Current at: 29 July 2008
An Introduction to Applying for Finance
Are you applying for a loan or line of credit for the first time? The following aims to make the process easier.
Banks (and other types of financiers such as building societies) are in the business of lending money. This article will refer to all of them as lenders. Like all businesses, lenders are in business to make a profit. The way in which they make a profit is by charging interest on the money lent. Interest is usually expressed as a percentage (called the interest rate) of the amount borrowed. The amount that is being borrowed is called the principle.
The interest rate is described as being either fixed or variable. A fixed interest rate is expressed as a particular figure, e.g. 6 per cent, and will not change over the length of time you are allowed to pay the money back in full, i.e. the term. A variable interest rate is one which changes in accordance with the changes in the official interest rate (as set by the Reserve Bank of Australia).
Who can apply?
Only a legal person can borrow money. A business isn’t a legal person, it is an asset that belongs to a legal person. A legal person is an individual or a company. So, if you intend to carry on business as a sole trader or in a partnership, the borrower will be you or you and your partners together as individuals. If the business is owned by a company, then the company will be the borrower.
Risk assessment
After receiving an application for finance, the lender looks at all the information that has been provided with the application in order to carry out a risk assessment. After making a risk assessment, the lender will either accept or decline the application (depending on whether the risk is acceptable or not). The type of risk that the financier is looking at is the possibility that the applicant will not be able to meet all of the repayments. Failing to make a repayment is often referred to as a default.
There is no one single piece of information that the financier looks at, and much will depend on a number of factors, including:
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whether the business is new or has been established for some time
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the trading history of the business
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the size of the loan
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the purpose of the loan
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whether the borrower has any other assets of value that can be offered as security (otherwise known as collateral).
Application accepted?
If your loan application is accepted, then you will need to sign some paperwork. The simplest scenario is where you are borrowing cash and the lender feels that the risk of default is so low that no security will be required. In this situation, you will be asked to sign the loan contract and/or bank account forms.
If you are borrowing cash and the lender wants you to provide some security, you will also need to sign whatever forms are required for the security. If you are borrowing money to purchase plant or equipment, then you will need to sign the loan documents, the security documents and the documents that you will need to purchase (and register, if applicable) the asset you are purchasing.
The above information is a brief outline only. Specific advice on which financing option is best for your business should be sought from professional advisers.