On this page
- Choosing a loan you need
- Improve your loan approval chances
- Risk assessment
How to get a business loan
When applying for a business loan, it's essential to prepare a detailed business plan and fully inform the lender about your proposed venture. This information helps the lender to provide you with the right type of finance and advice.
Deciding that your business needs a loan is only the first step. There are a number of things to consider before you approach a lender:
- how much do you need to borrow?
- what type of loan will you need?
- how long will you need it for?
- can the business afford to repay the loan, interest and any one-off or ongoing fees that come with the loan
- what security can you offer the lender and how this affects the interest rate offered.
Online repayment calculators are a good tool in researching options but make sure you take the following into account:
Access to funds you borrow
If you need to access the funds on a semi regular basis to help with cash flow to keep the business operating while waiting for your customers to pay for goods, 'at call' loans such as an overdraft or line of credit are designed for this purpose. However, if you need the funds to buy a new business or equipment to expand your existing business you will need the funds 'upfront'. This is also known as a ‘fully drawn advance’ and provides you with the entire loan amount all at once.
Loans provided upfront will need a portion of the loan plus interest paid back at regular intervals. The repayment amount will depend on the term or length of the loan. To determine the loan term suitable for your business you will need to calculate how much you can afford to service the loan. Be aware that the longer the loan term the more total interest you will pay. Loans that are at call have no fixed terms.
This is the average amount of an overdraft or line of credit that is used at any one time. For example, you may wish to have an overdraft limit of $20,000 to provide money for the occasional big expense, but usually you won't use more than $5000 of that credit limit on average. So in this case $5,000 is the level of ongoing funding you need.
When applying for an overdraft limit, things to watch out for are:
- higher the overdraft amount higher the fees
- clauses where the lender can demand repayment of the whole loan at any time.
The choice of rate will affect the stability of repayments, overall cost of the loan and the loan features available. With a fixed rate loan the lender bears the risk of interest rate moves, while with a variable rate you will bear this risk. Ultimately, the choice of variable or fixed rates will depend upon how much free cash flow your business generates after you have paid all your expenses, including loan repayments. If your business has a low profit level, a variable rate loan repayment may rise beyond your ability to pay.
Loans can be secured or unsecured by various types of assets, including residential, commercial, rural property or business assets. Alternatively, some loans are unsecured by any asset. Generally the less you provide for security the higher the interest rate will be. Be aware the lender has the legal right to seize any property or asset you offer as security if you can't repay a loan on time.
There can be fees which can make a loan less attractive than it first seems. These include one-off fees such as establishment/application fees, exit/discharge fees and early termination fees or regular fees such as service fees or line/credit advance fees. The Business Loan Finder tool includes the cost of set-up and ongoing fees in the average monthly repayment to give you a better idea of the true cost of the loan.
The information provided here will provide you with a range of possible finance options. It is important to seek advice from your accountant or business advisers before approaching a lender for a loan.
Tip: Use our below Cashflow forecasting template to plan your cash flow and work out how much you need to lend.
Lenders will ask for a lot of in-depth information about the financial history of the business. It's also important for you to create a convincing and detailed business plan which should include a profit and loss budget and cash flow forecast. The information you use to build your business plan may also be needed by the lender to assess your project. This includes both the past and future plans for your business, the people working in it and the market itself.
The outcome of your application is strongly influenced by how well your proposal is researched and how well it is presented.
Banks and other lenders will look at your business's risk profile when considering your loan application. Understanding what lenders look for and what they consider risky will help you present your business in a favourable manner.
As a general rule, lenders look for:
- the level and nature of your security (what you're offering to give them if you can't repay the loan)
- your ability to make regular loan repayments (cash flow risk)
- your ability to ultimately repay the debt (business risk), including any other debts you might already have.
You need to be able to assess the level of cash flow or business risk in your specific circumstances. A projection of the cash requirements of the business is most important to a lender, as it is the actual cash left after expenses that will repay the loan, not income. It also shows you are an effective manager.
A lender's perception of risk
The following factors can influence your lender's perception of risk. If a number of these areas apply to you and your business you may need to consider another source of finance.
- start up businesses incorporate financial, business and management risk
- lack of security
- lack of business history
- industry sector, factors will include levels of competition, barriers to entry, profitability profile and current economic conditions
- highly seasonal businesses, for example swimwear and agriculture. You'll need to demonstrate how you'll deal with cash flow pressures in the off season
- lack of planning, market knowledge and finance skills
- poor credit history.
For more details visit the Guide to managing your tax debt on the ATO website.