How to get a loan to kick start or grow your business
Looking to start your own business or expand your existing venture? Then you need a business loan to fund it.
Business loans are different from home loans and investment mortgages. That’s because they may not be used to buy a property at all.
Australian banks and lenders understand this and assess them a bit differently.
Your loan application and your business must be strong in order to qualify for a great deal.
How do banks assess business loans?
With business loans, banks are generally less strict with their lending requirements. The reason is simple. They aren’t regulated by the National Consumer Credit Protection (NCCP) act.
However, to qualify, you’ll need a strong application and a strong business.
Business loans are assessed just like home loans but with a noticeable difference. Business loan applications are ranked in a letter system to reflect the risk of the loan. Different banks may have slightly different ranking systems.
For example, a bank may rank your business loan application anywhere from A to D. Here, A may be low risk while D is high risk.
Each business is also graded from 1 to 15. This is based on different factors such as their strengths, ratios and how long they’ve been running.
For example, a business that has lasted 20 years with profit may be scored a 3 or 4. A new business may be scored an 11 or 12.
With the above examples, a 1A rating would mean a very strong application. A 15D application may not be approved. Please note though that business loans are always assessed on a case by case basis.
How do I qualify for a business loan?
When assessing business loan applications, lenders will consider a number of factors. These include how much money you’re putting into the deal, your business experience, the type of business and your security property.
You’re more likely to qualify if you’re an existing business operating within a lower risk industry where financial failure is less likely.
Lenders are more conservative towards businesses within high risk industries such as housing, mining and construction. They also consider government risk.
However, please note that there are no set guidelines to qualify. Business loans are always assessed on a case by case basis.
An inexperienced person who wants to start up a restaurant would likely be declined even if his loan is secured. That’s because it’s a tough industry and he has no experience.
On the other hand, businesses operating for a long time with very strong income can get over a million dollars in lines of credit.
How much can I borrow?
The amount you can borrow generally depends on the lender, the loan product and their assessment of your application.
Typically, you may be able to borrow anywhere from $250,000 to $50,000,000 with a business loan. However, business loans over $5 million to $50 million have stricter lending criteria.
If you’re only refurbishing or getting fit-outs then you may be able to borrow up to 100% of the fit-out costs with a residential property as security. Learn about this in detail in the fit-out loans page.
Our mortgage brokers understand which banks assess business loans more favourably.
You can call us on 1300 889 743 or fill in our free online assessment form to find out if you qualify and how much you can borrow.
What loan features are available?
Almost all standard home loan features are available on business loans. However, some lenders may not offer certain features so applying with the right lender is key.
Once you’ve assessed your loan needs, you can consider making use of business loan features such as:
- Overdraft facility: You can usually get an overdraft facility if you have an acceptable security property. Your credit is also assessed before this is granted.
- Line of Credit (LOC): If you can prove that you’re a low risk applicant, you can get a line of credit with a very high limit. Depending on your application and the lender, this may be well up to a million dollars or possibly more.
- Interest only: Some lenders can accept an interest only term of up to five years. You may be able to negotiate a longer term on application.
- Interest rate type: You can choose a variable rate, a fixed rate for up to five years or even bank bill facilities if you qualify.
- Additional repayments: This is generally allowed only on variable rate business loans.
- Redraw facility: With a redraw facility, you can draw back the amounts that you have paid in advance.
- Offset account: Some lenders can offer you a 100% offset account. This can help you pay off your loan sooner and save on interest expenses as well.
Please note that fees and charges are applicable for some of these features.
How do I get approval to my business loan application?
Even if banks are more flexible towards business loans, your application may be declined. You’ll need to prepare yourself before applying in order to increase your chances for loan approval.
Lenders will want detailed information about the financial history of the business. You can prepare yourself by creating a detailed business plan with a profit and loss budget and cash flow forecast.
Loan approval depends heavily on how well your business loan proposal is researched and presented. If you’re considered high risk, your application may be declined despite having a strong business.
What to consider before applying for a business loan
As a general rule, you can consider the following before applying for a business loan:
- Decisions to make: This includes decisions such as setting the loan amount, loan type, period, and security property. You’ll also need to decide if you need the money upfront or on an ongoing basis. This will help you apply with a lender that can meet your specific loan needs such as buying an insurance broking book of clients, trade finance or buying a financial planning practice.
- Planning and preparation: Know and understand your key financial figures even if you don’t prepare them yourself. This may include figures such as your current income, net profit, expenses and projected income. When it comes to business loans, lenders prefer confident applicants that have planned and prepared their proposals accordingly.
- Lender’s view of risk: There are many risk factors that can influence a lender’s view on risk. This may include factors such as business history, business and management risk, credit history, planning and finance skills, and market knowledge.
- Business loans on offer: Shop around and find out what products are on offer. Research the fees and interest rates on different business loans before applying. It may be a good idea to speak with a business advisor or your accountant before applying for a business loan.
How can I prove my income?
Some of the common ways to prove your business income are by using:
- Projected cash flow statements.
- Bank statements and tax returns.
- Your Year To Date (YTD) income from MYOB, in some cases.
- Your Net Cash After Operations, in some cases.
If you don’t have enough evidence to support your income, you may apply for a low doc business loan instead. However, you’ll need to have a large amount of equity to qualify.
A guarantor can improve your chances!
Even if you can prove your business income, some lenders may need you to have a guarantor. This is because a guarantee basically ensures that the business loan will be repaid. If you’re unable to make your repayments, the guarantor will have to pay the guaranteed amount to the lender.
Business loans FAQs
Where can I find the best rates for business loans?
Lenders may not always advertise their best interest rates. This is even more true when considering business loans because each application is assessed case by case.
Business loan interest rates are also negotiated depending on the loan size, equity position as well as the strength of the loan application.
However, we’ve published the best interest rates from our panel of almost 40 lenders all over Australia so it’s easier for you to shop around.
To find the best rates for business loans, you can check out the business loan interest rates page.
Additionally, you may qualify for a better interest rate if you take out a business equity loan.
Refinancing a business loan
You can consider refinancing your business loan every two to four years. This way you can always remain in a competitive interest rate and reduce your repayments.
Please note though that it all comes down to your objectives. Refinancing is essentially taking out a new business loan. This means you’ll be applying for a mortgage all over again.
It may be a bad idea to refinance in certain situations. For example, if you’re on a fixed rate you may have to pay expensive break costs when switching lenders.
There are many reasons to refinance your mortgage, especially if you have a bad credit business loan. However, also consider all of the costs that may be applicable when refinancing such as borrowing costs, loan application fees, valuation fees and discharge fees.
Can I get a business loan to buy a franchise business?
What do lenders think of business loans?
Business loans are generally profitable so banks and lenders prefer these customers. The loan amounts are also higher in most cases, which also signifies higher risk.
However, loan approval largely depends on the strength of the business as well as the applicant.
We can help you get a business loan!
Unlike standard residential home loans, business loans can be a lot more complicated.
However, we have business mortgage brokers that have many years of experience in the industry and specialise in business loans. We can help you qualify for a better deal just by choosing the right lender for your business loan needs. We can also help you to manage your business finance.
You can speak with one of our mortgage brokers by calling us on 1300 889 743 or by completing our free online assessment form.