What’s missing for many small businesses?
Before considering the lending criteria, lenders want to be sure that you have a few basics in place before you apply for a business loan, including business loan requirements.
The first is knowing where you stand financially. According to the Reserve Bank’s Access to Small Business Finance report (September 2018), 45 per cent of small businesses don’t use accounting software to prepare and update their financial records. Having clear and up-to-date financial records shows that you are serious about business and have a clear picture of the financial health of your business. If you’re one of the small businesses that don’t have up-to-date and accurate financial records, you’ll want to start using accounting software to meeting basic business loan requirements.
The lenders surveyed for the Access to Small Business Finance Report also highlighted that small business owners don’t understand the factors lenders use to assess creditworthiness. For example, if a small business owner has previously applied for multiple personal credit products, such as vendor finance or personal credit cards, their credit score will be lower. Given that the credit score and report are important factors in assessing loan approvals, it’s important to know what determines a credit score. Learn more from What is a Credit Score and How Does It Affect You and Your Business?
The third point brought up by lenders in the Reserve Bank report was that many small businesses do not pay their tax on time, effectively using this as a cheap form of finance. Many of these business owners don’t know that having ATO debt makes it more difficult to get a bank loan.
So before you apply for a business loan and the business loan requirements, consider these three factors first.
Typical business loan requirements
When approaching a bank, additional business loan requirements will include:
- Identification – this is one of the basic business loan requirements. The bank will want proof of who you are, so bring your driver’s licence, passport and other forms of identification.
- Financial statements – when you have accounting software and are keeping it up to date, it will be easy to create financial statements. Banks will usually want to see your Balance Sheet, Income Statement and Cash Flow Statement.
- Proof of personal income – lenders will want to know your financial situation so they will want two most recent tax returns and notices of assessment.
- Bank statements – the lender might want to see your most recent bank statements in hard or electronic copies. In addition, other statements that show assets and liabilities, such as credit card and business savings statements, are common business loan requirements.
- Business plan – business loan requirements often include a business plan for new businesses and start-ups. Writing a business plan will take some time, research and effort but it will show that you have a viable business that can repay the loan. Points that must be addressed in the business plan are the amount of funds needed and what they will be used for. Learn more in How to Write a Business Plan When Applying for a Business Loan.
- Collateral for secured loans – if your loan will be secured with collateral, be prepared with the information the bank will require for proof of collateral. This will include the value of the property and amount of equity you have in it. Find out more in What Types of Collateral Can You Use for Secured Business Loans.
Options if you don’t meet bank business loan requirements
If you don’t meet the business loan requirements to get small business loans from banks, there are other options available. Research conducted in 2017 highlighted that around 75% of SMEs are rejected for bank business loans. In addition, it can take up to two months to get an answer when you apply for a business loan.
Fortunately, alternative finance options are available. Some of these include asset-based finance, factoring, invoice discounting, and merchant cash advances.
Unsecured business loans are another form of finance that has been growing in popularity. Learn more about unsecured business loans from Moula.