You need to clearly outline why you want the loan and the business benefit of getting the additional funding.
This is important for the lender as they may be reluctant to issue a loan if the purpose is for funding operating losses or a luxury purchase for the business owner.
Examples of the loan purpose include:
- Funding capital expenditure such as plant, equipment, vehicles, property and improvements.
- Increased working capital resulting from growth or to support increased stock holding.
- Replacement of existing equity with debt.
- Succession planning to provide an exit strategy for family members.
- Acquisition of another business or part of business
- Research and development or commercialisation stage
- Expanding distribution or developing new markets
If the loan is to buy an asset (i.e. equipment or property), or for a contracted service (i.e. IT support), provide the lender with all the important documentation you have collected relating to the purchase.
You should state when the funds will be needed and when you expect to be able to repay them. Businesses often underestimate how long it can take a lender to process the application and this may have a negative impact on your business if the funds are not ready when you need them.
Loan amount
Loan amount
How much you need depends on you and your planning. It is good practice to revisit your business plan when key elements of your business change.
In order to determine the total amount of funds required, you will need to prepare a cash flow forecast. Prepare this forecast as if the loan has been successful. It should cover the expected duration of the loan and when it will be drawn down.
Don’t forget, there will be a number of costs associated with the loan.
Upfront costs can include:
- Establishment fee
- Guarantee fee
- Legal fees
- Valuation fees
Ongoing fees can include:
- Half-yearly loan charges
- Interest (can be charged monthly, semi-annually, annually)
- Transaction fees (charged every time the loan funds are accessed)
- Default fees.
Make sure these costs are included in your cash flow forecast to ensure you will have adequate funds to cover all costs.
Term of the loan
Term of the loan
Through your planning, it will become obvious how long you will need the funds for. The type of loan is an important factor in determining the length of the loan.
You can find out more about the different types of loans in the Before you apply section of this site.
Servicing the loan
Servicing the loan
It’s vital that you demonstrate to the lender that your business has sufficient cash flow to make the regular loan repayments, including all associated costs. A good understanding of your financial statements and cash flow forecast is important.
You must make a strong case on how the forecast cash flow will support the repayment obligations of the loan within the allocated time frame. Reviewing the financial ratios on your forecasted profit and loss and balance sheets also provides information on the expected profitability and financial health of your future business operations.
Security for the loan
Security for the loan
For most loans, lenders will require security or ‘collateral’ so that if the business is not able to repay the loan, they can liquidate the security items to repay the outstanding amount. Make sure you know what security you are prepared to offer as collateral.
It is important that the security offered matches both the type of loan being made and the lender’s perception of the risk associated with the loan application. For example, where the loan is for a medium term of three years, then stock would not be acceptable as it is a short-term asset. More appropriate security would be equipment or property that has a valuation in line with the loan over a lifespan of more than three years.
Include the following information about the security available:
- Description
- Proof of ownership
- Purchase date
- Current valuation
- General condition
- Photos (if relevant)
- Other relevant information
