Does the thought of getting business finance put you in a lather of sweat? It shouldn’t. Here are a couple of steps you should take to help you apply for a business loan or another form of business finance.
Step one is to shop around. There are a range of options outside the big four banks for business banking finance.
Step two is to get your financial paperwork in order. Whether you go to a bank, building society or credit union they will be looking for similar things. The lender will be looking for more than just some money in the bank and healthy profits. They will want to look at your financial statements, typically at the balance sheet,profit and loss statement and cashflow forecasts. Not all sole traders have a Balance Sheet or Profit and Loss. For them, a statement of assets and liabilities and tax returns are the equivalents. You need to show potential lenders you are ‘on top of’ your business finances ‚Äì that you are running the business, it isn’t running you.
The balance sheet will show assets, liabilities and equity.
Cash in the bank isn’t necessarily a positive to a lender because it can fluctuate from week to week. Assets such as property or land don’t fluctuate much so they show a healthy balance sheet. Your stock and debtors (accounts receivable) will also be of interest more for their quality than the dollar value.
The fewer liabilities on your balance sheet the better. Make sure you are up to date with tax payments, superannuation, payroll tax and work cover payments.
The more equity the better. Equity or shareholders’ funds represent capital injected into the business and/or profit retained to fund and build assets. Negative equity suggests that liabilities exceed assets and is a cause for concern.
PROFIT AND LOSS
A lender will go over your cashflow and profits to assess the business’ strength and the interest coverage of the funds lent to ensure you can repay them. Financial institutions will typically want to see the last two-to-three years’ profit and loss. Lenders often use industry benchmarks against which to assess your business. They will look at trends in your fundamentals such as rent and wages relative to your turnover as well as gross margin, stock, sales and revenue growth.
If your financial statements are written more with an eye on reducing tax than on accurately representing your business, this can cause problems when it comes to getting a loan.
Typically, a lender will look at historical earnings and cashflow as the basis for calculating your ability to repay the loan. They may also ask to see projected cashflows for a couple of years. When preparing a cashflow you should demonstrate your ability to make interest payments and principal repayments if required, but don’t gild the lily. Lenders will see through this and decide your forecasts are unreliable.
If you do a little bit of homework before seeing a lender you won’t be guaranteed finance but the process will be much easier.
Wes Lassam is a Business Banking Specialist with the Hunter-based Greater Building Society. Wes has 38 years experience in the financial services industry including 23 years of service with The Greater. The Greater provides business banking services through its 61 branches across NSW and Gold Coast, as well as though mobile and internet banking.