The more quality information the bank has about your business, your plans and your industry, the more likely your application will be successful.
If you have used an adviser to prepare your financial information, make sure you understand it before meeting with the lender.
The loan application
1 Executive summary & introduction
The executive summary is the first part of the loan application. It should provide a concise, easy-to-read summary of the loan application, covering all the key elements including:
- The nature of the business
- The potential for profit, management, marketing
- Any competitive advantage the business may have
It should clearly state the:
- Business purpose
- Purpose for the loan
- Loan amount needed
- Projected profits that will be used to repay the loan
- Length of time needed for the repayment
Next comes the introduction and should include:
- An overview of your business
- Its structure
- The legal structure
- If relevant, which business is applying for the loan
- A history of the business
- The work experience/ qualifications of the owners
- Other key business information that is not covered in the other sections of the loan application, for example, licenses or registration certificates.
2 Statement of Purpose
You need to clearly outline why you want the loan and the business benefit of getting the additional funding.
This is important for the lender as they may be reluctant to issue a loan if the purpose is for funding operating losses or a luxury purchase for the business owner.
Examples of the loan purpose include:
- Funding capital expenditure such as plant, equipment, vehicles, property and improvements.
- Increased working capital resulting from growth or to support increased stock holding.
- Replacement of existing equity with debt.
- Succession planning to provide an exit strategy for family members.
- Acquisition of another business or part of business
- Research and development or commercialisation stage
- Expanding distribution or developing new markets
If the loan is to buy an asset (i.e. equipment or property), or for a contracted service (i.e. IT support), provide the lender with all the important documentation you have collected relating to the purchase.
You should state when the funds will be needed and when you expect to be able to repay them. Businesses often underestimate how long it can take a lender to process the application and this may have a negative impact on your business if the funds are not ready when you need them.
3 Business plan
To make an assessment of the loan application, lenders need to understand how your business operates, what you see for the future and expected financial results.
The most effective way to present this information is to provide a current business plan and details of how you intend to implement that plan.
Providing a business plan shows that you have:
- Considered how you’re going to manage the business moving forward
- Assessed any possible risks
- Understood the financial impact a loan will have on the business
Remember, your lender doesn’t know your business like you do. A business plan is a great way of helping them understand your business and goals.
- Map out what you need to include in your business plan. Refer to the Business Plan template we’ve provided in the Forms & Checklists section
- Undertake research, assess the competition, include market analysis and robust forecasts
- Verify any external information you use in your plan – this builds credibility into your assumptions
- Seek assistance from an accountant or qualified adviser to prepare the financial forecasts, including some scenarios. For example, if turnover increases or decreases by 10%, what impact does this have?
- Present the business plan in a professional way in your loan application to give a good impression to potential lenders
- Set aside enough time to prepare a professional plan that covers every aspect of your business and the potential funding requirement.
- Remember that the business plan is for you – not just for potential lenders. If you are going to spend time preparing a plan make sure it will be useful for providing direction in your business.
- Executive summary
A succinct overview of key aspects of the business plan.
- Business description and vision
Include location, history, legal structure, assets and ownership details of the business.
Also include your vision for the business – where you see your business in the future, what plans you have for growth and how you will get there.
- Description of products and services offered
Information on what the business provides to customers – what problems does it solve for your customers?
- Market definition and analysis
Describe who is your target market, demographics of your market, trends in the industry, growth of market and competition, SWOT analysis (strengths, weaknesses, opportunities and threats), marketing strategies.
- Overview of the organisation and management
Provide an organisational chart, information on management structure, management experience and track record, staffing, including qualifications and skills gaps and how these will be addressed.
- Business operations
Information on all business operations including management information systems and controls, risk management assessment, insurance details and any other relevant business activities.
- Financial forecasts
Include your business case for the loan.
The financial forecasts should include profit and loss budget, budgeted balance sheet and a cash flow forecast for the term of the loan or three years minimum. Include separate detail of all of the assumptions that have been made for preparation of the budgets and forecasts. Include sensitivity analysis on the prepared financials. Your accountant can help you with this.
4 Financial history and forecasts
Your budgets and forecasts are important to the lender as these show how your business will operate during the period of the loan. It’s important to know how to prepare these forecasts in line with your lender’s expectations. You may need your accountant’s help with this.
By preparing both a cash flow forecast and profit and loss budget, you will have sufficient information to prepare a balance sheet budget. Remember to prepare the forecasts as if the loan has been approved.
Your financial forecasts should include the following:
As you are preparing your estimates on income and expenditure, you will be making assumption on how your business will operate in the future.
It’s best to use realistic targets that you believe are achievable. A good place to start is to look for any trends in your historic financial information.
Any industry information provided by independent reputable companies will also give your assumptions credibility.
One of the most important pieces of information for the lender is a cash flow forecast that provides the necessary detail on the cash available to pay back the loan.
A profit and loss budget shows the potential lender whether the new business plan is profitable.
The balance sheet provides a picture of the financial health of a business at a given moment in time (usually the end of a month or financial year).
It lists in detail the various assets the business owns, the liabilities owed by the business and the value of the shareholders’ equity (or net worth of the business).
A budgeted balance sheet provides the lender with information on the expected net worth of the business after the loan has been drawn.
The lender will review this information to ensure your business has sufficient equity / net worth and they will be looking for an increase in the net worth of the business over the term of the loan.
Potential lenders use financial ratio analysis to evaluate the current and potential performance of your business.
The most common ratios are:
- Liquidity ratios
- Return on assets and investment
Every lender will carry out some analysis on the financial forecasts you have provided. It’s important that you include your own sensitivity analysis to show that you are aware of the impact to the financial position of the business when unforeseen events occur during the term of the loan.
Historical business financial statements
For existing businesses, the lender will want to review historical financial information including your balance sheet, profit and loss statement and cash flow statements.
Typically, the lender will want business records going back three or more years.
Ideally, this information should be either prepared and or reviewed by an accountant. This offers an assurance that the information is accurate and complete.
- A balance sheet
- Profit and loss statement
- Cash flow statements
- Previous BAS statements (usually for the last four returns)
- Annual tax returns, including the assessment notices received from the ATO
- Current accounts receivable and payable schedules (debtors and creditors lists)
- Bank statements for all bank accounts and loans for the past three years
- Details of any current or previous bank or other loans including all loan agreements and statements
- Details of any other types of financings such as leasing or hire purchase
- Previous bank relationships
- Key customer relationships
- A copy of your Tax Office portal page showing any current payment obligations with the ATO
In addition to the financial statements, the lender will most likely also want to check the historical operating data of your business to get an idea of the way your business is managed and get some insight into the character of the owner/s.
5 Personal information and credit check
Lenders need to know that the funds you borrow will be repaid.
One of the most important indicators for lenders is your personal spending habits.
The lender will usually require information from the past three years. This ensures any unusual circumstances are “averaged” over the period.
Types of personal information can include:
- Personal assets - purchase price and date, independent valuation if available, ownership documents (i.e. mortgage or leasing agreements) and, for any policies, the most recent policy statements.
- Tax returns - you may be asked to supply supporting documentation to the tax schedules such as proof of income from investments.
- Personal bank details - all statements issued from the bank or financial institution. For bank loans, include the original loan agreement as well as the statements.
Download a table that you can use to complete your personal information from the Forms & Checklists section.
Personal credit check
When you apply for a loan, it’s likely the lender will complete a personal credit check; the authorisation to do so is usually included on your application form.
A clear report means you have not, in the past, defaulted on any payment obligations. This will have a positive impact on your business application.
You can check your personal credit rating through various credit bureaus. Web addresses are included in the Helpful websites page under the Resources & Tools section.