Business Loan

In the business world, a business loan is the borrowing of money from a lender to pay for expenses related to the operation, such as insurance rates, advertising, depreciation, employee benefits, taxes, utilities, payroll, marketing expenses etc. Startup expenses can be covered by this amount of capital. Depending on the lender's terms and conditions, the loan is repaid with interest.

What Makes Me Eligible For A Business Loan?

Checking your eligibility before applying for a business loan is always beneficial since it informs you of your chances of approval or denial. A variety of factors are considered to determine the risk of an applicant, including their profile, financial history, repayment history, credit score, and business stability. Different lenders have different eligibility criteria for business loan applications. However, the eligibility criteria commonly include

1. Business Registration Number

Most lenders require businesses to have an ABN (Australian Business Number) or ACN (Australian Company Number). An ABN identifies your business from all others. It also enables the Australian Taxation Office to track company activities and taxes. Meanwhile, you get an ACN from Australian Securities and Investments Commission(ASIC) if you register your business as a company.

2. Time in the Industry

When lenders check your time in the industry, they want to know how long your business bank accounts have been open.

3. Business Revenue

The required business earnings depend on the type of business loan you apply for. Standard-term loans may require a minimum revenue of $200,000 per annum while those that finance small businesses usually require an annual revenue of at least $50,000 to $100,000.

Business and Personal Credit Scores

Good credit scores are essential to convince lenders that you can manage your finances wisely and repay your debts responsibly. The standard business credit score ranges from the lowest 0 to the highest 100. Aside from your business’ credit score, your credit score as a borrower is also factored in. The most popular personal credit scoring model lenders use is the FICO Score model which ranges from 300 to 850. You need to get at least a FICO score of 650 to get approved for a business loan with a decent interest rate.

5. Tax Debt

You can get denied for a business loan if you owe money to the Australian Taxation Office. ATO can also disclose your business’s tax debt information to credit reporting bureaus which negatively damages your credit score and reduces your chances of getting approved for future business financing. To reduce the risk of lenders declining your application based on your outstanding tax debts, settle them first before seeking business financing.

Business Loan Requirements

Business loans require supporting documents to prove your eligibility. Your business plan, financials, and legal documents are all part of this process.

1. Business Plan

A comprehensive and interesting business plan is essential when seeking financing from business lenders. Your business plan is a written document of your business goals, strategies, sales, marketing and financial forecasts which maps out the details of your current and projected financials within a specific timeframe. This will give your lenders more confidence in your business which increases your chances of loan approval.

2. Proof of Identification

You will be asked to provide your identity when applying for any loan.

• These identification documents include your birth certificate, driver’s license, passport and other papers that bear your full name, address, photo and signature.
• You must provide your ABN/ACN and business licenses for your business identity. You also need to present your trust deed, partnership agreement, company registration, commercial leases and articles of incorporation.

3. Personal and Business Bank Statements

Your personal and business bank statements help lenders to assess your current financial position. Some lenders also require other financial documents that show your assets and liabilities like credit card and business savings statements.

4. Proof of Income

Lenders require documents proving your income to assess your financial capacity to repay the loan. These include your two most recent individual tax returns and ATO notice of assessment.

5. Financial Statements

It consists of a balance sheet and statements of income and cash flow. They may also include your latest tax returns, business activity statements and self-managed super funds related to your business.

6. Collateral

If you’re applying for a secured business loan, you need to pledge a valuable business or personal property as collateral. These assets can be your invoices, equipment, vehicle, real estate or your business entity itself.

Unsecured Business Loans

Unsecured loans don't require collateral like equipment, inventory, or real estate to be approved. There are unsecured loans for businesses that can be obtained without pledging any assets as collateral. Cash flow and the creditworthiness of the borrower determine the loan amount. Start-ups and emerging businesses can use these loans for small-scale operations with short trading times and no security required.

PROS:-

• No need for security.
• Quickest access to funds.
• No risk of losing any assets owned.
• Loan sanctioning requires bank statements for the last six months, which reduces document approval rates.

CONS:-

• Higher interest rates are charged.
• A loan is offered for a shorter life span.
• The amount you can borrow is usually lower.
• If the loan is repaid before its maturity date, some lenders may charge an early repayment penalty.

Secured Business Loans

Securing a business loan involves pledging an asset as collateral or providing a personal guarantee. The lender can claim a specific piece of collateral if the loan is not repaid. As secured loans present a lower risk to lenders, borrowers may be able to enjoy lower interest rates.

PROS:-

• Lower interest rates are charged.
• A higher loan amount can be obtained.
• A loan is offered for a longer life span.
• Easier to obtain with poor credit.

CONS:-

• Potential loss of assets.
• Credit damage.
• Need to have security to get a secured business loan.

Difference Between Secured Business Loans And Unsecured Business Loans?