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How should you prepare to secure a small business loan in Australia? It actually starts long before you submit an application. You need to lay some solid groundwork, in advance. The more you prepare can be the difference between a smooth approval and unnecessary delays.
If you’re looking for short-term financing in Sydney, or funding a commercial project on the Gold Coast, Brokers like Hodgestone Finance want to see that you’re prepared, organised and clear on why you need the funds and what you will use them for.
In this guide, we’ll walk you through exactly what you have to have ready before you approach a private lender so you improve your chances of getting finance.
Why Preparation Is the Difference Between Approval and Rejection
Applying for finance through a private lender happens much faster than applying through traditional markets such as the banks. You need to be prepared to move at a moment’s notice with everything- documents, plans, credit scores, and more. Because private lenders focus more on the quality of the deal and your exit strategy, having these things thoroughly documented and backed up, is vital for your success.
Proper preparation shows you’re reliable, serious and knowledgeable about your business. It can help reduce the perceived risk of lending to you. It reflects well on your character and your business acumen.
There are five Key elements that will help your applications with a private lender.
- The Exit Strategy: This is possibly the most important element for a private lender. They will want to clearly see how you will repay the loan, either through generating business revenue, selling the property or other financial ways you will successfully pay off this loan.
- A Comprehensive Property Valuation: If your loan is going to be secured by real estate, you need to provide recent property appraisals and a thorough comparative market analysis. This allows the lender to ascertain the Loan-to-Value (LTV) ratio. This is not something the Borrower needs to do themselves.
- Detailed business or Project plan: Be specific about how you will use the funds for your project. Outline timelines, costs and projected ROI.
- Financial Statements: Despite their flexibility, private lenders still want to see that you can manage cash flow. You may need tax returns, bank statements, profit and loss statements and any other personal financial statements.
- Credit and Background Checks: Don’t hide any low credit scores or bankruptcies. You don’t need to go into detail, a brief explanation of circumstances is enough and focus on how your financial situation has improved since.
Why Preparation Prevents Rejection
Being prepared and showing your preparedness demonstrates competence. It shows you’re serious about obtaining finance, a mature person who is unlikely to default.
Preparation builds trust. Unlike lending from the banks, which is purely driven by numbers, private lending is built on relationships. Being upfront about your financial past, or any risks, helps a private lender to understand your position and understand the risks.
It can also help justify the deal. Preparation can help tell a compelling story about the potential profits of your venture and framing the loan in more than just numbers, and make it more about success.
Know Your Numbers
While applying for a loan with a private lender does focus on your exit strategy and the equity in your security, you still need numbers to show strength and reliability in you as the one borrowing money. Understanding your financial position before applying for the loan can make the process a lot smoother and the relationship between you and the lender that much stronger.
What are some important numbers you need to know?
Statement of Position: Private lenders will mostly base their decisions on your net equity, your assets versus your liabilities.
- What is the current market value for your assets- real estate, vehicles, shares and cash?
- What is the total balance for existing mortgages, credit cards and other debts?
Exit Strategy: How are you planning on repaying the loan? A private lender is most interested in how you will pay back the loan, through selling property, refinancing with a traditional bank, or other solutions. Provide evidence that shows you’ll be able to repay and finish the loan.
Affordability and Cash Flow: How will you service the loan during the term? Private lenders need to know of your cash to ensure you can make payments without defaulting.
What Documents Will a Lender Ask For?
To ensure a smooth and speedy loan application, here are the key documents you need to have prepared before you approach a lender.
Verification of Identity
You legally must identify who you are.
- You will need a photo ID, such as a current passport or driver’s licence.
- Proof of address, such as a recent utility bill or a council rates notice that is under three months old.
- Entity documents if you’re borrowing through a company or trust. This must include a stamped copy of the Trust Deed or an ASIC Company Extract.
Security Property Details
Private lenders weigh the real estate put up as collateral very heavily in their consideration of your loan. It can be a residential property or commercial property or even a vacant lot of land.
- Rates and land taxes noticed for all properties being considered for security.
- If there are lease holders, then any active lease agreements must be provided.
- A recent valuation of the property so they can determine how much it is worth for security purposes.
Clear Purpose for the Funds
Why do you need a loan? Lenders want specificity around this, they want to know exactly what you will use the money for.
- Write a brief executive summary, a simple and direct explanation of why you need the money. Don’t sugar coat it or get emotional. Just a simple explanation- short-term business expansion, purchasing inventory.
- An exit strategy is arguably the most important document you can prepare. It shows how you plan to repay the loan. This is what a lender wants to know. If you have a good exit strategy you are a lower risk, and a better chance to obtain a loan.
Financial Health
Private lenders are more flexible than banks, this is true, however they still want to know that you’re financially healthy and can service the loan.
- Assets and liabilities that you are connected to. Make a clear list, don’t leave out anything. There is nothing worse than a surprise in your financial health statements.
- Three to six months of bank statements to show a good cash flow.
- Recent statements for any existing mortgages, credit cards or personal loans.
Pro Tip:
Have them ready to go. It’s not a good look to have most of them done and tell the lender you’ll have the rest in a few days. Scan all your documents into high quality and clearly labelled PDFs. This helps with convenience and sharing to the lender if needed.
Also categorise your documents and organise them. It makes it much easier for the lender to go through them, understand them and speeds up the approval process.
Common Mistakes Small Business Owners Make When Applying
For small business owners applying for loans for the first time, they can make some mistakes in their application. Here we list the most common mistakes, so hopefully you won't make them yourself.
- Mixing Personal and Business: If you operate commingled accounts it can be difficult for a lender to verify what transactions are business related and what are personal. This can slow down the approval process significantly.
- Not Checking Credit Profiles: Private lenders review both business and personal credit histories. If you assume your personal credit doesn't impact your business loan then this can lead to unexpected delays or rejections.
- Applying When Desperate: Waiting until your cash has run out before applying for a loan is a mistake for two reasons. First, desperation may lead you to accept the first offer you receive, which may not be in your best interest. Second, lenders are wary of borrowers whose financial practices leave them cash-strapped, as it raises doubts about their ability to repay. Apply when your revenue is robust. Borrow proactively.
- Misunderstanding LVR: Borrowers sometimes expect that 100% of the value of property will be considered that they’re using as security. However most private lenders are conservative, and usually hold LVRs at 70-80% only.
- Not Using Professional Advice: Some small businesses try to navigate the complex world of private lending without a broker or a financial adviser. This can easily leave them trapped in expensive loans that are difficult to get out of.
Why Working With a Finance Broker Saves You Time, Money and Stress
Working with Hodgestone Finance allows us to do the heavy lifting, saving you time, money and stress. We have access to many different private lenders, which means you only need to complete the documentation once, for us, and we can then find the right lender for you.
Our team understands compliance and obligations and how strict contracts can be, so we work with you while you prepare so there are no nasty surprises. Then we match you with the right lender whose criteria aligns with you and your business.
Ready to Take the Next Step?
Preparing for a business finance application doesn't have to be overwhelming. By having your documents in order, understanding your borrowing needs, and working with the right team, the process becomes far more straightforward than most business owners expect.
At Hodgestone Finance, we work with small business owners across Australia every day, helping them access the right small business loans at the right time, without the stress of going it alone. If you need short-term finance in Sydney or a tailored funding solution for your commercial project in Melbourne, our team is here to guide you from preparation through to approval.
Get in touch with Hodgestone Finance today and let's make your next move possible.
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