Accounting & Finance

The Small Business Owner’s Mini Guide to a Successful Loan Application

Written by Michael Steengaard

Time to apply for a loan? The thought of it alone could make many feel anxious. But it doesn’t have to. Technology has begun to improve small businesses’ access to finance, with faster reviewal processes and more positive response rates.

Still, a well-rounded application will always get you much further than any new tech trends. If you’d like to know what you can do to avoid an unpleasant rejection, here are a few things to remember.

One question to rule them all

Will you be able to repay the loan?

That’s what underwriters are trying to figure out while looking at an application.

Lenders want to finance your business, but like any other enterprise, they need to have a clear view of the risks behind this decision. They have to understand why you need the funds, how you’re planning to make a good return on the investment, and what measures you’ll take to manage repayments. A successful applicant provides this information by connecting the dots for the lender.

Don’t shy away from having a credit history

Records of handling debt in the past aren’t a bad sign. Quite the opposite, they boost your chances of approval.

It sounds counterintuitive, especially since we’re often told that a pristine financial history is the only way to show you’re good at managing money. But to a lender, a clean slate leaves them guessing; it doesn’t show whether you’re capable of handling a loan appropriately.

Being approved for finance in the past puts you in the position of a business that another lender has chosen to trust. What’s more, having managed repayments and successfully returned the loan, you’re proving your ability to manage debt responsibly.

Know how much funding you need, and why

Lenders want to see how their finance will create profitable opportunities for your business.

Otherwise, they’re missing a justifiable reason to trust you with the funds.

Part of convincing them is having a concise plan about your next steps, how much funding these will require, and the reasons why the investment is sound. The less specific you are, the riskier you look as a borrower.

Talk about the rationale behind your plans, what business need they will address, and what evidence suggests that they will generate profit. While the lender might not be an expert in your niche, they want to get to know your business to the best of their ability. Help them along the way.

Find the right lender and research their requirements

Sometimes an application is rejected not because of the business itself, but because the type of finance they applied for isn’t the right fit.

For example, if you want to open a new store, a business line of credit wouldn’t be an appropriate source of capital; it would make more commercial sense to apply for a mortgage or a long-term business loan.

But if you need to put money down for renovating your existing location, the credit line would be the more appropriate choice.

Another point to consider is that lenders also differ in their requirements, especially with the advent of alternative finance and online lending. Some ask for piles of paperwork, others only need access to your digital records.

Requests vary depending on the amount of finance and the length of the contract. By taking the time to customize your application to the criteria listed by your chosen lender, you’ll make the process much easier for them, and by extension increase your chances of approval.

Frequently requested documents

But what should you prepare? Is there a base you could start with straight away, given that some of the paperwork takes time to arrange?

Here are documents lenders tend to ask for the most:

  • Income statements and balance sheets for the last 6 months to 2 years;
  • Up-to-date financial statements;
  • Business plans or project plans to demonstrate the direction your business is taking;
  • Tax returns to verify your income statements;
  • Bank accounts details;

Consider investing in accounting software. Not only will it keep your documents in order, it will also remove much of the work behind delivering them. It’s wise to be careful about sharing your data with external bodies; that’s why responsible lenders take the utmost care to protect your information. In most cases they’re granted temporary access, and only to documents that are essential for the reviewal process.

Overall, consider your application as an opportunity to tell the story of your business and its next steps. If you’re able to demonstrate how the loan will unlock growth, and ultimately be repaid, you’ll be an applicant that lenders find hard to say ‘no’ to.

“The opinions expressed by BizWitty Contributors are their own, not those of BizCover and should not be relied upon in place of appropriate professional advice. Please read our full disclaimer."

About the author

Michael Steengaard

Michael Steengaard is the head of client services at Spotcap Australia. He has over 15 years of financial services, multi asset class advisory experience, including over a decade at Macquarie Bank.