The assessment of a business loan can be way more complex than a simple home loan. Best is to speak to an experienced mortgage adviser as not all home lending brokers are experienced enough to provide suitable advice for business loans. As a very high-level indication, the lenders’ assessment will include the following:
- Borrower and Guarantor’s profile, which will include their personal historical background, their credit profile, area of expertise, experience and qualification, the capital they propose to introduce etc.
- The proposed business profile, including the industry; unit size; location; competitors; historical financial performance; lease terms; suppliers & customer profile; operating hours and staff profile etc.
- Borrowers’ business plan including their business strategy going forward and financial projections.
- Security offered – type / value of collateral offered
2- How much can I borrow for the business?
The lenders will require a decent contribution from the promoter borrower and how much the lender will be comfortable lending will depend upon their risk perception in regard to the industry, the particular business unit, whether start-up or going concern; client profile / industry experience etc.
For small sized retail businesses, the main banks normally require at least half the acquisition cost be contributed by the borrower. This contribution can be saved cash or collateral security, which normally is equity in residential or commercial property.
In case of established franchise units, few more specialised lenders may lend with nominal deposit from the borrower, but it all depends on how strong the proposal is.
3- What business loan terms are available?
In most cases, for working capital loans, the lenders will coincide the loan term amortization to the existing lease terms but in many cases, the lender can consider providing “interest only” terms for the initial one or two years, again depending on the strength of the application.
In cases of term loan to purchase plant & machinery, the banks generally amortise up to the residual life of the assets or up to 10 years and some cases even 15 years, depending again on lenders’ assessment
4- How do repayments work?
The lenders require the borrower to repay the lending in full within the loan term, which will include the principal and the interest. In some cases, if the lender deems fit, they may allow interest only terms for the initial period of the lending for the client to settle down in the business.
5- How can I use the funds?
In case of business lending for working capital, the banks mostly allow an overdraft limit, within which the borrower must operate. The thumb rule is that the borrower is expected not to exceed arrangements, i.e. account balance must remain within the approved overdraft limit and also, the overdraft account ideally must return to a credit balance at least once within a month – this evidences that there is no hard core element in the working capital funding.
6- What does the loan cost?
The cost of business lending typically will include the lenders’ one-off loan approval fee and on-going line fee and the monthly interest cost. Besides, there will be legal cost for initial loan/security documentation and could potentially be fee for other professionals like business / property valuers etc.