When preparing to apply for a small business loan, several crucial factors require careful consideration. These include selecting the appropriate loan type, determining the exact amount of funds needed, gathering the necessary documents for the loan application, and evaluating your business’s ability to afford the loan.

At SmallBusinessLoansAustralia.com, we aim to assist you in mentally and physically preparing for the sometimes rigorous journey of obtaining a business loan. Our business loan tips, specifically tailored for first-time applicants, are easy to understand and implement. It’s not just about how to apply for a business loan or what you need to apply for one; it’s about making a decision that aligns with your business’s interests and serves your needs.

We also recommend familiarising yourself with our guide to good vs bad business debt.

Prior to Applying: Three Tips for Business Borrowing

1. Write down what you need and why

To secure financing that meets your unique requirements, you need to know exactly what you are looking for. Before you begin, the first step in preparing for a business loan is to ask yourself why you need to borrow money, how this funding can help your business generate more revenue, and whether you have any alternative financing options.

Some people and business owners borrow money for no reason at all. It’s the power of habit for people who have constantly been in debt all their lives, or – too busy to actually manage their finances, so they’re happy to artificially increase cashflow and live comfortably. Other business owners are simply throwing good money after bad into a business that won’t yield a return on investment. The act of writing down the precise purpose of borrowing money is perhaps the most crucial of all business loan tips because it requires business owners to be honest with themselves and justify taking a loan in a logical manner.

2. Write down how quickly you need the funds and how fast you can repay the loan

Speed is a big issue when applying for a business loan. If your business needs funds urgently, you may have to consider alternative lenders like Lumi and settle for a higher interest rate than you could have obtained with a bank. The speed of repayment also plays an important role. If you anticipate that your business will be able to repay the loan quickly, you might be willing to borrow at a higher interest rate as long as there are no early repayment penalties.

Nowadays, you don’t necessarily have to pay more for speed. New solutions such as the Cape card have emerged as the best online business bank account in Australia, providing interest-free cash flow injections for up to 30 days with a fast approval process (1-2 days).

3. Calculate and write down your monthly expenses and expected earnings to ensure you can repay your debt

It is crucial to make absolutely sure you will not default on a business loan because it will lower your business credit score and  potentially throw you into a debt spiral, forcing you out of business. What’s more, defaulting on a loan can cause significant mental strain and hinder your productivity in other areas. It is better to know your limit and avoid applying for a business loan that you simply cannot afford. Utilise tools, such as our business loan repayment calculator during the process to ensure accurate calculations.

Choosing on the Right Business Loan for Your Needs

If you are a DIY-type business owner or have a background in finance, you can navigate the tiring world of different lending solutions. However, without prior knowledge, it can be challenging to grasp the subtle differences between each type of loan, such as the various types of secured loan.

The first step is deciding between banks vs online lenders. Banks are slower, require more documentation, and are less likely to approve your application. In many instances, it also takes weeks before they decline or approve your business loan application. The primary advantage of using a bank is that the interest rate should be better (they themselves access cheaper funding from the RBA). Online lenders are instant, tech-savvy, easy to communicate with, transparent (at least the top-rated ones), and user friendly. However, the interest rates they charge can be substantially higher, especially for unsecured business loans.

Usually, the choice between applying for a business loan with a bank or an alternative lender comes down to necessity. Businesses that require cash fast and/or have bad credit are more likely to seek unsecured business loans from non-bank lenders. Other businesses may initially approach a bank but then realise they need collateral (security) for the loan.

Applying for a Business Loan with Private Lenders

When dealing with private lenders, the most important business loan tip for first-time applicants is that if you have collateral, such as assets or machinery (or if you plan to use the loan to purchase equipment, i.e. equipment loan), you can obtain a secured loan from a lender with a lower interest rate, similar to that of a bank. However, the type of asset, whether it is new or second-hand, and the age of the asset, can all influence the cost of the loan. And that’s before taking into account the circumstances of the borrower and their individual risk profile. For this reason, it is challenging to compile precise interest rates for each loan type or different lenders. Ultimately, you will have to apply to get a specific quote.

For this reason, seeking the help of a business loan broker can be official. They gather the necessary information, understand your needs and limitations, and offer the right type of loan while connecting you with relevant banks or lenders.

However, loan brokers typically charge a markup of 7%-17% of the loan, and there is a free-to-use alternative to consider. Online platforms such as Lend serve as brokering systems, connecting business owners in Australia with lenders. You can make your application below:

Use the form below to find relevant business loan offers by Australia’s top SME lenders. Access more than 50 lenders offering a variety of business finance.

Applying for a Business Loan with Banks

If you are applying for a bank business loan, you need to know how to prepare for a business loan with an archaic process. Be prepared with all accounting information, a comprehensive business plan, and a thorough explanation of how the funding will be allocated. Additionally, the bank will evaluate your business not only based on the data and projections you provide but also based on your character and their assessment of your ability to execute the presented business plan.

Given banks are notorious for rejecting a greater number of applications, particularly with regards to SMEs, it can be beneficial to test the waters with a number of banks. Though this should only be to the pre-approval stage. Making a formal loan application with multiple lenders in a short space of time will impact your business credit score.

Are Business Loans Regulated?

Business loans are mostly unregulated. Lenders that provide loans to consumers must have an Australian credit licence from ASIC and must be a member of AFCA. Lenders that only provide commercial loans are not required to have a credit licence and are not legally required to be a member of AFCA. That’s not to say all commercial lenders are not members of AFCA – larger lenders may have voluntarily registered. Back in 2018, market-leader Prospa removed unfair loan terms following an ASIC review.

As part of your preparation for a small business loan, it is of paramount importance to conduct your own due diligence of the lender’s you apply with. Browse lender reviews and learn more about their reputation in the market.

Understand the Terms & Conditions

Reading and understanding the terms and conditions before agreeing to a business loan is vital. It allows you to fully comprehend the rights, obligations, and potential risks associated with the loan agreement. By taking the time to review the terms and conditions, you can make informed decisions and avoid any unpleasant surprises in the future.

Here are some of the key areas to cover:

Interest rates and fees

Pay close attention to the interest rates, including whether they are fixed or variable, and any additional fees or charges associated with the loan. Some lenders present their repayment schedule with a factor rate and an APR is the best way to compare loan offers from multiple lenders. There could also be things like establishment fees, service fees and late payment fees. Understanding these costs upfront will help you accurately assess the total repayment amount and make informed decisions regarding affordability.

Repayment terms 

Carefully examine the repayment schedule, including the frequency of payments, due dates, and any penalties for late payments or early repayment. Understanding these terms will help you plan your finances effectively and avoid any potential financial strain.

Collateral and security requirements

If the loan is secured, review the terms regarding collateral and any assets that may be at risk in case of default. Understanding the consequences and implications of providing collateral will allow you to make an informed decision regarding the level of risk you are comfortable with.

Remember, if any part of the terms and conditions seems unclear or confusing, don’t hesitate to seek clarification from the lender or consult with a legal professional. Being well-informed about the loan agreement will help you make sound financial decisions and ensure a smooth borrowing experience.

Final Say: How to Prepare for Business Finance

In conclusion, be sure to apply for a business loan with a well-defined purpose. By outlining your specific needs and justifying the reasons for borrowing, you can align the loan with your business goals and make a logical case for funding. Additionally, considering the speed at which you require the funds and the anticipated repayment terms can help you choose the most suitable loan option. And of course most importantly, ensure that you can afford to repay the loan in full – taking into account all associated fees that apply on top of the interest rate.