Every business owner has a story.
How the business started, where it’s going, the opportunities in front of it, and why an extra $500,000 of funding could help take it to the next level.
And I genuinely love hearing it.
But when it comes to getting a cashflow business loan or overdraft approved, most lenders don’t really care about the story with all the gold and rainbows.
They’re generally following a system.
And while every lender is slightly different, there are four things that tend to have a much bigger impact on the outcome than almost anything else.
Your last six months of bank statements
Six months of business bank statements tell lenders a lot about how the business is really doing today, not 12 months ago when you did your last tax return.
They can see turnover, regular expenses, existing loan repayments and, importantly, account conduct.
It also gives them a starting point for how much they may be prepared to lend.
As a very rough example, if a business is consistently receiving $100,000 per month into its account, some lenders might be comfortable with a maximum loan somewhere around $200,000.
That doesn’t mean every business turning over $100,000 a month can automatically borrow $200,000. But in a lot of cases this will be close to the mark and with good conduct, approvals can be issued in hours.
But this bank statement-led finance approach can also work against you.
A dishonoured payment or missed direct debit within the last six months might not sound particularly serious, but for some lenders it can be enough to rule the application out immediately.
This is why the most recent six months can sometimes matter more than the last two years of financials when it comes to cashflow and working capital lending.
Whether you own property
You might be applying for an unsecured business loan with no intention of offering your home as security, so why does owning property matter?
Because from the lender’s perspective, it can significantly strengthen your personal guarantee.
It can affect both how much they’re prepared to lend and the interest rate they’re prepared to offer.
And if there’s a mortgage attached to that property with a strong repayment history, that can provide another useful indicator of how you’ve managed debt previously.
None of this means you need to own property to get a cashflow loan.
There are plenty of options for business owners who don’t.
But two otherwise similar businesses can end up with very different lending options simply because one director owns property and the other doesn’t.
Your credit profile
This is probably the most obvious but also the easiest one to accidentally get wrong.
You need a business loan, so you jump online and apply with a few different providers because they all promise a quick answer.
It seems harmless.
But those applications can leave enquiries on your credit file, and suddenly the next lender is asking questions about why you’ve recently approached three or four other lenders.
Most lenders will ask about anyone who you’ve made enquiries with during the previous six months. And a whole lot of enquiries in a short period can cause an automatic decline with some lenders.
So applying everywhere to see who says yes can actually reduce your options rather than improve them.
This is one of the reasons it helps to understand which lenders are likely to fit the scenario before submitting applications.
Sometimes the lender you don’t apply to is just as important as the one you do.
Tax debt
Tax debt probably has a worse reputation in business lending than it deserves.
Business owners often assume that any outstanding ATO debt means lenders won’t touch them.
However, a modest tax debt with a manageable repayment arrangement can be completely acceptable to some lenders.
In fact, one of the more common reasons businesses use cashflow lending is to refinance or clear tax debt.
That can make sense when replacing the existing ATO repayment with another facility improves the monthly cashflow of the business.
Of course, the size of the debt, repayment history and overall position of the business still matter. Usually tax debt at 10% of annual turnover and an otherwise strong profile is very manageable.
The Takeaway
Every business has a great story.
And the story absolutely matters to use when we’re trying to understand what the business needs and whether taking on debt actually makes sense.
But when it comes to getting a cashflow loan approved, most lenders are following their system, not a story.
Understanding that system before applying can make a significant difference.
At HKW Finance, our job is to understand what the business is trying to achieve, then find a lending solution that matches that need while also playing by the rules of the cashflow lending system.