How to get a business loan approved, and what lenders read in your file

The short answer

A lender wants the purpose of the money, the source of the repayments, and a set of documents that all tell the same story as the answers you gave. A file that settles those without being chased is a file an assessor could approve on the merits rather than defend later.

Nobody could make a lender say yes, a broker included. What you could do is remove the reasons for the answer to be no, and put the case somewhere it does not have to be hunted for.

Why a business file is read differently to a home loan

On a home loan the income arrives on a payslip, and most of the assessor's work is verification against a written policy. On a business file the income is the result of the business continuing to trade, so the assessor is exercising judgement rather than ticking a box.

• Your numbers are historical and your repayments are in the future, so the lender is testing whether last year describes next year
• The business is assessed and so are the people behind it, because most business lending is guaranteed personally
• How the business is owned forms part of it — the trading entity, any trust, and who else holds an interest
• The reason for the borrowing is part of the assessment rather than an administrative field on the form
• Borrowing for a business purpose is a commercial contract, so the protections that attach to regulated consumer credit are not automatically part of it

The last point is the one worth stopping on. Read the facility agreement, any guarantee and any security document with your solicitor before you sign, because those obligations could outlast the reason you borrowed the money.

What a lender is reading in your file

Appetite for business lending varies widely, and two lenders could read the same set of financials and reach different answers. Underneath that, a business credit assessor works through much the same short list of questions on every file that reaches them.

• Does the business earn enough, after everything it already pays, to meet this repayment as well
• Is the trading pattern steady, seasonal or heading in one direction, and does the recent period agree with the last full year
• What is the money for, and does that purpose plausibly protect or improve the ability to repay
• How the accounts have been run and not only what is in them — dishonours, overdrawn periods and discretionary spending in the recent statements are all read
• What stands behind the debt if trade turns — the security, the guarantees and the directors' own position
• Is anything unexplained, and does every document supplied agree with every other one

The last question is the quiet one. An assessor who finds a figure that does not reconcile starts reading everything else more closely, and the file stops being one they could sign off without having to justify it.

What to have ready before you apply

Most of the waiting in business lending is not the lender deciding. It is the file being assembled a document at a time, with each request going back to you and each answer restarting the queue.

• Financial statements and tax returns for the trading entity, for the most recent completed years
• Interim figures from your accountant, if the last completed year end is far enough back to be out of date
• Recent statements for every business account and every existing facility
• A cash flow forecast for the period ahead, with the new repayment written into it and the assumptions it rests on set out
• Aged debtors and creditors listings, so the working capital position is visible rather than inferred
• Your position with the ATO, including any payment arrangement in place
• The ownership structure, including any trust or holding entity, and who would be guaranteeing
• Details of what the money is being spent on — the contract, the quote, the lease or the sale agreement
• Identification for every director and guarantor, current and matching the name on everything else

Those business accounts should be the business's own, kept separate from your personal ones. Where the two run through the same account, nobody could see what the business actually earns and spends without unpicking it first, and an assessor reading a mixed account reads everything more slowly. If they have run together, expect to explain the personal spending rather than hope it passes unnoticed.

Then check the set against itself before it goes anywhere. The management figures should reconcile to the last lodged return, the statements should show the facilities you have declared, and the ownership recorded with ASIC should match what you have written on the form.

If something on that list is missing and could not be produced quickly, raise it at the start. Some lenders assess on alternative evidence where the financials are not current, and that is a decision to make deliberately rather than a hole to leave in the file.

What strengthens an application

None of the following changes the arithmetic of what the business earns. All of them change how much work an assessor has to do to believe it, and on a judgement-driven file that is not a small thing.

1. 1

   Write down the purpose and the repayment source

   One short paragraph saying what the money buys, what it is expected to do for the business, and what the repayments come out of. It sounds obvious, and it is missing from most applications, which is exactly why including it stands out.

2. 2

   Bring the financials up to date

   Old numbers make a lender guess, and lenders guess conservatively. Where the last year end is well behind you, interim figures prepared by your accountant could do more for the file than any amount of explanation.

3. 3

   Explain the weak period before you are asked

   A year with a loss, a quiet season, a one-off cost that distorted the result — every business has something. Explained in the file it is context; found by the assessor it becomes a question about what else has not been mentioned.

4. 4

   Tidy the tax position and the small debts

   Lodgements up to date, any ATO arrangement formalised and being met, and the small expensive facilities cleared where the business can. Each one removes a reason to hesitate, and hesitation is what turns into conditions.

5. 5

   Check your credit file and the PPSR before you apply

   Request your own credit report, and search the Personal Property Securities Register for what is registered against the business and its assets. A financed asset that was paid out years ago and never released still reads as an encumbrance to an assessor. Both are correctable, and both take longer to correct than they take to find.

6. 6

   Ask for what the purpose actually needs

   A request sized to the job, with your own contribution visible where there is one, is easier to approve than a round figure with no working behind it. If the amount moves after you first ask, say why it moved.

7. 7

   Keep trading normally while the file is assessed

   New commitments taken on between application and drawdown change the position the assessment was built on. Many lenders look again before funds are released, and an approval could be revisited at that point.

Where business applications come unstuck

Most declines and most delays trace back to a short list. Nearly all of it is fixable before submission and expensive to fix afterwards.

• Financials too old to describe how the business trades now
• Management figures that do not reconcile to the last lodged return
• An ATO liability disclosed late, or one with no formal arrangement behind it
• A purpose that keeps moving, or an amount with no working behind it
• Business and personal spending running through the same account, so the trading position has to be unpicked before it can be assessed
• Facilities left off the form that appear in the bank statements anyway
• A structure nobody has explained, where the trading entity, the asset owner and the applicant are not the same
• Applying to several lenders at once, which leaves a trail of credit enquiries and no single well-prepared file

The right lender for a business file is the one whose appetite suits how your business actually trades, which is rarely the one advertising hardest. Working that out before anything is lodged is most of the job, and the business loans page on this site sets out how it is done.

Everything here is general information rather than credit advice. Any facility is subject to lender approval, to the security offered and to your circumstances at the time you apply, and lender policy varies and changes without notice.