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Applying for a loan? This is what lenders look for

Lenders want to see good financial habits, a clear vision for the future, and a funding proposal supported by processes and a strong team. See what else they look for and how you can improve your chances of getting finance.

Turn up with a plan

Setting out your vision, purpose and why you need funding is a key part of a successful finance application, according to research carried out by business.govt.nz.

“Most of the major banks and other lenders we spoke to told us that business owners often turn up with an idea, unable to explain how their business works,” says Bevan Hall, Business Performance Manager at business.govt.nz.

Although lenders want to understand your business, they don’t want to have to wade through a 12-page document. When you get to the application stage, they will probably have a format you need to follow. Being prepared will make you look proactive and professional.

Most lenders who took part in this research had a list of four to five things they wanted to understand about a business:

  • Motivation: Why are you in business and what is your vision for the future? You should be able to describe this in a few sentences. Half a page is too long.

An introduction to business strategy

  • Capability: What experience and skills do you and your staff – including advisers – have? What technology do you use? Have you developed any processes to make your business run better? If you have gaps, call them out and talk about how you’re going to address them.
  • Financial position and performance: What is the business’s current financial position ie what is the state of the balance sheet? You need to be able to summarise this and talk about it in more detail if they have questions. Knowing your business’s trends and financial position over the previous two years is a good place to start.

How to read financial statements

  • Personal finances: You might also be asked to share details of your personal spending and financial habits, such as showing a history of saving and repaying debt.
  • Financial forecasts: Lenders commonly want to see a financial forecast for the next 12 months. They might ask you about different points in your forecast or what will happen if something doesn’t go to plan. It’s important to put some logical thinking behind the numbers and projections you put into the forecast.

Cash flow forecasting

  • Purpose: What is the funding for? How will the money be used and, importantly, how will you be able to pay it back?

Good habits are important

Your track record is just as important as your future plans. You need to be able to show a history of being responsible with your money, paying your bills, credit card and other loan payments on time, not unexpectedly operating in overdraft and not spending a lot of money on things you don’t need.

Lenders will look at your past financial statements, often wanting to see your last 12 months of bank transactions to see a pattern of your financial behaviour.

“By not developing good financial and business habits early (potentially well in advance of needing funding) businesses miss the opportunity to add strength to their case through demonstrating patterns of good behaviour,” said one of the banks we spoke with.

Character as well as cash flow

Your character plays a more important part in lending decisions than you might think. Lenders will look beyond the numbers, assessing your financial habits, your behaviour, experience and skill-set. They want to be reassured that they can trust you to meet your repayment obligations. Simple things like being able to speak about your cash flow forecast, having a governance process and knowing how to improve cash flow in a pinch can go a long way.

A governance process could be as simple as having a team of professionals to support you and regularly meeting with them. Lenders said when it comes to professional support, they look for the ‘holy triangle’ when assessing an application. This is usually a lawyer, an accountant and an industry adviser.

What governance is and why it's important

Funding options

Bank loans are not the only financing options available to small businesses. In fact, experts recommend a number of steps prior to applying for debt lending. Even if you still pursue debt lending, completing these steps can make the application more likely to succeed. If you’d like to understand these steps and the different funding options that might be appropriate for your business, try our Funding Explorer tool.

Funding Explorer(external link)

Behind the research

The research referred to above was a multi-year programme led by business.govt.nz and involved in-depth conversations with banks, small businesses and a range of non-bank lenders, consultants and other experts. It was also informed by a business.govt.nz survey which 457 subscribers to this newsletter responded to. We carried this work out with support from the New Zealand Business Performance Panel and Otago and Duke Universities.

“This research showed that accessing finance is a pain point for many small businesses. It can be hard to work out the different finance options, other than debt, that are available. When looking at debt, it can be difficult to understand how to prepare for the application process,” said Bevan Hall, who led the research. “Huge thanks to all of those people who gave up their time to help us understand this problem better.”

Based on this research, business.govt.nz created the Funding Explorer and Cash Flow Forecaster tools. We are also working with major banks on a new tool to help smooth the path for small businesses looking to get finance.

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