If applying for a business loan – have you considered these factors?
Monday, 28 November 2016 11:42
Is it time for you to apply for a business loan? There may be a few things to check off the list beforehand. You may need to come prepared for the meeting with your lender, and that can require some research and understanding of your own finances. If you come prepared and confident, it may make all the difference.
Prepare questions beforehand
Before you start talking to a lender, you may like to consider your financial past. For example some of the following questions may help with a conversation with your potential lender.
- What is your credit history like?
- How much do you want to borrow?
- Over what period of time do you want the loan for?
- Fixed or variation interest rate?
- Are you willing to put your assets on the line?
- Will you need access to cash-flow on a regular basis?
- Have you considered the risk?
- Have you spoken to a financial advisor?
Review your credit history
As a small business owner, it may be worthwhile to investigate your own credit history. This may be one of the first things that a bank will check. You may like to conduct your own check on your credit history through a credit reporting firm. Generally, you can request a report for free once per year1.
Consider your choice of interest rate
You may need to consider whether to opt for a fixed, variable or a split loan interest rate. This is less a choice between repayment amounts and more of a choice in risk. Choosing between fixed, variable or split interest rates can be quite difficult as no one can accurately predict future loan interest rates set by your prospective banking institution2. This is a choice you will need to make based on adequate research and understanding. It may also be helpful to seek advice from a qualified professional.
This is where cash flow may come back into it. If you can secure an agreeable fixed interest rate, you save the possibility of having to pay more - but a variable rate offers the opportunity to pay less3. Business Victoria explains that your profit level should help define your choice: Those with a low profit level risk may be unable to sustain rising variable rates, but conversely miss out when variable rates drop3. In this situation, a fixed rate may provide some comfort in that repayments remain constant during the fixed period of your loan.
Prepare to front up collateral
Depending on your personal financial circumstances, some banks may require collateral to assist in mitigating some of the risk involved with providing you with a loan in case you default on your loan repayments. CPA Australia states, that a common asset used is the home of a small business owner4. Should unforeseen financial circumstances arise, your business may impact your personal assets. If this is not an option, you may require alternative security that is acceptable for the bank to mitigate the risk in providing you with a loan.
Consider developing a business plan
Considering how important profit will be to the success or failure of your business (and thus, whether you will default or not on the loan), your lender will want to know some details, such as; the industry sector, levels of competition, barriers to entry and a profitability profile5.
Building your own business can be an incredibly exciting venture and you should be proud that you are in a position to even consider getting a loan. But you may need to invest quite a bit of your time and effort in preparation. Consider your financial history, gather documents, seek professional advice and have a plan. If you walk into a meeting with a lender confident and knowledgeable you will come away knowing that you have done everything you could.