, you’ll need to have quite a bit of financial information prepared before you apply. Approval also hinges on the strength of your business loan proposal.
Putting in the effort to make sure you have a well-researched, thorough proposal will show your lender, not only that your business will thrive financially once you have financing, but that you know what you’re doing and how to turn your loan funds into profits.
Your business proposal will include:
- Details about your business including where it’s located, information about your products or services, staff details, and information on your business structure.
- Financial projections, cost analysis, and any other financial details to help your lender understand how your business operates financially, where money currently comes from, and what the plan is moving forward.
- Market details, which includes market research on your customers and competition, as well as the framework of your marketing strategy.
- You’ll also need the right documentation to verify what’s in your loan proposal, including a cash flow forecast, profit and loss budget, and BAS statements, in addition to your basic info like your ABN and an overview of how the loan will be used for company goals.
How to Strengthen Your Case and Improve Your Chances of Qualifying
Having a well-researched loan proposal is the core of your business loan application preparation work. As securing a business loan and qualifying for one that works for your business’ goals is critical, it’s worth consulting with the right professionals to make sure you’re as ready as you can be before approaching a lender.
- • Talk to a business consultant and/or your accountant about the details of the loan. You’ll want to decide what security to use, the loan amount, loan type, and period, as well as whether you require the money as a lump sum upfront or if you need an ‘at call’ loan, such as an overdraft or line of credit to help with cash flow.
- • Take the time to research different loan products, comparing interest rates and fees. The details of business loans can vary widely – which means the cost of your financing can vary significantly depending on which lender you apply with.
- • Know where you stand with your credit history and the risk level you represent to lenders. Your security, cash flow risk, and your ability to repay the loan along with any other debts you have are the biggest risk factors a lender will consider.
If you need advice and guidance to help you prepare for your business loan, call (07) 3146 5732 to talk to one of our business loan specialists. You can also contact us online.
Which Is Better – a Variable or Fixed Rate Business Loan?
The type of interest rate will impact your loan in several ways. You’ll want to think about the impact of either a variable or a fixed rate in terms of what your business can handle.
- Financial stability. A fixed rate offers stability of repayments, which may be important if your business doesn’t have high profits and would struggle to repay the loan if interest rates went up.
- Loan features. A variable rate will usually come with more available loan features – are the features you will miss out on with a fixed rate loan important to you?
- Loan cost. Fixed interest rates are usually higher, making the loan more expensive – at first. Keep in mind, with a fixed rate, you’re paying a higher rate to reduce your own risk. With a lower variable rate, you take on the risk if interest rates move, as your loan repayments could increase. Overall, your variable rate loan could cost more than if you simply paid a fixed rate.
What Fees Do Lenders Charge?
Business loan fees can make a loan product more costly than it first appears. That’s why you want to evaluate the fees of the loans you’re considering rather than just focusing on the interest rates.
- Set-up fees such as a loan establishment or application fees
- Ongoing maintenance fees, which can be monthly service fees, or a charge every time you advance some of the loan if it’s a line of credit
- Exit fees and early termination fees – make sure you understand how much you’ll pay if you decide to refinance the loan in the future, or if you pay off your loan early
How Much Can You Borrow When You Get a Business Loan?
How much you can borrow depends on how long you’ve been in business, your security, and how much you can afford to repay. With a financially healthy, low risk business, you may be able to borrow from $250k to several million.
If you are borrowing over $5 million, expect the bank to apply very strict lending criteria.
For small businesses and startups, you may want to start with a much smaller loan that you can pay back quickly.
Is a Security Necessary for Qualifying for a Business Loan?
When you apply for a business loan, you can use a property or another asset to secure the loan. This helps to reduce the amount of risk the lender has to take on, which means you’re more likely to qualify for a business loan with a low rate.
But what if you don’t have a high-value asset, or you aren’t comfortable using your home as a security?
In these instances, you can apply for an unsecured business loan. Many alternative lenders and some banks offer unsecured business loans.
- The rates and fees will be different to what you’d expect with a secured loan – they’ll generally be higher.
- You also won’t be able to borrow as much – unsecured business loans usually go up to $500,000, assuming you’ve been in business for some time and can prove you are capable of repaying the loan.
- Unsecured business loans are usually offered for short terms, from 3 months to 3 years. Once you repay your loan on time, your lender may be willing to offer you another loan. As long as you continue to demonstrate that you’re a responsible borrower and your business continues to thrive, qualifying for unsecured financing shouldn’t be a problem.
What Loan Features Do Business Loans Come With?
You’ll find a variety of useful features when comparing business loan products. To get the best out of the comparison, you need to know which features matter the most to your business.
Redraw facility – This will give you more flexibility. Any amount you pay in advance of the due date can then be drawn back if you need it.
Additional repayments – If you want to try to pay your business loan off ahead of time, make sure you can make additional repayments without paying any penalties. Generally, additional repayments are included with variable rate loans.
Offset account – Another feature primarily associated with variable rate business loans. With a 100% offset account, you can reduce some of the interest you owe and pay down the loan faster.
Line of Credit – If you need to access money at different intervals, a business line of credit can be a huge advantage. You’ll need to be a low risk applicant to qualify for this feature.
Overdraft – This feature will help if you need money to keep your business operating whilst you wait on outstanding client payments. You’ll need clean credit and a property as a security in order to qualify for a loan with an overdraft facility.
Interest-only loan – As long as you are a strong candidate for lending, you may be able to get an interest-only loan for up to 5 years.
When Should You Refinance Your Business Loan?
It’s a good idea to assess your loan every couple of years to make sure you’re getting the best rate possible. A lot of business borrowers will refinance every three or four years if they can get a lower rate, which decreases their repayments. If you select this option, it would free up your budget for other needs or make it easier to repay your loan more quickly.
There are a few things you should consider before refinancing a business loan:
- If you have a fixed rate loan, you may have to pay expensive break costs if you refinance – which could outweigh any savings you’d see from refinancing to a lower rate.
- Because you are essentially applying for a new loan, make sure your credit is in excellent condition – if you’ve made late payments on other accounts or if you have a worse credit score than you did when you qualified for your current loan, it may be more challenging to qualify when you refinance. Ideally, your credit history and strength as a borrower has improved, which will help you qualify for better rates.
- Even if you don’t have to pay break costs for leaving a fixed rate business loan, there are still other refinancing fees you’ll have to pay including application fees and valuation fees. Before applying for a new loan, calculate how much you’ll save each month from lower repayments – how many months will it take for this amount to equal your refinancing costs?
There may be other reasons you want to refinance your business loan such as to help you consolidate other debt or to lower your repayments with a longer term so you can get some financial breathing room for your business. As you decide when to refinance with commercial loans you’ll need not only to look at the cost-benefit analysis of switching loans, but also at how well a new loan will align with your current and future business goals.
Where Can I Find the Best Rates on Business Loans Right Now?
Searching for the best business loan rates is more complex than comparing mortgage loan rates. Often lenders don’t post their lowest rates for business lending. Also, the rates you do see posted could be very different from the rate you’re offered.
There are two main reasons for this:
- Applications are assessed individually, and your rate ultimately depends on a range of different factors, like your credit history, how long you’ve been in business, and the strength of your business loan proposal.
- Your lender will negotiate the rate with you based on the loan size, your equity position, and your strength as a borrower.
Even though many lenders don’t post their business loan rates, you can still look at the rates of the lenders who do post them. This will give you an idea of what banks are currently charging for the type of loan you’re applying for.
Applying for Your Business Loan
When you qualify for a competitive business loan, you can secure the financing you need to help your business grow.
Our business loan specialists can work with you, helping you get the best rates possible, including any discounted rates you may be eligible for. Contact Nexus Money today to get started – call (07) 3146 5732 or contact us online.