If you are thinking of going for a business loan, don’t leave it too late to tell us about your plans – sometimes the first time we know a client is looking at getting finance is when they ask us to send financial statements through to their bank. This can be too late for us to help ensure that their business is in great shape when you want to borrow. Additionally, we can help connect you to lenders that we know won’t waste your time and money or even worse, reject you.
Banks have tightened up their lending to the point that if your business is leasing your property from you or your trust (a common setup), it is not enough to demonstrate that you have been paying a commercial rent from your business to yourself/your trust. Banks ignore this now – what they want to see is that, based on your salary and the profits of your business, you are able to service the loan. Another good tip is to ensure that your business is always paying you a commercial rate as a salary by considering what it would cost to replace you. If your business is struggling to pay you what you’re worth and make a profit of at least 10% of your sales figure (and if this is you, then please talk to us!), then banks, under the current climate, may reject your finance application. Below are the main things a bank will check before they agree to finance you a loan.
When a small-business owner requests funding, lenders almost always check the owner’s personal credit, so having a good personal credit score is essential. Building great credit for the business itself is also very useful when trying to get a good business loan.
There are ways to check your credit rating and fix any issues before your complete your finance application. Sometimes the problem is a clerical error that is easily fixed, saving you headaches down the road.
Cash flow and income
Lenders look at the profit of a business when assessing its risk. The higher a business’s cash flow and income, the better the chances it has of getting a loan.
Age of business
New businesses often have difficulty getting funding because most lenders only lend to businesses with a track record of at least two years
Current amount of debt
The other part of the debt-to-income ratio is debt. Businesses and borrowers with too much debt will have difficulty getting new loans.
Lenders view debt backed by things of value as less risky, so collateral-based loans can be easier to get and have lower interest rates.
During the loan approval process, lenders assess the risk of your type of business. Some industries are easier to get loans in than others.
Other things that may affect your application:
- Your social media profiles – banks can refuse lending based on ‘character’ and sometimes your social media is the problem
- If you have credit cards that you are keeping ‘just in case’, remember that the unused portion is counted, so consider reducing your limits or canceling credit cards prior to making your application
- Your postcode! – yes, sometimes this can go against you, but barring moving, unfortunately there’s not much you can do about this one
We’re always available to help you get your business in the best shape before you start applying for a loan, so you have a better chance of getting financed. Contact us if you have any questions or need help with your business finances.