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. Remember that these steps are no guarantee, as banks have different policies around who they lend to and what equity (secured payment) they'll accept upfront. It may be that your bank doesn't do business loans or that your current plan, and banking profile, doesn't fit their requirements. In that case, you may need to look at other lenders, although these same steps will apply.
They're in no particular order, but read the complete list before jumping into anything.
And before you begin, do you know your credit score? You're going to want to know that before starting anything else. That's because your score will affect your ability to apply for a loan and the amount of interest you'll pay, among other factors. A good score won't guarantee you a loan, but a poor one could bar you from dealing with the banks entirely. 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 the following points in your plan;
- What are your business goals?
- What do you do as a business?
- 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 your credit score is looking presentable, you should check our tips on raising your 'credit score number'. This will also tell you more about what a good score looks like.
As an estimate, you'll need a number around 700 and above to secure a good loan. Again, this won't guarantee you a loan, but a lower credit score than this could deny you loan access.
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 more professional before you present yours to the bank.
Step 4: Get your financial records in order.
While you're getting your report sorted, you'll want to make sure your financial information is in order. This includes your;
- Balance sheets
- Cash flow statements
- Income statements
All these are key pieces of data for banks to know because they summarise your history of repayments and the likelihood that you'll repay your new loan. The more history you can show, the better — so if you haven't already started keeping a list of all your statements, we recommend you do.
Step 5: How much do you need?
Do you know how much money you need to borrow?
A well-thought-out budget tells a bank you've done your research. Make sure you don't go over or under budget in your estimation — evaluate based on what your business is worth and what you expect to make. It's 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 self-evident after step 5, but how much you need to borrow really boils down to how you intend to spend your money.
Doing a complete refit for your store or just setting up? Well, there's a particular loan for that — an equipment loan will help with all those start-up costs.
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 achieving 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 repaying your loan on time and to the full amount agreed upon to avoid having your loan agreement revoked.
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.
In short.
Those are the seven steps to becoming an expert at business loans. 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.
- And finally, pick a bank to approach.
Don't be disheartened if you're not accepted by a bank the first time. We recommend waiting a few months between applications, as each fresh application will result in a dip in your credit score. If you are rejected, we suggest taking note and first trying to improve your approach and financial standing before striking out again for a fresh loan.
