Key interactions business owners have with Australian banks

If you’re running a business in Australia, you’re no doubt going to need to have an interaction with a bank at some stage. Here’s the lowdown on what to expect, writes Nina Hendy.

All business owners need a financial leg up at some stage, particularly during periods of growth. But dealing with Australian banks and other lenders needs to be handled diplomatically.

We’ve listed some of the key interactions you’re likely to have with your bank or lender below so you can be fully prepared.

Applying for a loan with an Australian bank

Applying for a loan requires some careful planning.

Start by getting a clear picture of what you need the loan for, and detail in a budget exactly how much you need, and what you need it for.

READ: How to get a loan approved quickly for a trades-based business

Next, do some research on the types of loans offered by the major lenders.

Lenders will assess your eligibility for a small business loan against a number of criteria, such as:

• Financials: Bring along your business financials such as bank account statements, loans, profit and loss statements and your business plan with financial projections.
• Turnover: You may need a minimum turnover to satisfy a lender’s eligibility criteria.
• Business longevity: If you’re only just starting out and don’t have many runs on the board yet, lenders are less likely to want to touch you.
• Market risk: Lenders will want to measure your market risk to determine if you operate in a risky industry
• Credit history: Your financial past will be considered, so make sure you understand your credit score.

There are steps you can take to increase your chances of securing a loan, advises Dana Boyd, director of Tundra Business Synergy.

“Lenders are more critical when lending money,” said Boyd.

“They require more information, verification and understanding around the business, and business owners.”

Lenders want to minimise their risk, so the more information you have to support your business, the better.

Having equity in your own home will also lower the risk for the lender.

“Having two years of financial statements will mean you can apply for a full document loan,” said Boyd.

“This will help get a more competitive interest rate for your loan.

“Generally speaking, lenders favour those who can provide two years of financials such as profit/loss and tax returns.”

Understanding your cash flow

If you’re about to enter a period of growth, you may need to sit down with your bank manager and get a clear picture of your cash flow so you can negotiate some additional working capital.

READ: Understanding cash flow for new business starters

Scottish Pacific Business Finance senior executive Wayne Smith says robust financial forecasts will help a business owner with any conversations they’re having with potential financiers.

“A profit on paper doesn’t equal cash in the bank, so it’s important to understand when payments are expected in and when outgoings need to be paid,” said Smith.

Late payments

Successfully managing cash flow is essential, because failure to pay your accounts on time can adversely impact your credit score.

If you do get behind on repayments, you’re better off contacting your lender.

Consider whether you can negotiate terms based on hardship and bear in mind that if there are assets secured against the loan, the lender can seize those.

“Contacting the lender sooner rather than later may mean that the business can negotiate the terms of their loan based on hardship,” said Boyd.

“A hardship verification must be reviewed by the lender, and may help to vary the loan terms to help the business repay their loan.”

Switching lenders

If you’ve found a lender with a more competitive rate, minimal ongoing costs or better features, you might feel motivated to switch to a new bank.

Lenders are increasingly cautious about providing loans for small business, which has paved the way for a number of new second-tier lenders and digital banks, such as Prospa and Moula.

But bear in mind that refinancing could be an expensive process. Make sure you read the fine print and do your research to be sure you’re coming out on top.

Also, don’t burn your bridges with your bank manager, because you never know when you might be knocking on your existing lender’s door down the track.