How to ensure your business finances make you loan-worthy

Many small business owners seek finance options. So, what do they need to know to ensure they are doing the right things on their end to go through the process and successfully get funds? 2024 Better Business Awards SA Broker of the Year Jenaya Kennett gives Kiera Elliot-Pickett the lowdown.

Navigating the world of finance can be eerily nerve-racking, particularly in today’s economic climate of increasing interest rates. While the world is still turning and small businesses strive to start and survive, the rate of those applying for funding may not be heavily impacted. But how confident are Australian business owners when it comes to an approval?

It doesn’t come as a surprise that up to 79 per cent of Australian business-owners feel uncomfortable taking on debt. Or that 2 in 3 felt unconfident about loan approval. Multi-award-winning, South Australian broker, and Ausloans Finance Strathalbyn Director, Jenaya Kennett suggests there are ways to increase your confidence. “Getting finances for business vehicles or personal loans are the most common reasons customers come to us to seek funding. With the right preparation and knowledge, business owners can confidently secure the funds they need.” 

Show healthy business financials

Making sure your bookkeeping is up-to-date and accurate is essential. “Lenders want to see that your business finances are being recorded and adhered to by following proper business practices laid out by the ATO”, said Jenaya. “Things like tax returns, BAS statements, income statements, balance sheets, and cash flow projections will indicate that you have an understanding of your financial health”.

Lenders look to make sure a business is sustainable. “Demonstrating that the business is profitable with positive cash-flow shows that your business is earning more than expenses therefore able to make loan repayments comfortably” said Jenaya.

Know your score and get professional advice

It’s important to know your credit score and file contents. Lenders will use this rating, alongside their own risk criteria, to decide whether to lend to you, how much and at what rate of interest. “A strong business credit score (or personal credit for sole traders) secures better terms and rates. Maintaining a score of 670 or over, and being in business for two years or more can significantly increase your chances of approval”, Jenaya advises.

If your credit score is below 670 – don’t fret, there are ways you can improve it over time. “If your score is between 500-670, you can normally improve it within 6-12 months. We advise you to stop enquiring for credit. Each time you apply to a financial institution, it’s recorded on your file and drags down your score. This is where a broker can help as we can help to determine if you’re loan-ready without marking your credit file. We can also give you personal advice on how to improve your business finances to make you loan-worthy”, said Jenaya. She adds, “Showing consistency with any current payments you have can improve it, and avoid any new accounts or payday cash loans of $5000 or less – they’re almost as bad as a default”.

Jenaya warns that a credit score below 500 can take a lot longer to improve but suggests there could be ways to speed up the process. “If someone has a credit score below 500, it’s likely they may have issues that need attention. Open accounts should be paid off or payment plans should be arranged to avoid late payment fees or missed payments that further impact your file. They could even have defaults. Defaults aren’t the be-all, end-all. In some cases, credit repairers can help you to negotiate with lenders to get rid of them.”

Your personal and business credit scores are one in the same when you go seeking funding. Lenders take both into consideration so it’s important to maintain good standing in both areas. “You can get a free personal copy of your credit file from Equifax, or your business file from Dun & Bradstreet.”

When seeking funding – less is more

Though it’s beneficial to demonstrate to lenders that you can manage a responsible borrowing history, high existing debt can raise concerns about your ability to take on more. Jenaya said, “keep your debt to a minimum. It’s best to borrow only what you need and keep your debt-to-equity ratio low.” She continues, “You have a borrowing capacity based on personal circumstances, if you need further funding, you might not have the affordability to borrow it”.

“If you’re not feeling confident but need to apply for funding, a financial advisor or broker can help you to determine whether you have the capacity to take out a loan based on your personal circumstances”, said Jenaya.

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