Bank Loans

Banks want to provide loans to businesses who are solvent and profitable. Generally they consider lending to one-person operations or new businesses without solid track records as high risk.

You need to show the bank that a loan to you is a low risk proposition. To improve your chances of securing a bank loan, thorough planning and management is essential.

Each financial institution has its own criteria for assessing applications. Generally you will need to provide a comprehensive and well supported business plan, accurate financial forecasts and collateral to match the value of the loan.

There are a number of websites like InfoChoice and Canstar which make it easy to compare interest rates and financial products. Just be aware that comparison websites may have commercial arrangements with financial services companies.

Loan assessment

Many banks use an initial basic assessment known as the 3Cs: character, cash flow, and collateral. How do you measure up to these:

  • Character: relates to your past commercial experience, your skills and abilities. The bank manager will assess whether you can actually do what you want to do.
  • Cash flow: refers to the cash “ins” and “outs” of the business which should be realistic, showing that sufficient funds can be generated to cover any loan requirements.
  • Collateral: refers to what you are offering as security against any potential loss by the bank.

Risks involved

Both the lender and the borrower face risks when money is borrowed.

  • The lender's risk is that the loan won't be repaid, will be paid late, or that it will cost a lot of time and money to collect payment.
  • The borrower's risk is that they won't be able to make the repayments, and the lender will call in their security, or sue for recovery of the monies outstanding.

It is strongly recommended you seek professional advice from your business advisor and lawyer before entering into any contract.

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Related Information

Business Briefs to view:
Recovery of a Debt
Applying for Finance

Business Guide to view:
Records Management Tips

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