Are you starting a business but are unsure how to approach the bank for a loan? There are a few steps to follow, so here we've distilled our advice down into seven easy steps.
They're in no particular order, but read the complete list before jumping into anything.
First off, though, what's your credit score? You're going to want to know that before anything because your score will affect your getting a loan and the amount of interest you'll pay. So if you haven't already, check out our blog on credit scores.
Step 1: Start a business plan.
You'll need a strong business plan that tells the bank how practical your business idea is. So, before you get started, check you're covering these things;
- What are your business goals?
- What do you do?
- What's your strategy (for meeting your financial objectives).
Business.govt.nz provides a complete list for Business Planning to help you set those goals.
Step 2: Check your credit score.
When presenting your creditworthiness, you're going to need a copy of your credit score to show banks. This will show them how reliable you are at managing repayments and other financial amounts.
To make sure it's looking presentable, you'll want to check our tips on raising your 'credit score number'.
In short, you'll need a number around 700 and above to secure a good loan.
You may see a slight dip in your score when you put in a complete credit application, but that's perfectly normal. It's all part of the credit enquiry process, which we cover in detail in another blog.
Step 3: Mockup a credit report.
This is the document you give to banks, which details all your credit activity. It will get looked over in detail, so you'll want to check for mistakes before you do. You can also get a credit record from your bank and ask them to change anything incorrect. But we'd recommend getting a credit report from an NZ credit agency because they'll structure your credit report to look professional.
Step 4: Get your financial records in order.
While you're at it, you'll want to make sure your financial info is in order. This includes;
- Balance sheets
- Cash flow statements
- Income statements
All these are key for banks to know because they tell them whether you can repay or not. The more history you can show, the better — so if you haven't already started keeping a list of all your statements.
Step 5: How much do you need?
Do you know how much money you need to borrow?
Budgeting correctly tells a bank you've done your research. Make sure you don't go over or under budget — evaluate what your business is worth and what you expect to make—time to be brutally honest with yourself.
If your personal or business credit isn't 'desirable', you may be asked for something called 'collateral'. This is a guarantee valued against your 'personal assets' — anything big enough to be attractive to a bank (such as your home, car, or any significant amount of money, like cash, savings, or deposit).
Step 6: But what's it all for?
It might sound evident after step 5, but how much you need boils down to how you intend to spend your money.
Once you know all the small details, you can decide whether you want a short-term or long-term loan. That is, can you repay all your costs in a few short months, or are you thinking more long term (say, in the next decade or two).
Step 7: Which bank do you go with?
Which bank you choose does make a difference. Before this step, you'll want to have checked your credit report and filled in all the details — because then you'll know what type of loan to apply for and how much interest you should come up against.
Always go for low-interest rates but also flexible approval guidelines — that way, you give yourself wriggle room.
Remember — approval doesn't lock a bank in. You can still be denied if you're late on payments or your credit score drops after approval. So keep up the excellent work as you go.
If you're rejected, you can legally ask for a 'notice of adverse action' — which is technical speak for a piece of paper that tells you why you were rejected.
So, those are the seven steps to being a complete business loan pro. Just so they're clear (or in case you skipped to the end), the key takeaways are;
- Make a business plan.
- Check your credit score.
- Get a good credit report.
- Order your finances.
- Figure out how much you need…
- …and why you need it.
- Pick a bank.