Preparing a business loan application your bank will take seriously

A business loan is rarely declined because the business is bad. It is far more often declined, delayed or offered on worse terms because the application is incomplete, the numbers do not reconcile, or the lender cannot see how the money will be repaid. Credit teams are cautious by design. Your job is to make their decision easy.

This article sets out what Australian lenders generally look for and how to prepare.

Think like a credit assessor

Most lenders assess an application against a handful of questions, sometimes summarised as the "five Cs":

• Character. Your track record, credit history and whether you meet your obligations, including to the ATO.
• Capacity. Whether the business generates enough cash to make the repayments with room to spare.
• Capital. How much of your own money is in the business or the project.
• Collateral. What security is available if things go wrong.
• Conditions. The purpose of the loan, the industry and the wider economy.

Every document you provide should help answer one of these questions. If it does not, it is probably noise.

The documents to have ready

Requirements vary by lender and loan size, but a well-prepared application usually includes:

1. Financial statements for the last two to three years. Profit and loss, balance sheet and, ideally, notes. Accountant-prepared statements carry more weight than a software export.
2. Tax returns and notices of assessment for the business and often for the directors or owners personally.
3. Current-year management accounts, so the lender can see trading since the last financial year end.
4. Recent BAS lodgements showing turnover is consistent with the financials.
5. An aged debtors and aged creditors report, which shows how quickly you collect and pay.
6. A list of existing debts and facilities, including asset finance, credit cards and any related-party loans.
7. A cash flow forecast for at least the next 12 months, with the new loan repayments built in.
8. Details of the security offered, such as property, equipment or a general security over business assets.
9. A short written explanation of what the money is for and how it will be repaid.

Lenders may also ask for a statement of personal assets and liabilities from each director or guarantor.

Make sure the numbers tell one story

The quickest way to lose a credit assessor's confidence is inconsistency. If the profit and loss shows $2 million of revenue, the BAS lodgements for the same period should broadly agree. If the balance sheet shows a $150,000 loan from a director, it should appear in your list of debts. Before applying, check that:

• the financial statements, tax returns and BAS reconcile;
• the balance sheet reflects all loans and finance facilities;
• personal and business expenses are clearly separated;
• one-off items, such as a large insurance claim or the sale of an asset, are identified rather than left to inflate or distort profit.

Where profit has been reduced by items that will not recur, or by owner benefits run through the business, it is reasonable to show an adjusted figure, as long as each adjustment is explained and supportable.

Show capacity to repay

Serviceability is usually the deciding factor. Lenders typically want to see that earnings comfortably exceed debt repayments, often expressed as a debt service cover ratio. As an illustration, a business with $240,000 a year available to service debt and $160,000 a year of total loan repayments has cover of 1.5 times. Many lenders look for a buffer of that kind, though the exact requirement varies.

Your forecast should show:

• the assumptions behind revenue and costs, in plain terms;
• what the loan funds and how it lifts earnings, if that is the case;
• a sensible downside scenario, such as revenue 10% below forecast, and that repayments can still be met.

A forecast that only works if everything goes right does not reassure anyone.

Get your ATO position in order

Lenders increasingly check whether tax lodgements are up to date and whether there is tax debt. Overdue BAS or income tax returns, or an unmanaged ATO debt, can stop an application. If you have a debt, a formal payment arrangement that you are meeting is far better than an unexplained balance. Make sure superannuation guarantee payments for employees are also up to date: unpaid super is a red flag, and directors can become personally liable for some unpaid amounts.

Understand security and guarantees

Most small business lending involves security, and directors are commonly asked for personal guarantees. Before you sign, understand:

• what assets the lender can call on, including your home if it is offered;
• whether the guarantee is limited to a set amount or unlimited;
• whether a general security agreement covers all present and future business assets;
• how the guarantee interacts with other people, such as a spouse who co-owns the property.

Independent legal advice on guarantees and security documents is strongly recommended, and some lenders require it.

Explain the purpose clearly

A one or two page summary helps a lender understand the request quickly. It should cover what the business does, how long it has traded, who runs it, how much is needed, exactly what it will be spent on, and how it will be repaid. If you are buying a business, include the purchase price, how it was arrived at, how much of your own money you are contributing and the key terms of the sale. Our article on business funding options explains why matching the type of funding to its purpose matters.

Common reasons for delay or decline

• Financial statements that are out of date or unreconciled.
• Unexplained drops in revenue or profit.
• Personal spending mixed through the business accounts.
• Tax lodgements overdue or an unmanaged ATO debt.
• No clear explanation of how the loan will be repaid.
• Asking for the wrong product, such as an overdraft to fund a long-term asset.

A lender is not judging whether your business is good. It is judging whether its money will come back. Show that clearly and you are most of the way there.

Timing matters

Start preparing well before you need the money. Credit assessments can take weeks, valuations of property security take time, and lenders often come back with questions. Applying in a hurry, with gaps in the information, tends to produce slower answers and less favourable terms.

How we can help

We prepare financial statements, reconcile the numbers, build cash flow forecasts and help business owners present a clear, consistent case to their lender. If you are planning to borrow, contact us early, or read more about our accounting services.

This article is general information only and does not take into account your circumstances. It is not financial product advice. Speak to a qualified, licensed adviser before acting on it.