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6 Tips on What To Do Step-By-Step Before Applying For a Small Business Loan or Seek Investor Funding

Posted by Melinda Stevenson on 21 September 2020

Do you want to improve your success rate when obtaining business funding from a bank or an investor?

Are you ready to get your business finance health checked to remain financially fit so you are in good shape for success?

In this article we will provide step-by-step tips on preparing a business plan, checking your finances and deciding the most appropriate type of financing you require based on your business need.

Tip #1. Advisers Can Help

According to Australian Small Business and Family Enterprise Ombudsman, businesses should consider professional advice as a business investment rather than a cost. It is this mindset that can help your business succeed.

It is recommended that you use a good accountant with strategic experience instead of only seeing an accountant a few times a year such as during tax time to receive some advice.

Tip #2. Five Cs Understand Lenders Criteria

According to Australian Small Business and Family Enterprise Ombudsman, lenders usually use the five Cs criteria to determine if the business can pay back a loan namely capital, capacity, collateral, character and conditions.

Depending on the business need or financial position, lenders may not require all of the criteria outlined below.

  1. Capital - Lenders look at the borrower's financial position including assets, liabilities, net worth and liquidity.
  2. Capacity - To assess if the borrower can repay the loan over a certain period of time, lenders may calculate various ratios to determine it. Lenders use various ratios such as debt-to-income or servicing ratio which includes cash flow, revenue, expenses and other outgoings.
  3. Collateral - Lenders reviews the security types that the business is providing such as property, land, accounts receivable as well as their age, location and various aspects of the security.
  4. Character - Lenders reviews the business reputation as well as the business owner's reputation and credit history. Lenders may consider various factors such as loan repayment history, general savings history, tenure at their work and credit ratings file.
  5. Conditions - Lenders assess how the borrower will use the money, trading ratios and determine if they have security. Lenders also looks at other external factors such as state of the economy to calculate loan conditions.

Depending where the organisation lies within the business life-cycle and what is important to business owners at the time, will determine the different types of funding options that are appropriate based on their situation.

To find the right financing solution based on your circumstances, it is important that your adviser assesses your financial position and your business situation.

According to Australian Small Business and Family Enterprise Ombudsman, the biggest barrier for small business growth is access to finance, and about a third of small business owners experienced having their bank loan application rejected.

To increase the chance of small businesses to successfully secure funds, they need to prove their credit worthiness by working with their trusted advisers to get their business finance-ready. The advisers could help in producing a comprehensive business case for investment in pursuit of growth and success.

6 Main Reasons Why Business May Need Funding

Here are the main reasons why a business may require some funding.

  1. Expansion - Business growth require the need to purchase new equipment, increase inventory and employ more staff which can put pressure on the business' operational cash flow.
  2. New business - Scaling up to meet the demands of a large customer or to take advantage of a new opportunity may require utilising the surplus cash available in the business.
  3. Reached existing funding facilities - Business may have reached the limit of their existing finance facilities and business owners may not be aware of other potential sources of funds that are available to them.
  4. Meet commitments - Falling behind in making repayments to the Australian Taxation Office or meeting payroll or superannuation obligations which are building up.
  5. Slow paying customers - Delayed payments from customers may be putting pressure on the daily operations of the business.
  6. Using personal funds - Business owners may have to use their personal funds to put towards the ongoing business operations.

Tip #3. 4-Step Funding Preparation Checklist

By becoming finance fit before applying for funding will make all the difference to your success rate in obtaining the loan.

Step 1. Review your business accounts and get it in order

  • Separate personal and business finances.

By getting into a habit early on to separate your personal finances from your business finances, will provide lenders and investors with a much clearer picture of the company's financial position.

  • Tidy up the accounts and get it in order.

Business owners should generate reports such as earnings before interest, taxes, depreciation and amortisation, Profit and Loss, balance sheet and cash flow statements. Separate any once-off or extraordinary expenses. Lenders use these financial reports to assess if you can repay the funds borrowed.

  • Check Australian Taxation Office record.

Check the Australian Taxation Office (ATO) record to ensure everything is in order for your business. Check that you are meeting all your obligations such as paying payroll tax on time.

  • Financial commitments.

By having all your financial commitments in a simple document where you outline all your commitments can help with funding applications.

  • Review bank statements.

Bank lenders look at bank statements closely. Ideally, you should be able to show that at least in the last six-month period, there were no default payments, accounts were not overdrawn and there was minimal discretionary spending on the bank statements.

Step 2. Prepare, write, review and update your business plan

  • Show clear goals - It helps lenders, investors and you to clearly see your goals and achievements. A good business plan outlines goals and the actions required to reach those goals. The plan should be a living document that shows the business' progress. It should include market analysis, historical financial performance against forecasts unless it is a new business, and future period's financial forecasts.
  • Financial reports - Include Profit and Loss Statement, Balance Sheet and Budget reports.
  • Cash flow forecast - Prepare cash flow forecast then compare what you said you would do against what you achieved. It should include a cash flow statement comparing actuals with budget and forecasts. The historical statement should capture the seven cash drivers namely revenue, operational expenses, overheads, debtors, creditors, inventory and gross margin.
  • Debt servicing - When servicing a debt, use the budget and cash flow statement to determine the business' "break-even point", to assess what it costs for the business to remain operational, what revenue the business must generate to make a profit and what cash is available to service the debts.

Step 3. Finance fitness check and credit worthiness assessment

  • Get credit report - There are online providers who can supply credit reports for free. The report shows Personal Property Securities Register (PPSR) information which may include old and expired equipment leasing data which the applicant can update.
  • Create assets list - Many business owners may feel that they have nothing to use as security. By having a list of every piece of equipment, tools and furniture you own, it can all add up.
  • Online reputation - Lenders can access a lot of information about you and your business including social media such as Facebook. Be aware that lenders may look through the business' website, business' Facebook page and the business owner's personal social media activities. It is a way that lenders may assess one of the 5 Cs namely, character of the borrower.
  • Tidy up issues - Before seeking any funding, tidy up any outstanding issues to give yourself the best chance of obtaining funding approval.
  • Credit rating and ATO - Check your personal credit rating, business credit rating and your Australian Taxation Office portal. This is important to ensure everything is in order to avoid any surprises when the lender checks your credit history.
  • Multiple applications - By having multiple finance applications in progress at the same time or within a short-period of time can have a negative impact on your credit rating.
  • PPSR report review - Access your PPSR report search results. It is important to review it and your adviser can help you do this.
  • PPSR register review - Carefully check PPSR by undertaking a search of the register as lenders will check it. Prepare a statement showing the reason for any registrations. Any out of date or incorrect entries can impact the business' credit application. It can limit the security you can offer another lender if you are applying for additional finance. All out of date registrations should be corrected to obtain an accurate picture of your business. You can seek legal assistance as required. If there are any issues in these reports, work with your adviser to correct them.

Step 4. Assess Funding Requirements

  • Funding needs - It is appropriate to require some funding. By having the right type of funding for your situation can really make a difference. It can help you to achieve business growth as it may be difficult to solely rely on sales to achieve success.
  • Business needs - Determine your business need. Assess if you need to borrow, seek funding from investors or self-fund your business operational requirements.
  • Cash urgency needs - Assess if you require urgent cash to address the short-term issue in your business. Determine if you require some funding instead to meet your needs that focuses more on the ongoing operations of the business.
  • Debt serviceability - Determine if you can service the debt. When assessing the serviceability of the debt, it is not only taking into consideration the funding amount. It is the total cost including fees and charges.
  • Giving guarantees - Understand what it means to give a guarantee for secured and unsecured loans.
  • Mental health matters - Your mental health matters. The state of your mental health is critical to the success of your business. It is important to have a business plan and appropriate funding in place to give you some peace of mind.

Tip #4. 12-Step Finance Health Checklist

Here are the things you can do to improve your chance of success before you apply for a business loan.

  1. Get business accounts in order.
  2. Create or update a business plan.
  3. Review the balance sheet and Profit and Loss reports.
  4. Create monthly cash flow forecasting.
  5. Ensure clean credit rating history file.
  6. Check Personal Property Securities Register.
  7. Sort out Australian Taxation Office affairs.
  8. Lodge PAYG (Pay-As-You-Go) and BAS (Business Activity Statement) on time.
  9. Understand your business needs.
  10. Assess if you require business funding.
  11. Decide which funding option best suits your business needs.
  12. You are ready to apply for funding.

Tip #5. Business Planning Review

Business planning is an ongoing business activity as outlined in business.gov.au. As your company changes, many of the strategies in your business plan will need to evolve to ensure your organisation is still heading in the right direction.

By having an up to date business plan, you can remain focused on where you are heading. You can make further adjustments to the plan as your business objective changes.

It will help to ensure that you are ready when you need to adjust your company's strategies and when you require business funding in the future.

Do-It-Yourself Business Plan Option

A business plan provides direction, keeps you on track and it is usually a requirement when you seek finance. According to business.gov.au, depending on your business type, your plan could include the following sections:

  • Business Summary - A one-page overview should be written after your business plan is finalised.
  • About your business - This is usually called the management plan or operations plan. It covers details about your business including structure, registrations, location and premises, staff, and products or services.
  • About your market - This is the marketing plan. It should outline your marketing analysis of the industry you are entering, your customers and your competitors. This section should also cover your key marketing targets and your strategies for delivering on these targets.
  • About your future - This section covers your plans for the future. It can include a vision statement, business goals and key business milestones.
  • About your finances - The financial plan includes how you will finance your business, costing and financial projections.

Done-For-You Business Plan Option

A business plan sets you up for success and helps you adapt as your business grows. The business plan is a guide that provides a roadmap for your organisation's future and help you to better manage your future business goals. Do not leave your business plan to the last minute as it takes time to do research, to carefully prepare and develop an impressive plan that can create guidance to help in positively impact investors and lenders with your funding requirements.

  • Determine who the plan is for - Determine if your business plan has more than one purpose. Assess if the plan will be used internally or will third parties be involved. Deciding the purpose of the plan can help you target your answers. If third parties are involved, determine their interest in your business plan. Do not assume they are only interested in the finance part of your business. They are likely going to look at the entire business as a whole.
  • Get some help - If you are not confident in completing the business plan yourself, you can seek the help of a professional such as a business adviser or accountant, to look through your plan and provide you with advice.

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Tip #6. Taking on a mentor or business coach

Participating in mentoring or coaching programs can help you develop a greater understanding of business processes and practices. It can help to provide you with the skills you need to grow and improve your business.


To summarise, by being aware of the lender's criteria based on the five Cs, undertaking a finance health check and having a good business plan are some of the important factors to help increase your success rate in receiving funding from banks or investors.
Without a proper business plan, no funding preparation checklist conducted in advance and no essential finance health toolkit that you can use as a guide, you may find your business struggling or even failing to obtain funding at a time when you need it the most.

Free Resources

Download the FREE Business Funding Essential Guide - visit our Resource Centre.





Research Source Acknowledgements

Based on The Australian Small Business and Family Enterprise Ombudsman and Scottish Pacific Business Finance data.

business.gov.au. (Australian Government website).

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Copyright 2020 Dynamic Zenergy.


This article is not intended for use as a source of legal, business, accounting or financial advice. All readers are advised to seek services of competent professionals in legal, business, accounting and finance fields. This article is general information only.

Author:Melinda Stevenson
About: Dynamic Zenergy provides specialist business advisory consulting services. Our mission is to accelerate your business growth by increasing your revenue streams and profitability. We help you in systemising, automating and improving processes by leveraging business management software and outsourcing services so that your organisation can thrive and to maximise the return when exiting/selling the business.
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