How Lenders Assess Your Business Loan Application

Loans can be a great way to get the working capital you need to achieve your business goals.

However, depending on the lender and type of loan, businesses often have to undergo a rigorous application process before getting the money they need.

You might wonder, “How does my lender assess my application?”

Here’s everything you need to know about how lenders typically assess your business loan application and how you can increase your chances of getting approved.

Key Requirements for Business Loan Applications

You’ll be asked to provide key documents when applying for a loan or business financing.

Everyone involved in the business may need to submit requirements, including directors, partners, or guarantors.

Whether you’re looking for a bank loan or loans from alternative lenders, they will require financial information before they finance your needs.

These are the key requirements for your business loan application:

Identification

Existing customers can skip this requirement if their lender already has this information. However, new customers must submit identification, like a driver’s license or passport.

These documents can vary depending on your business structure. You may also be required to submit your partnership agreement, trust deed, or company registration.

Proof of Individual Income

If you hold a specific position in your company, whether you’re a director or a shareholder, you’ll be required to provide documents reflecting your personal income.

Lenders can request your two most recent individual tax returns and an ATO Notice of Assessment.

Typically, they’d only require a business account to finance your business. However, there are cases when they look through your personal accounts for security purposes.

They might also ask for additional documents regarding other income streams unrelated to your business, like a rental statement for your investment property.

This would show the lender that no matter what happens with your business, you have other options to repay your loan amount and its interest.

Bank Statements

Your latest bank statements, whether paper or electronic, help your lender have a better view of your financial position.

They can request personal and business income, savings, and liabilities, such as loans and cards. 

This extends to other financial institutions you may have an account with. It also includes existing loans and a business credit lines you may be maintaining.

If properly managed, they can be an asset to your business loan application as it helps build your history. However, poorly maintained bank statements can be a red flag for your lender.

Financial Statements

Your financial statements show your assets, net worth and liability positions, business expenses, and income. They should be prepared by an accountant.

These determine if you meet your existing or proposed repayments and can manage your financial situation despite your loan and other ongoing fees.

You might also be asked for your latest tax returns, printouts of statements from your Australian Taxation Office (ATO) portal, and business activity statements (BAS).

Trusts and self-managed super funds (SMSFs) related to your business would need additional documents for proof.

Additional Documents

When a new business applies for business loans or if a lender’s policy requires it, you may need to submit other documents compared to any existing business.

Any business owner can be asked to comply with these additional documents from their lender:

• A detailed business plan
• Business contract of sale
• Cash flow projections
• Lease of agreement
• Information on existing loans from other lenders

These are only some of the additional documents you might be required to have. You can ask for professional advice regarding what you need to prepare for a higher chance of approval. 

Things to Consider Before Applying for a Business Loan

These are the things you need to consider when you apply for business finance and find the right loan for your business:

• Amount – know how much you need to borrow and how much you can repay.
• Funding arrangement – know if you need to access the money all at once or over a period of time. 
• Type of loan – there are many loan options, like a line of credit or equipment finance. Some can even rely on your outstanding invoices, depending on your loan terms. Each type can have different requirements and might limit your access to specific business plans and purchases.
• Variable rate vs. fixed rate – you should choose an interest rate that won’t burden your cash flow in the long run. 
• Loan security – providing security can be necessary, especially if you’re looking into secured business loans. You may have to provide an asset or prove that your trading history is stable enough to sustain your business’s cash flow during your loan term.
• Extra fees – early loan repayments, early termination fees, establishment, and other maintenance charges can affect how much you’d have to pay when you borrow from a lender. You’ll have to take note of these before you sign for your funds.

Mistakes to Avoid

These are the common red flags that prompt a bank or alternative lender from approving your business loan application:

• No business plan or a poorly prepared plan that lacks critical information about your business
• Poor personal or business credit history
• Insufficient collateral to secure the loan
• A history of financial losses, declining revenue trends, or inconsistent cash flow
• An over-reliance on a few key customers or suppliers
• No evidence of how your business will repay the loan

FAQs

Let’s discuss the common questions you might encounter during your business loan application.

How Do I Apply for a Business Loan?

Lumi’s business loan application is easy and STRAIGHTFORWARD.

All you need to do is submit an application online and the necessary documents. 

Apply with a business plan to make it more transparent between you and the lender regarding where you plan to use the funds.

Once you get the money, you need to remember to pay interest and other fees on top of your amount. This will ensure that you get reasonable offers for future loan applications.

Can I Still Apply for a Loan Even With Bad Credit?

Unlike many traditional lenders, Lumi doesn’t only focus on your credit history to determine if we approve your business loan.

We also consider several factors to offer you the BEST DEAL to get the funding your business needs to grow.

Conclusion: Can I Be Approved for a Business Loan?

A business loan application comes with many requirements. However, as long as you meet them and prove your ability to repay the loan, you will be more likely to be approved.

Every lender and loan type has different requirements. Research what your lender needs to finance your business and get the funds you need to grow in the industry.

Explore loan options, apply for a business loan with Lumi, and grow your business today!