The small business world is changing.

Female small business owners are becoming increasingly common in Australia, and in fact, over 35% of all small businesses in Australia are now owned by women. (Way to go ladies!

Over 50% of all start-ups in Australia are financed through the owner’s personal savings (p13). And this makes sense, entrepreneurs tend to be frugal with their money. But there comes a point in every small business owner’s life when they need to branch out and look for new ways to help finance the business. 

There comes a point in every small business owner’s life when they need to branch out and look for new ways to help finance the business. 

When you look for new sources of finance you need to think carefully and consider all of your options. 

This is something you can do in a number of ways, such as by gathering investors, selling shares, or applying for a business loan. 

One of the most common ways entrepreneurs secure financing for their business ventures is by applying for business loans. In fact, over 55% of small business owners turn to banks (p57) when looking for additional financing. So there is a strong possibility that at some point in your entrepreneurial career you will have to apply for a business loan. 

Over 55% of small business owners turn to banks when looking for additional financing.

From first glance, it can seem like a pretty daunting process.

You can’t just walk up to a teller and say “hey I’d like some money please”. 

There’s a process.

Think of applying for a loan like a job interview, you need to impress them, and that means showcasing your business in the best light possible. The financial institution wants to be sure that your business is both viable, and that you’ll be able to make your loan repayments in a consistent and timely manner. Because if you can’t prove these facts, you won’t stand a chance of receiving a loan.

You have to impress them.

Think of applying for a loan like a job interview, you need to impress them, and that means showcasing your business in the best light possible. #womeninbusiness #fempreneur Click To Tweet

So, how do you do this? 

You need to do your research, write a killer loan application, and show them that your business is a viable investment for them! 

Know Your Requirements

Before you apply for a bank loan you need to establish that you have these three things. Without them, your chances of being approved for a loan are much lower. 

  1. A current ABN (Australian Business Number) or ACN (Australian Company Number).
  2. A trading history of at least 3-6 months. (This is not necessary if you’re applying for a New Business Loan).
  3. Have a monthly turnover of at least five thousand dollars.

The Five C’s

When evaluating Business Loan applications, banks and other financial institutions assess you based on the five C’s. They assess you based off of your Character, Capacity, Capital, Collateral, and Conditions.

Establish Your Character

Now when I say ‘character’, I’m talking about your overall character. That’s right, financial institutions are interested in more than just your business. They want to assess who you are as a person and whether you are a good investment to them.

Financial institutions are interested in more than just your business. They want to assess who you are as a person and whether you are a good investment to them. #businessloans Click To Tweet

They want to be assured of your integrity, your reputation, and your overall willingness to pay off your debts. In order to gain a good understanding of this, they will want to look at your financial records, particularly your credit history, and your overall financial history. It’s important to have these ready to go when you’re putting together your loan application. And if you use an accountant, it’s a good idea to have them organise these as banks prefer financial statements that are professionally prepared.

They want to be assured of your integrity, your reputation, and your overall willingness to pay off your debts.

They will also want to determine your personal and professional stability. Your financial institution will most likely look at your job history (particularly how frequently you change jobs), your ability to save money, any past legal issues, and how many ventures (both failed and successful) you’ve started in the past. 

Before you apply for a loan you should also ask yourself the following questions, because the bank definitely will! You want a ready-to-go, polished answer that will instil confidence in your business.

  • What is the purpose of my loan? You need to have a realistic purpose for the money. Why do you need it? Is it to manage your cash flow, or fund your growth? Do you want to buy new equipment or a vehicle? 
  • How much do you want to borrow? If you’re applying for the loan to pay for a new piece of equipment, it shouldn’t be too difficult to work out how much you need. However, if your requirements aren’t cut-and-dry or you are trying to cover a potential cash shortfall, you’ll have to look closely at your financial records and your business budgeting. The lender will want a good reason for you suggesting that figure, so do your research!

What is Your Capacity?

The bank or lender will also want to be reassured that you have the ability and finances to pay back the loan, both on time and with interest. Essentially they want to determine how stable your earnings are and whether your business is profitable. 

Essentially they want to determine how stable your earnings are and whether your business is profitable. 

They will want details pertaining to your living expenses and any debts you may have, as well as how many (if any) dependents you have. Looking into your business they will want to know more about your business income and expenses. 

Compile documents to help show your capacity, including your financial records, bank statements, proof of individual income, tax returns, and comprehensive identification

And if your venture is less than 12-months old, you’ll also need a few extra things to prove the viability of your business. This includes any business plans, lease agreements, and your cash flow projections

What sort of Capital do you have?

The term Capital refers to your assets and liabilities, both business and personal. The bank will want to be assured that your assets are sellable and easily liquidated in the event that you default on your loan. What you need to be able to do is prove that you are in a financial position where this is not an issue. 

Before you get anywhere near lodging your application, make sure that you calculate how much you can afford to repay. You need to be aware of the possible repayment schedule in terms of the amount and frequency of repayments.

Ask yourself, how much can I afford to repay each month? You’ll want to study your financial records and create cash flow forecasts to help you figure out what is viable for you. You can also discuss this with your accountant or with the bank when you apply.

Ask yourself, how much can I afford to repay each month?

You don’t want to end up losing an asset or with a massive debt you can’t repay, and the bank doesn’t want the hassle of trying to make back their money through your asset. It’s in both of your best interests for you to pay back your loan. 

So, make sure that you have your historical balance sheets and budgeted balance sheets handy when you apply for the loan.

You will also have to decide whether you want a fixed or variable interest rate.

A fixed interest rate will be agreed upon when you first apply for the loan and will not change during your repayment period. This means that if interest rates go up, you won’t pay more (yay), but if they go down, you won’t pay less either. However, if you want the reassurance of knowing exactly how much you need to pay each time, fixed rates are the way to go. 

But if you’re not on a tight budget and are confident you can make the repayments no matter what, you may want to go with a variable rate, where there is a chance you’ll end up paying much less if interest rates go down. It’s a gamble, but if you do your research and plan well, it could be very beneficial to you.  

Do You Have Any Collateral?

The bank will look at what sort of collateral you have, and what you’re willing to put up against your loan. If you can’t repay your loan, the bank will seize this asset as an alternate form of payment. This is known as a secured loan. 

Secured loans are the more common option and are preferable to most banks as there is less risk involved for them. They can also be a better option for your business as they tend to have lower interest rates than unsecured loans

If you’re interested in applying for a secured loan, you’ll want to do your research and find the financial institution that best suits your business. Banks have their own business interests in specific industries and if you fall into that industry, they’ll be more invested in your business.

When you lodge your application, the bank will want both the current and future valuation of your asset, as well as it’s purchase date and photos of the asset.

However, if you don’t want to offer up collateral when applying for your loan, you can apply for an unsecured loan. Unsecured loans are great as you don’t have to offer up an asset, but they can be much more difficult to obtain than secured loans and tend to have high interest rates. You could also face legal action if you end up defaulting on an unsecured loan.  

Be Aware of the Terms & Conditions

Once you’ve figured out all of the above, you need to start looking closer at the different banks and options available to you. Pay attention to the fine print and the terms and conditions of the loan. 

Pay attention to the fine print and the terms and conditions of business loans. #solopreneurs #womeninbusiness Click To Tweet

A loan with conditions that are favourable to the financial institution, is more likely to be approved than one with few benefits to them. Banks prefer loans with higher interest rates and a better return. 

You need to make sure that you understand all of the fees and charges before you take out the loan. You don’t want to be blindsided by anything that could mess with your repayment plan. Check for things like establishment/application fees, ongoing monthly fees, early repayment fees, exit fees, and (for secured loans) valuation fees. These are small payments, but they can add up, costing you a lot more than you originally budgeted. 

You need to make sure that you understand all of the fees and charges before you take out the loan.

It’s Time to Build Your Application

Once you’re sure of your purpose and what type of loan you want, you need to make sure that you put together a professional, detailed loan application. This will help speed up the process and make you appear confident and collected. For more information about what to include in your application, check out Commonwealth’s Business Loan Application Guide (for Australian businesses). 

And, if this process seems incredibly complicated and daunting, don’t let that stop you. It may be worthwhile for you to discuss your situation with an expert and determine the best options for you. Whether you talk to a Business Loan Expert, your accountant, or your Bank, get a second opinion and figure out what will best suit you.  

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Have you ever applied for a business loan, or are you considering it? What do you think the most important thing to remember is? Let us know in the comments below! 

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But while you’re here, why not check out some of our other articles?