Whether you’re looking to expand your business, purchase equipment, improve cash flow or take advantage of a new opportunity, securing the right business finance can help you make your next move.
But before approving a business loan, lenders want to understand one key thing: how comfortable are they lending money to your business?
Unlike a standard home loan, assessing a business loan can involve looking at several aspects of both the business and the people behind it. Your financial performance, cash flow, credit history, existing debts, loan purpose and available security can all play a part.
Understanding what lenders are looking for can help you prepare a stronger business loan application and potentially give you access to a wider range of finance options.
Here are some of the key factors lenders may consider.
1. Your Business Financials
One of the first things a lender will generally want to understand is the financial position of your business.
Depending on the lender, loan amount and type of business finance you’re applying for, this could include reviewing:
- Profit and loss statements
- Balance sheets
- Business tax returns
- Business Activity Statements (BAS)
- Bank statements
- Existing business debts and liabilities
- Accounts receivable and payable
The aim is to build a picture of how the business has been performing and whether its financial position supports the proposed loan.
Strong revenue is useful, but lenders aren’t necessarily looking at turnover alone. Profitability, expenses, liabilities and the overall financial health of the business can be equally important.
2. Cash Flow and Your Ability to Repay the Loan
A profitable business can still experience cash flow problems, which is why business cash flow is often an important part of a lender’s assessment.
A lender may look at the money regularly flowing into and out of your business and consider whether there is sufficient capacity to meet the proposed loan repayments alongside your existing commitments.
They may consider questions such as:
Is revenue relatively consistent?
How much of the business’s income is absorbed by expenses?
What existing loan repayments does the business have?
Does the business experience significant seasonal fluctuations?
Will the new finance improve or place additional pressure on cash flow?
Having accurate, up-to-date financial information can make it easier to demonstrate the position of your business.
3. Your Credit History
Your credit history can also influence a business loan application.
Depending on how the loan is structured, a lender may consider the credit history of the business as well as its directors or owners.
A credit report can contain information about previous credit applications, repayment history and defaults. Lenders can use this information as one part of assessing the risk associated with providing finance.
A less-than-perfect credit history doesn’t automatically mean business finance is impossible. Different lenders have different credit policies and appetites for risk, which is one reason it can be useful to understand your options before submitting applications.
4. How Long You’ve Been in Business
The length of time your business has been operating can also matter.
An established business with several years of financial records gives a lender more information to assess. They can see how revenue, profitability and cash flow have performed over time.
For a newer business or start-up, there may be less historical information available. That doesn’t necessarily mean finance isn’t available, but the lender may place greater emphasis on other factors.
These could include:
- Your experience in the industry
- Your business plan
- Financial forecasts
- Existing contracts or customers
- Your personal financial position
- The amount you’re contributing
- Any security available
The right lending solution will depend heavily on the circumstances.
5. Why You Need the Money
Lenders generally want to understand the purpose of the business loan.
There is a big difference between borrowing to purchase a productive asset and borrowing simply because the business is consistently running out of cash.
Common reasons businesses seek finance include:
- Purchasing vehicles or equipment
- Buying commercial property
- Renovating or expanding premises
- Purchasing stock
- Funding business growth
- Acquiring another business
- Managing working capital
- Refinancing existing business debt
Clearly explaining what the funds will be used for and how the finance fits into your broader business plans can help provide context for the application.
It can also determine which type of business finance may be most suitable.
6. Your Existing Debts
Lenders don’t assess a new business loan in isolation.
They will generally want to understand the debts and financial commitments you already have.
This could include:
- Existing business loans
- Equipment finance
- Commercial property loans
- Business credit cards
- Lines of credit or overdrafts
- Other financial commitments
The important consideration is whether your business can comfortably manage its existing commitments as well as the repayments on the proposed finance.
In some circumstances, reviewing or restructuring existing business debt may also be worth considering before taking on additional finance.
7. Security and Assets
Some business loans are secured, while others are unsecured.
With a secured business loan, an asset is provided as security for the finance. Depending on the type of lending, this could potentially include property, vehicles, equipment or other acceptable assets.
Security can reduce the lender’s risk and may affect factors such as how much you can borrow, the interest rate available and the loan terms.
However, not every business loan requires property as security.
There are numerous types of business finance available, and the appropriate structure will depend on the purpose of the loan, the financial position of your business and the lender’s individual requirements.
8. The Industry Your Business Operates In
The type of business you operate may also influence how lenders assess an application.
Some industries have relatively predictable revenue, while others may be more seasonal or exposed to economic changes. Lenders can have different policies and risk appetites across different industries.
This means two businesses with similar financial results may not necessarily receive identical lending options.
An experienced business finance broker can help identify lenders whose policies are better aligned with your business, industry and borrowing requirements.
9. The People Behind the Business
Financial statements tell an important part of the story but lenders may also want to understand the people running the business.
For example, they may consider your:
- Industry experience
- Business ownership history
- Management experience
- Personal financial position
- Track record within the business
This can be particularly relevant when you’re operating a relatively new business or seeking finance to fund a significant expansion.
How Can You Improve Your Business Loan Application?
Preparation can make a significant difference when applying for business finance.
Before approaching a lender, it can help to make sure your financial records are current, understand exactly how much you want to borrow and have a clear explanation of how the funds will be used.
It’s also worth understanding your existing debts and having realistic forecasts where they are relevant to the application.
Most importantly, consider your lending options before submitting multiple applications.
Every lender has its own policies, lending criteria and appetite for different types of business finance. The lender you already bank with isn’t necessarily the only or most appropriate option.
How a Business Finance Broker Can Help
Finding business finance isn’t just about finding a lender willing to approve the loan.
It’s about finding a lending structure that makes sense for your business.
At Crafted Capital, we take the time to understand your business, what you’re trying to achieve and the financial position behind it. We can then explore lending options from a range of lenders and help you navigate the application process from start to finish.
Whether you’re looking to purchase equipment, improve cash flow, acquire commercial property, refinance existing debt or fund your next stage of growth, we’ll help make the process clear and straightforward.
Based in Port Macquarie and servicing businesses across the Mid North Coast and beyond, Crafted Capital brings extensive lending experience across business banking, commercial banking and finance broking.
Looking for a Business Loan?
If you’re considering a business loan or commercial finance, getting the structure right from the beginning can save a lot of time and frustration.
Talk to Crafted Capital about your plans and we can help you understand your borrowing options, prepare for the application process and find a finance solution tailored to your business.
Ready to discuss your business finance options? Get in touch with Crafted Capital today.
Find out more about working with Crafted CapitalThe information in this article is general in nature and does not take into account your individual circumstances. Lending criteria, terms, conditions and eligibility requirements vary between lenders and loan products.
