Are you planning on expanding your existing business or starting a new one? If so, you might need a business loan for it. However, it is important to know that business loans are different from home loans and other mortgages, because these cannot be utilised to purchase a property. This is why Australian lenders and banks evaluate these products differently. If you wish to qualify for a business loan, you must have a strong business and loan application.
How do Lenders Evaluate Business Loan?
Lending requirements of business loans are less strict as compared to the requirements of other loans, as the National Consumer Credit Protection (NCCP) Act does not supervise or regulate it. But in any case, you need to have a good business and strong application. Although, lenders assess business loans the same as they assess home loans, yet, there is a prominent difference in the assessment criteria. A ranking system is used for business loan applications in order to show the risk level of a loan. However, the ranking system varies from one bank to another. For example, a bank might rank the loan application between A and D, whereby, the former may represent an application with low risk and latter represents a high risk.
Lenders also grade businesses between 1 and 15. The grading system takes into account the following while assessing an application:
- How long has a business been running successfully?
- Analysis of overall business position through financial ratios
- What are the strengths of the business?
For instance, a business with a time span of 15 years might get a score of 3 or 4, whereas, a score of a new business might be 10 or 11.
Keeping the above scenarios in mind, banks consider an application with 1A rating a strong application and the one with 15D rating would be weak. However, it is important to know that lending institutions assess businesses on a case-by-case basis.
How to Qualify for a Business Loan?
Financial institutions take into account a number of factors when they assess applications for a business loan.
- The property that serves as a security against the loan
- Type of business
- The amount of money you put into a deal
Lenders tend to have a conservative toward new businesses when it comes to issuing a loan. In addition to that, they are not very passionate about businesses in high-risk sectors, such as government, construction, mining, or housing. There is a high probability that a bank qualifies you for a loan if your business is in a low-risk sector.
How Much Can You Borrow?
You can borrow an amount between $250,000 and $50,000,000. However, the amount you can borrow varies from lender to lender.
It also depends on the following factors:
- Your business loan assessment
- The loan package
You must bear in mind that loans above the value of $5,000,0000 or $50,000,0000 have strict policies and criteria.
Furthermore, you can also get a business loan for refurbishing or in case of fitting out the shop. You can get up to 100 percent fit-out cost if you use your house as a security against the loan.
Features of a Business Loan
Business loans offer all the features of a home loan. But there are some lenders who may not offer some features. Therefore, it is very important to find the right lender when you apply for a loan. You must consult a broker and seek his or her help in order to find the right lender.
Once you evaluate the loan requirements, you must consider the following features in a loan package:
- Overdraft Facility – If your property to be used a security is acceptable, you can avail an overdraft (O/D) facility. Banks also assess your credit worthiness before allowing you to use O/D facility.
- Offset Account – There are some banking institutions that offer you 100 percent offset accounts. It is a useful option as it enables you to pay off your debt quickly and saves interest cost as well.
- Redraw Facility – With this facility, you can redraw the amount you pay in advance.
- Additional Repayments – You can also make additional repayments on a business loan. However, this option is normally available on a business loan with a variable rate.
- Type of Interest Rate – Business loans are available with a fixed rate of interest or a variable rate of interest. You can even avail bank bill facility if you qualify for it.
- Interest Only Loan – Banks also accept these terms for a period of 5 years. You can also negotiate longer terms for your business loan.
It is very important to keep all these factors in mind when you apply for a business loan. Seek the advice of a broker as he or she can guide you in the right direction based on their experience.
Chat to Hunter Galloway today on 1300 088 065 or email Nathan.Vecchio@HunterGalloway.com.au