What Lenders Look for in Your Business Loan Application

For many small businesses, applying for a loan can be stressful. You may need the funds quickly to avoid running into cashflow troubles or perhaps, the funding will play a crucial role in growing your business. But no business owner wants to waste their valuable time and resources applying for a loan they might not receive.

Once you apply for a loan, your business will undergo a ‘credit evaluation’. The lender will then decide whether they are willing to loan your business money based on current economic conditions and their assessment of your creditworthiness. Basically, this means they want assurances of your ability to repay the loan, plus interest, on time.

Understanding how banks and online lenders assess your creditworthiness and overall loan application can greatly increase your chance of success and the speed of your loan process. That’s why we want to help break down some of the most important factors.

5 factors that matter most in a business loan application

There are a five fundamental factors that lenders will focus on when assessing your application. These are often referred to as ‘The 5 C’s’.

1. Character
   Lenders will try to assess your integrity as well as your willingness and capacity to pay back previous debts. In a sense, they will look at your past to determine whether or not you will be a good investment in the future. In this stage, lenders will look at a number of factors including:
   • Your personal and business credit history, particularly whether you’ve consistently made late payments, or had a delinquent account
   • Your tax returns, financial history and ability to organise and manage your finances
   • Whether you’ve paid off previous loans or debts by other lenders
   • Other factors such as your job stability, the success of previous business ventures, and whether you’ve been involved in any legal issues that might impact your business

   Applicants will want to demonstrate qualities such as stability, consistency and reliability to give lenders greater peace of mind that the loan will be repaid on time. Providing accurate financial records can be useful in demonstrating these qualities.

2. Capacity
   Your past can only tell lenders so much about what to expect in the future. That’s why they’ll also evaluate your current capacity to repay the loan. That means looking at how your business will generate revenue and how much revenue is expected.

   An established business can demonstrate this through their recent Profit and Loss Statements. A new business might not have a proven track record of positive cash flow and should include company projections, backed by data. Lenders will also look at whether you have other outstanding debts, your dependents and living expenses as these factors can impact a business owner’s ability to repay a loan.

3. Collateral
   Collateral is typically offered as an extra assurance for lenders. In the event that you are unable to make your repayments, the bank can potentially seize the collateral. Collateral is not required for an unsecured loan, but it can improve your chances of being approved or help reduce your interest rates. If you’re not sure what qualifies as collateral, be sure to check out our guide.

   Collateral will have to be assessed to determine its current and future value. Lenders will want to know that the collateral has a similar value to what they are lending and that it can maintain a high level of value throughout the duration of the loan. You may be required to take photos, provide details and obtain an up-to-date valuation of the collateral.

4. Capital
   Capital includes your business’s assets and liabilities. These might include things like specialized equipment or machinery your business owns, your products and inventory or buildings or other infrastructure. Lenders are interested to know what kind of capital you have as the assets can potentially be sold off in the event you are unable to repay the loan.

   They will consider, however, how easily the assets could be sold or liquidated and how much return they would likely see. The assets could depreciate in value, making it harder for a lender to recoup its losses.

5. Conditions
   Loans will be tailored to your business, so the conditions are likely to vary. Some of the factors to consider include:
   • The loan amount – It may differ from the amount you were originally seeking.
   • Interest rate and fees – A riskier investment for the lenders usually means higher rates for your business
   • Repayment schedule – How long it will take to repay the loan and how frequently you will make your repayments
   • Other factors – Lenders may set other requirements or conditions in order for the loan to be approved.

   Remember, if the terms don’t work for you continue to shop around.

Information to have ready before you apply for a business loan

To expedite the loan process, it is best to have key personal and business information at the ready, including:

• A valid form of ID, such as a driver’s license or passport.
• Information about your business including registration details, ABN
• Evidence of your financial history including bank statements, sales records, profit and loss statements etc.
• Business plan communicating your business model, demonstrating your understanding of the market and validating your goals with data
• Explanation of the purpose of the loan and how you intend to use the funds
• Your recent tax returns

What type of business loan do you need?

The most important thing to understand when looking at whether you are likely to be approved for a business loan is the type of loan you want. There are a variety of different loan and funding options, so it is important that you select the type that is right for your business.

A key consideration in understanding the likelihood of receiving a loan is to know whether you are applying for a secured or unsecured loan. Secured loans are typically offered by traditional financial institutions and often have stricter application requirements. One of those requirements is providing collateral to secure or support the loan, such as property, accounts receivable or inventory. An unsecured loan is supported only by the borrower's creditworthiness. There is no collateral to put forward but there are other requirements that will impact your application.

Let’s look more closely at both types and how the applications might differ.

Applying for a secured loan

Secured loans can be beneficial to businesses of all shapes and sizes but the most successful applications are likely to come from more established business, particularly those with value assets and strong credit history. Secured loans usually offer higher loan amounts, with lower interest rates, and longer loan terms, so lenders want more assurances that businesses will be able to repay on time. That means they will have stricter business requirements to meet.

For instances, lenders may require that you have:

• Operating your business for at least two years
• Annual revenue of at least $50,000
• An asset to secure the loan, usually residential or commercial property
• Income at least 1.25 times greater than your total expenses
• A detailed business plan

Lenders will differ on their exact loan requirements, so it is best to double check the requirements before applying. If you don’t think your business will meet the stricter requirements of a secured loan, you might want to consider an unsecured loan.

Applying for an unsecured loan

There are a few ways that an unsecured loan application can different from that of a secured loan. It is generally easy to apply for an unsecured loan online and applications usually see faster approval times. The requirements are also less strict, which enables more small businesses to apply.

For instances, lenders may require that you have:

• Business registration
• Operating your business for at least six months
• Annual revenue of at least $50,000
• Evidence of your credit history
• A detailed business plan and explanation of how you intend to use the funds

Lenders will differ on their exact loan requirements, so it is best to double check the requirements before applying. If you’re not sure yet which loan is best for you, you can read more about the most popular types of business loans.