You may have seen the ads for business loan providers highlighting the minimal requirements to qualify for one. These providers are usually non-banks. What they won’t show in their advertising is their interest rates.
The reason for this is simple. They know that businesses that apply with them probably won’t qualify for a bank business loan so an interest rate of 25-48% p.a. is not uncommon in this sector.
What the above are selling is pain-free borrowing and they’re hoping you don’t care about the price.
Before you jump off the above ledge, let’s see if you qualify for bank lending.
Here’s a quick list of what most bank lenders will require:
- A group structure diagram showing ownership involving persons, trusts, companies and any other entity.
- A statement of position showing assets and liabilities of the business owners.
- 2 years of financial statements. These will need to be prepared by your accountant.
- Tax portals for the borrowing entity and any other entity that will be involved. If their are outstanding taxes to be paid, the bank will require these to be paid first.
- Personal guarantees of the director(s)
- personal tax returns (2 years)
- security – if the security is property (and it usually is) a valuation will need to be done – which the bank will arrange and charge the cost to you (unless it’s a mortgage over residential property).
- A credit check. If you have any disputes with creditors (like phone companies or any other creditors), you will need to settle these to have them taken off your credit record. If you have settled them, you will need evidence that you have. A bank will arrange a credit check once you’ve signed a privacy consent form.
- If you have wound up a company voluntarily, ensure you have documentation stating that you are not liable for any ongoing disputes (usually your accountant or lawyer can arrange this).
- Company searches – the bank will arrange this to ensure that you are a good corporate citizen and you pay your bills as and when they fall due. If you have a few black marks, you will need to have a good explanation along with accompanying evidence.
- Debtors List. This is to ensure that you collect what is owed to you regularly and that your customers aren’t using you to fund themselves. If the bulk of your debtors is over 90 days, you will need an explanation (it may be an industry norm for example). But if your goods are being used immediately (like food) and you’re not getting paid for 3 months this may cause you problems.
- Creditors List. This is to ensure you don’t have any items that may come back and haunt the bank (like pending legal action because you haven’t paid your bills).
- 12 months of bank statements – so that the bank can check what you’re/we’re telling them adds up.
The above will allow the bank to get started with their assessment of your ability to run your business and therefore borrow. There will be other requirements that may be specific to your business loan. Such as construction specific requirements or acquisition finance. Each transaction and industry will have it’s own set of criteria that generates a different list of information required by the banks.
Don’t let the onerous amount of information put you off. Most of the above should be at your fingertips and the rest can be easily sourced.
Why? Well, if you’re a small business you probably don’t have access to all of the financial and strategic disciplines that a bank has access to. Use this process as a learning experience to impose disciplines on your business.
If that doesn’t convince you then perhaps the price will. Our last three loans that we arranged from a bank achieved a price of 3.9% – 4.7%. That’s a far cry from 25%.
If you think that once you get the loan you can rest easy, you haven’t been paying attention.
Unlike a home loan – which is approved once and forgotten (as long as you make the regular repayments) – a business loan is reviewed each year. You may also be required to provide quarterly, half-yearly or annual financial statements to show that you comply with various conditions (called covenants) which the bank has inserted into your business loan documentation. Further, you may be required to make various declarations (also in your business loan documents).
So if you think your business can’t cope, maybe the above is not for you. But if you’re willing to evolve into a disciplined business who’s on top of their creditors, debtors and finances in general, we can help you get the right business loan and banker to suit your business.