Business loans can finance a business initiative, enhance cash flow or assist with capital expenditure for business growth. It is advisable to compare business loans from different financial institutions and investigate the fees and costs.
When you apply for a business loan, online or at the financial institution, a lot of information will be required as well as supporting documentation to verify the information. It is required that the applicant must be eighteen years or older and able to provide supporting documentation to verify the information.
The standard documentation required to prove income when applying for a business loan includes a twenty-four month’s (in some cases a thirty-six month’s) financial statements, a balance sheet, and profit and loss statements. You should also submit the last financial year’s tax return for each business principle. If your business is a start-up, you will have to provide a business plan and cash flow projections.
Additional documentation can be required for specific entity types, such as:
• Partnership: Operating agreement, privacy statement and consent forms signed by the parties, Tax file number and documentation that verifies the partnership information such as a partnership agreement, minutes of a partnership agreement or a reliable document relating to the partnership.
• Company: Operating Agreement, Privacy Statement and Consent signed by all parties, identity declaration and Tax File Number.
• Trust: Copy of Trust Documents, Operating agreement, Privacy Statement and consent forms signed by the parties and Tax File Number.
• Societies: Operating Agreement, Fax File Number and Society account documentation, such as a copy of Minutes of Meeting.
The lender will assess your application and analyses all the information. The process involves determining if the business can afford the loan, be able to make the required payments and if the business can provide security. An important factor that lenders focus on when evaluating a loan is debt-to-equity-ratio.
Debt-to-equity-ratio measures the relationship between the capital contributed by creditors, and the capital contributed by shareholders. By using the debt-to-ratio formula (divide the total debt or total liabilities by the total equity and to get a percentage you can multiply the answer by 100) you will have an indication that a business or company may not be able to generate enough cash to satisfy the debt commitments.
Once the business loan is approved, the lender and the applicant will agree on an interest rate and a payment schedule. The applicant is required to sign the agreement. It is important to get a clear understanding of all the terms and conditions stipulated in the agreement.
If you are not knowledgeable about how and when you should make payments, you may end up repaying on the wrong dates or make electronic transfers, and it will not show on the lender’s records in time. By making late payments you can face additional charges.
Business loans can finance a business initiative, enhance cash flow or assist with capital expenditure for business growth, but it remains advisable to compare business loans from different financial institutions and investigate the fees and costs.