Business Loan Requirements You Need to Meet
Are you looking forward to boosting your working capital or updating your technological equipment with a business loan? Increase your chances of approval by meeting the business loan requirements.
Proper preparation makes all the difference when it comes to taking out a business loan, whether from a bank or an alternative lender. By arming yourself with accurate information and sufficient documentation, you can have a less stressful application process and get the funds you need fast.
General Eligibility Criteria
Different lenders have different eligibility criteria for business loan applications. Banks and other traditional lending institutions usually have more stringent standards while online lenders and fintechs are more lenient and less likely to dismiss you even if you have a less than stellar credit profile. However, the eligibility criteria commonly include:
1. Business Registration Number
Most lenders require businesses to have an Australian Business Number (ABN) or Australian Company Number (ACN). An ABN identifies your business from all others. It also enables the Australian Taxation Office to track your company activities and taxes. Meanwhile, you get an ACN from the Australian Securities and Investments Commission (ASIC) if you register your business as a company.
- It is wise to register your business first before seeking financing. You can easily prove that you are an established organization if you have a business registration and license within your area of operation.
- If you don't have an ABN or ACN, you can still get business financing through a Low Doc Loan. However, you need to prove your financial capacity to pay the loan as required by the National Consumer Credit Protection (NCCP) Act.
2. Time in the Industry
When lenders check your time in the industry, they really want to know how long your business bank accounts have been opened.
- Business term loans provided by banks and other large financial institutions usually require your business to be operating for around five years or more.
- Fintechs and online lenders that offer small business loans and revolving lines of credit may consider at least one year of business operation.
- Meanwhile, alternative lenders that offer invoice financing can approve your loan application if it’s been in operation for a minimum of six months.
3. Business Revenue
The required business earnings depend on the type of business loan you apply for. Standard term loans may require a minimum revenue of $200,000 per annum while those that finance small businesses usually require an annual revenue of at least $50,000 to $100,000.
- The rule of thumb is that the bigger the loanable amount, the higher the required annual business revenue to mitigate the risk of default.
4. Business and Personal Credit Scores
Good credit scores are essential to convince lenders that you can manage your finances wisely and repay your debts responsibly. The standard business credit score ranges from the lowest 0 to the highest 100. Factors affecting the scoring include your business’s credit utilisation ratio, payment history and how often you pay your bills.
- While there is no specific cutoff score, most lenders consider a business credit score of 80 or higher to grant the loan.
Aside from your business’ credit score, your personal credit score as a borrower is also factored in. The most popular personal credit scoring model used by lenders is the FICO Score model, which ranges from 300 to 850.
- To get approved for a business loan with a decent interest rate, you need to get at least a FICO score of 650.
5. Tax Debt
You can get denied for a business loan if you owe money to the Australian Taxation Office. ATO can also disclose your business's tax debt information to credit reporting bureaus. This negatively damages your credit score and hurts your chances of getting approved for future business financing.
- To reduce the risk of lenders declining your application based on your outstanding tax debts, settle them first before seeking business financing.
- Depending on the level of tax debt you incurred, you can choose to set up automated payment plans online, discuss a payment plan with the ATO or get a tax debt loan to pay your debt off in its entirety.
Typical Business Loan Requirements
If you are eligible for a business loan, you need the supporting documents to prove your claims. These include your business plan, as well as financial and legal papers.
1. Business Plan
A comprehensive and interesting business plan is essential when seeking financing from lenders or funding from investors. Some landlords and property managers also require it before leasing a property to you.
Your business plan is a written document of your business goals, strategies, sales, marketing, operations and financial forecasts. It maps out the details of your business, including your current and projected financials within a specific timeframe.
- When presenting to lenders, your business plan must clearly demonstrate how your business intends to use the funds and how capable it is to make enough profits to cover the ongoing business expenses as well as the new loan payments.
- This will give your prospective lenders more confidence in your business, which thereby increases your chances at loan approval.
2. Proof of Identification
You will be asked to provide your identity when applying for any loan, especially if you are a first-time borrower.
- These identification documents include your birth certificate, driver’s licence, passport, and other papers that bear your full name, address, photo and signature.
- If you are not an Australian citizen or a permanent resident, you can get a business loan if your visa allows you to start a business. Your loan term must also not exceed the length of your expected stay in the country.
As for your business identity, you need to provide your ABN/ACN and business licences. You also need to present your trust deed, partnership agreement, company registration, commercial leases and articles of incorporation.
- If you have a limited operating history, you may also need to provide your business' financial projections.
- Some lenders also require your resume that shows your relevant business experience.
3. Personal and Business Bank Statements
Your personal and business bank statements help lenders assess your current financial position. They may need your bank statements from the last three months or more in hard or electronic copies. Some lenders also require other financial documents that show your assets and liabilities, like credit card and business savings statements.
4. Proof of Income
To assess your financial capacity to repay the loan, lenders require documents that prove your income. These include your two most recent individual tax returns and ATO Notice of Assessment. If you have other sources of income aside from your business, present the supporting documents. For instance, present a rental statement if you have an investment property.
5. Financial Statements
Generally, financial statements consist of a balance sheet and statements of income and cash flow. They may also include your latest tax returns, business activity statements (BAS) and trusts or self-managed super funds (SMSFs) related to your business if there are any.
These records show all your income and expenses, assets, liabilities and net worth positions. Lenders use them to ensure that you can meet your existing expenses and future loan repayments.
If you’re applying for a secured business loan, you need to pledge a valuable business or personal property as collateral. These assets can be your invoices, equipment, vehicle, real estate, or your business entity itself. Some lenders may require borrowers to pledge both business and personal assets to secure a business loan.
Show documents that prove that you own the asset and that it is properly titled and unencumbered if you’re pledging any collateral. You must also provide the information that shows the value of the property and the equity you have on it.
Waiting Time for Approval
After submitting your loan application to a lender, the processing and background checking begin. The time it takes to get approved (or denied) after submission varies greatly between lenders and on the types of business loans.
The decision for traditional bank term loan applications, which require plenty of paperwork, may take from a few weeks to two months. Meanwhile, the approval decision for small business loans provided by fintechs usually takes within 24 hours because the processing is done online.
- Prepare for your business presentation. Before speaking with any potential lender, prepare your business plan, financial reports and other documents that can help convince them that your business will be successful. Rehearse your presentation so you will appear more confident on the actual presentation day. Practice answering possible hard questions by roleplaying an interview with an accountant or business adviser.
- Check the loan terms carefully. Compare business loan terms provided by different lenders. Check out why some offers are cheaper than others. Do they have higher fees or fluctuating interest rate? Are there too many hidden costs that you could have overlooked? If an offer sounds too good to be true, it usually is.
- Manage business loan rejection. Not all business loan applications get approved. If you get denied, ask feedback from the lender and work on improving your future business financing applications.
Positive Lending Solutions provides business loans across Australia. With access to dozens of premium lenders in the country, we can help you find the ideal loan product for you. Call us on 1300 722 210 or request a Quick Quote now.