The Complete Guide to Getting a Business Loan
Written by Bindi Gethen
In the challenging world of business, few things induce as much stress and worry as the search for adequate funding. This scenario might seem familiar: You have a vision, a well-thought-out business plan, a motivated team, and an insatiable passion to succeed. Yet, all these seem to be held back by one significant hurdle – the need for capital.
So how do you get a business loan? First, you’ll need to prepare all necessary documents and assess your eligibility. Next, outline your financial situation and consult a finance professional. Lastly, determine your loan of choice. Keep in mind that each step can seem more gruelling than the last and that you’ll need to prepare yourself for rejection.
How Do You Get a Business Loan?
1. Prepare All Necessary Documents
You see, financial institutions are institutions of trust, and the foundation of trust is transparency (which is evidenced through documents).
Think of your documents as your business’ identity card. They tell a story of who you are, what you do, and how well you do it. These include things like your financial statements (2 years’ worth), tax returns, business plans, and bank statements.
To put it in context, you might be running a highly profitable venture, but if your financials are in disarray or you have incomplete tax records, your credibility may be questioned. Conversely, even if your business is going through a rough patch, meticulous record-keeping can indicate good management practices, making you a more attractive loan candidate.
2. Assess Eligibility
Different loans and lenders have different eligibility requirements. Eligibility requirements range from your credit score to the age of your business, from your annual revenue to your business industry. Meeting these requirements doesn’t guarantee that you’ll get the loan, but failing to meet them guarantees that you won’t.
Credit scores, both personal and business, play a pivotal role in your loan application process. These scores serve as a quantified measure of your credibility and repayment ability. If you have a high score, you’re golden. If it’s low, you’ll have to either find a lender who is willing to work with your score or take steps to improve it.
Other factors that are often considered are your annual revenue and the length of time you’ve been in business. Generally, the higher your revenue and the longer you’ve been in business, the better your chances of getting a loan.
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3. Outline Your Financial Situation and Business Goals
Starting with your financial situation, you need to take stock of your current assets and liabilities, income and expenses. This financial snapshot serves as a barometer of your ability to repay the loan.
However, it’s not just about your present situation. You also need to project your future cash flow, taking into account your growth plans and any potential financial challenges.
Moving onto your business goals, these are your destination points on your business journey. They can range from launching a new product or service, expanding into new markets, or increasing your operating capacity. These goals should be SMART — Specific, Measurable, Achievable, Relevant, and Time-bound.
Your financial situation and business goals aren’t independent; they’re interconnected. If your business goal is to expand into new markets, your financial situation should support this. If it doesn’t currently, you need to show how the loan will facilitate this expansion and how the increased revenue will service the loan.
Pro tip
Lenders are not just investing in your business, they're investing in your vision.
4. Talk to a Finance Professional
Entering the world of business loans can often feel like navigating uncharted territory. Even with thorough research and meticulous planning, the complexities of financial jargon, interest rates, and various loan types can be daunting. That’s where finance professionals come in.
Finance professionals – like bookkeepers, accountants, and business consultants – bring a wealth of experience and a breadth of knowledge that’s hard to match. They understand all the complexities of the business ecosystem and can significantly increase your chances of securing a business loan.
One key area where a finance professional can offer invaluable guidance is in understanding the different types of loans available. They’ll help you find the one that best fits your business goals and financial situation.
Another crucial aspect is the cost of the business loan. This isn’t limited to the interest rate alone; it also includes other fees and charges associated with the loan. A finance professional can help you understand the true cost of the loan, allowing you to make an informed decision and avoid any unpleasant surprises down the line.
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5. Determine Loan Amount and Loan Type
The loan amount should be based on your business needs and your ability to repay. It’s a balancing act. On one hand, you want to ensure you have enough capital to achieve your business goals. On the other hand, you want to avoid overextending yourself, leading to a debt burden that hampers your business growth.
When it comes to loan type, there’s no one-size-fits-all. Business loans come in various forms, each with its unique features and benefits. There are term loans, lines of credit, equipment financing, invoice financing, and more.
A term loan, for instance, is a lump sum you borrow and pay back with interest over a specified period. It’s ideal for long-term investments like purchasing real estate or equipment. A line of credit, on the other hand, gives you access to a pool of funds that you can draw from as needed. It’s suitable for meeting short-term working capital needs.
6. Apply for the Business Loan
This is the point where you put your best foot forward, presenting a compelling case to the lender. It’s essential to approach this process with the utmost attention to detail, ensuring that all the information you provide is accurate and all the necessary documents are in order.
The loan application process typically involves filling out an application form and submitting it along with your supporting documents. Keep in mind that any discrepancies could lead to a delay or rejection of your application.
Once you’ve submitted your application, it’s time to wait. The lender will review your application, verify your information, and assess your creditworthiness. This process could take a few days to a few weeks, depending on the lender and the type of loan. Be patient.
What If My Business Loan Is Declined?
Rejection is an experience that we’re all too familiar with, yet it never gets easier to handle. Having a loan application declined can feel like a crushing blow. However, a declined loan is not the end of the road. It’s a setback, yes, but also an opportunity to learn, refine, and bounce back stronger.
When your business loan is declined, it’s natural to feel disappointed, but it’s important not to let disappointment cloud your judgement. The first step is to understand why your loan was declined. Lenders are legally required to provide an explanation, and understanding the reasons behind their decision can provide valuable insights for future applications.
Typically, reasons for loan declines can include poor credit history, inadequate cash flow, lack of collateral, a new or unproven business, or even a lack of preparation in the loan application process. Identifying the reason for the decline is the first step towards addressing it and improving your chances in the future.
Once you’ve identified the reason for the decline, you can start formulating a plan to address it. If it’s poor credit, you might need to work on improving your credit score. If it’s a lack of collateral, you might need to consider different types of loans that don’t require collateral. If it’s inadequate cash flow, you might need to review and adjust your business model to improve profitability.
Remember, a loan decline is an indication that something in your application didn’t meet the lender’s criteria. So if one lender says no, it doesn’t necessarily mean that all lenders will. Different lenders have different criteria and risk appetites, so it might be worth exploring other options.
Pro tip
You could also explore other forms of financing such as grants, crowdfunding, or angel investors.
Weigh All Your Options With The Bookkeeping Studio
The world of business loans can be a bloody mess. It’s like standing in the middle of Sydney’s CBD during rush hour – noisy, confusing, and everyone seems to know where they’re going except you. We get it. But here’s the thing: At The Bookkeeping Studio, we’ve mastered this chaos.
Listen, you’re brilliant at running your business. That’s your gig. Our gig? It’s making sure you don’t get screwed over by some dodgy loan with nasty terms hidden in the small print. We look at your business, we weigh the options, and we lay it out for you – no bull, no sugarcoating. We’ve got your back. Learn more about what we can do for your business today.
Hey, my name’s Bindi Gethen! I’m the founder of The Bookkeeping Studio in Australia. With over 15 years of experience in the industry, I have a deep understanding of the challenges that small and medium-sized business owners face when it comes to managing their finances.
I am passionate about empowering my clients with the financial information they need to succeed. My team and I pride ourselves on our commitment to exceptional value, accuracy, and confidentiality. Our virtual bookkeeping services include payroll, budgets, and management reporting, among others.
Not to toot our own horn, but we can assure you that you won’t find a bookkeeping partner like us anywhere else in the Southern Highlands.
