Requirements for a Business Loan: How are you assessed?

Updated 24th July 2024

Taking your business to the next level is an exciting challenge. While growth requires a number of considerations, access to the working capital you need to sustain and fund that growth is one of the most important.

This is where business loans come in. Securing a loan might seem daunting and overwhelming, but the better prepared you are, the greater your chances of success. The ScotPac team is here to help you find the right customised loan to suit your needs.

But to get started, it’s essential you understand the requirements for a business loan.

Understanding the Requirements for a Business Loan

Why Businesses Apply for Loans

Business loans serve multiple purposes. While they can and are used for funding day-to-day operations and expenditure – such as purchasing inventory or expanding one’s team – they can also be used for specific growth purposes. This can include investing in new marketing campaigns, purchasing new equipment, or upgrading to larger and more fit-for-purpose facilities.

Understanding why you need a business loan is the first step to obtaining one. Apart from being a necessary piece of information to provide potential lenders, it also allows you to understand what sort of loan is right for you.

How Are Businesses Assessed?

It is important to note that every lending institution is different. So, this guide is intended to be general in nature. Always have an upfront and honest consultation with any potential lender you are looking to borrow from.

Be that as it may, most lenders use a multi-faceted approach to assess a business loan application. Two key factors that are considered include:

1. Business’s Financials

This can include a review of your financial statements (such as profit and loss statements, balance sheets, and tax returns) to gauge your business’s overall financial health. Financial projections may also be requested to demonstrate future viability and predicted growth.

2. Business’s Creditworthiness

Your business’s credit history provides lenders confidence that you will be able to service the loan, i.e., repay it. Your demonstrated ability to manage debt responsibly in the past is one way of evaluating this. Maintaining a good credit score and a clean repayment record on previous loans is essential.

Secured vs. Unsecured Business Loans

There are two different types of loans. At ScotPac, we provide both secured and unsecured business loans to suit the needs and capacities of our clients.

What is a secured loan?

These business loans require collateral. In other words, you will need to provide an asset as security. In the event that you default on the loan, the lender can seize the asset to recoup their losses. The benefits of secured loans are that they often come with lower interest rates and higher borrowing capacities due to the reduced risk for the lender.

What is an unsecured loan?

Unsecured business loans do not require collateral. There is no need to put up an asset as security, but they typically come with higher interest rates and lower borrowing capacity due to the increased risk for the lender.

Do Lenders Run Personal Credit Checks for Business Loans?

The answer to this question does vary from lender to lender.

Many financial institutions will run a personal credit check on the business owner(s) or guarantors of the loan. This is used to assess one’s financial health and thereby their ability to repay the loan if the business falters. The more confidence they have that a business or its owners will be able to repay the loan, the more willing they are to approve the application.

How is My Ability to Repay a Loan Determined?

Several factors are generally used to determine your ability to repay a loan.

1. Profitability

Ideally, financial institutions want to have confidence that the business is profitable or has a realistic plan for achieving profitability in the future. In other words, they want confidence that the business will succeed.

2. Cash Flow

Cash flow refers to the money coming in and going out of a business. A business that is able to demonstrate sufficient cash flow to generate enough income will inspire confidence that they can cover ongoing expenses and loan repayments.

3. Debt-to-income Ratio

This ratio indicates a business’s total debt standing compared to its income. A lower ratio indicates stronger financial health and gives the lender confidence that the business has a greater capacity to handle additional debt.

What determines an Interest Rate?

The interest rate on a business loan can be influenced by several factors.

Different loan types, such as secured and unsecured, tend to come with lower and higher interest rates respectively.

Similarly, the creditworthiness of a business and stronger financial performance can qualify some companies for lower interest rates.

The term length of a loan is another important factor. Shorter loan terms often come with lower interest rates compared to long-term loans.

Lastly, market conditions can be an important factor. Prevailing interest rates in the broader economy can and do impact the rate you may be offered.

What is the Application Process for Business Loans?

Every financial lender has its own application process. But in general, you will need to submit the required documentation, financial or otherwise, for your application to be considered. The better organised you can be with your various financial statements, the clearer you can be about your business goals, and the more prepared you are with your plans for how you intend to use the loan funds, the better.

At ScotPac, we leverage the latest technology to make our application process as easy, seamless and quick as possible. All you need to do to start the process is to submit your application online.

What Else Do I Need to Know About Business Loans?

Finding the right business loan for your needs is important. There are a variety of different considerations, so spend the time comparing rates and terms to determine which is right for you.

Before signing any loan agreement, carefully review the terms and conditions and make sure that you understand what you are agreeing to.

It is also important to understand that business loans are not the only form of working capital solutions for growing businesses. Invoice Finance, for example, is another way in which you can fund growth and cover operational expenses.

ScotPac – your local business loan lender

Securing a business loan can be a pivotal step in your company’s growth journey. That’s why you need a team with over 35 years and thousands of clients worth of experience.

Here at ScotPac, we’re ready to help. With offices across Australia, our lending specialists are within easy reach. To find your closest ScotPac office or to talk to our lending specialists on the phone, contact us today.