This page steps you through the process of applying for a loan and highlights the things you need to do and the information that you need to provide.
It’s important to remember that a bank doesn’t know your business like you do, so a comprehensive business plan is vital when applying. The plan should include market analysis, robust forecasting and the competitor market.
It’s also a good idea to get some advice, or use an adviser to assist in your loan application.
Key tips
- Prepare a business plan.
- Get some advice.
- Don’t believe the myths, go to the source and ask your bank directly. Don’t be afraid to talk to your bank. See them as a business partner that can add value.
- If you run into trouble talk to your bank… they can assist.
When preparing the loan application consider what the potential lender needs in order to assess your application.
You will need to answer the following questions in the loan application
- What is the purpose of the loan?
- How much do you want to borrow?
- When will the funds be required?
- How long do you need to borrow the funds for?
- How will the loan be repaid?
- What is the risk to the lender?
Not every application will be approved, simply because the risk the bank is required to carry is too high, or because it believes the applicant cannot support the risk.
Banks are required to make prudentially responsible lending decisions by the Australian Prudential Regulation Authority (APRA). This means, for every loan application, a bank must consider the risks it is taking on and the risks the borrower is taking on, including a borrower’s ability to repay the loan. The more risk the bank takes on, the more capital it has to hold against a loan.
The 5 C’s
Character
This relates to the borrowers reputation, integrity and willingness to repay.
Factors lenders consider:
- Loan repayment history
- Savings history
- Stability (e.g. years in profession)
- Credit bureau history e.g. Equifax, CheckYourCredit.com.au (Illion, formerly Dun and Bradstreet), Experian Credit Report
Your loan application needs to answer these questions:
- Have you repaid your debts on time?
- Do you have a good history of saving?
- Do you have stable income/cash-flow/employment?
- Do you have a history of defaults, writs, judgements or bankruptcy?
Helpful information you can provide:
- Copies of all compliance related payments such as GST and tax returns
- Copies of bank statements for investments and savings
- Historical financial information
- Credit Bureau report
Collateral
This relates to the borrowers 'security' for the loan.
Factors lenders consider:
- Type of security (property/land/vehicle/etc…)
- Value and marketability of the security
- Security age, location and attributes
Your loan application needs to answer these questions:
- Do you have sufficient ‘security’ for the loan?
- Is the security for the loan acceptable to the lender?
Helpful information you can provide:
- Detailed security register providing purchase date, current valuation, photos (if relevant) and any other relevant information.
Capacity
This relates to the borrowers ability to repay.
Factors lenders consider:
- Income
- Debt obligations
- Living expenses
- Dependents
Your loan application needs to answer these questions:
- How much do you earn and is this sufficient to meet your repayments?
- How stable are your earnings – will you continue to be able to ‘service’ your debts?
- What are your plans should things change?
Helpful information you can provide:
- Budgeted Profit and Loss statement
- Cash flow forecast
- Risk management strategies
- Marketing strategies
Capital
This relates to the borrowers financial position.
Factors lenders consider:
- Amount of asset and liabilities
- Type / liquidity of assets
- Type / nature of liabilities
Your loan application needs to answer these questions:
- Are you in a strong enough financial position?
- Could you sell (liquidate) your assets if you needed to reduce debts and how long would it take?
Helpful information you can provide:
- Budgeted balance sheets for the next 3 years
Conditions
This relates to the lenders 'terms' of providing the loan.
Factors lenders consider:
- Repayment schedule
- Pricing (interest rate and fees)
- Conditions precedent (something that must happen before funding)
- Conditions subsequent (during the loan)
Your loan application needs to answer these questions:
- Do you understand what you may need to give your financier?
- Will you be able to meet all of the ‘conditions’ of the loan?
- Do you understand what may happen if you ‘breach’ a term of the loan?
Helpful information you can provide:
- Summary of loan terms and conditions in loan application
- Budgeted balance sheets for the next 3 years
