What to consider before applying for a business loan

lady using calculator to work out a business calculation

The process of applying for and obtaining a business loan has long been seen as arduous, complicated and time consuming – and rightfully so. With little consideration for the stresses faced by small business owners, traditional lenders have historically pushed loans that do not fit the unique needs and wants of their smaller-scale clients. However, by arriving at the negotiating table better equipped with information about what’s suitable for your business and what you as an owner can offer a lender, your chances of obtaining a more equitable loan greatly improve. So, what should you consider before applying for a business loan?

Why do I need a loan?

Before engaging in the loan application process, it is crucial you understand what specifically you need a loan for. Are you looking to boost your cashflow and working capital? Or do you need to invest in new equipment? Perhaps you need to pay off existing debts and liabilities or are even looking to initiate ambitious expansion strategies. The purpose of a loan is generally the first thing a lender will want to know. Ensuring you have a clear, detailed understanding of how the loan will be utilised will allow potential lenders to design the most appropriate policy.  

How much funding do I need? 

Very rarely do small businesses walk away from the negotiating table with precisely the same amount of funding they intended on receiving. Often, we see applicants targeting loan amounts that disproportionately reflect their business’ turnover and security, causing lenders to view their applications less seriously. With consideration to what the purpose of your loan is, it is wise to construct a detailed budget forecast that encompasses all the costs of launching, running, or expanding your business. Examples of such costs include:

  • Tangible assets: building fit-outs, equipment, vehicles, inventory, promotional materials, platform development.
  • Recurring costs: wages, leases, utilities.
  • Hidden costs: rental bonds, business insurance, bank fees, website hosting fees, transport costs, work permits and authorisations. 

For new businesses, your early revenue will likely not be able to cover all these costs and more so it’s wise to be pragmatic about how much extra cash you will need to facilitate growth. Additionally, lenders may take a different view to your financial needs and so it’s important you include a buffer in your estimates. Make sure that the lower end of your buffer is still sufficient in providing enough capital for the loan to meet its purpose. 

What security can I offer?

Many newer businesses and startups are often looking for business loans while not generating clear profits. While this is often a deterrent for risk averse traditional lenders such as banks to provide funds to such entities, many alternate providers understand that it’s common for businesses to operate in the red while they consolidate their revenue streams and customer base. However, in both cases, it is important to be prudent about your personal financial health and the assets you can offer as security to secure a loan. While secured loans often provide higher capital at lower interest rates, you’ll need to either provide a cash deposit or use personal items such as property or vehicles to secure your loan. Offering such assets can improve your chances of obtaining a loan particularly if your credit health is less than optimal. Many unsecured loans on the other hand will use your personal financial circumstances, such as debt and income, to assess your loan suitability. 

Who are my potential lenders? 

Once you’ve built a clear picture of the loan’s purpose, how it will be used, and how your financial circumstances justify the loan amount, you’re ready to compare the available lenders. As a small business owner, you’re likely time-poor and so exploring lending options through a third party is often an attractive avenue to securing a loan. Finance brokers and funding platforms, such as Swoop, can do the heavy lifting in terms of comparing lenders against your unique circumstances to identify the most suitable funding options. 

We encourage you to find a provider that suits your needs. If you want to try Swoop, they have preferential rates for Australian Beany clients. Their platform gives access to hundreds of lending options in minutes with experts who can assist in the application process to ensure you have the best chance of securing a loan and getting back to growing your business as soon as possible!

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