Author: Michelle Griffiths, Partner, TAG Financial Services 
The first year in a new business is always the toughest and the riskiest time. If you get those initial estimations wrong and you run out of money, then you will have few options to be able to call on for help. The banks will not be interested in helping you until you have two years’ worth of trading history (and some banks want three) to support any loan that you may apply for, and that two year history had better be good.
If you think about the pattern of a normal start-up business, it is not uncommon to barely break even for the first year, as you are just establishing yourself and your sales networks, but you still have all the costs (and may or may not be paying yourself a wage). Therefore, you must have sufficient capital behind you to support your first two years of business and living expenses when you start out, as it is extremely difficult to get finance once you are fully into your new business venture.
Tips when dealing with banks for finance
These 10 tips will help you understand how the banks will assess your information once you have a more established business with profits you can use for a business finance application.
- They will want to see that the business has an ABN that has been active for at least 12 months.
- They will want to see the last two years of figures, including tax returns. If there has been a reduction in the profitability in the last year then they will want to know why, as a declining business will represent a greater risk to them.
- The banks will make their own adjustments to your profit figures to get to the net income figures that they will use to assess your loan. Some of the adjustments they will make include:
– if you have paid yourself wages
– government subsidies
– non-cash items
– extra-ordinary expenses
- You may be relying on other income as part of your overall serviceability in the form of rental property income or dividends/distributions from an investment portfolio. The banks will discount these as well. For example:
- Gross Rental is usually discounted by between 20-25%, and the bank will also take off the annual expenses.
- Dividends from blue-chip shares and distributions from managed funds will only be considered where there are multiple years of this income but will be discounted by between 25-90% depending on the bank’s policies.
- Gross Rental is usually discounted by between 20-25%, and the bank will also take off the annual expenses.
- The banks will look at all your loans and finances to assess your ability to repay not just the new debt but all your other loans (including home loans, credit cards etc.). your family situation, including your spouse’s situation, may also be considered.
- Other debts that can be particularly problematic when applying for a new loan include:
- Outstanding tax debt is a real problem. A bank will want to see evidence of the state of any ATO debts. They must be NIL unless you can demonstrate that you have cash that will settle the debt.
- Car loans can complicate the application assessment process. The banks will assess the outstanding balances, interest, and repayments – they then inflate this for their calculations. Sometimes it is easier to pay out the car loan or include this in the loans to be paid out with the new loan.
- Outstanding tax debt is a real problem. A bank will want to see evidence of the state of any ATO debts. They must be NIL unless you can demonstrate that you have cash that will settle the debt.
- Obtaining finance now is more about your ability to service (or payback) the loan, rather than whether you have sufficient assets to back the loan. So, you may have a home worth one million dollars and a home loan of only $300,000, but the bank doesn’t look any more favourably on this situation than having a home worth $400,000. The Loan to Value Ratio (LVR) is an important criterion (generally needs to be under 80%) but is not the determining factor of a loan’s assessment.
- Understand what your living expenses are, as this will be a key consideration in the lending process. As mentioned above the bank is assessing your ability to service the loan. It may be that you need to look at, and reduce your living expenses, to be able to afford the loan. See our previous article on financial leakage to explore how to do this.
- The bank will be assessing your ability to repay the loan based on the current interest rates (the banks will calculate an assessment rate, which is higher than the current interest rate), but also based on you paying interest and principal off the loan.
- It is not sufficient for you to only be able to fund the interest payments, even if you negotiate an interest-only loan, as this interest-only period will generally only be for a fixed period (often a maximum of five years).
Catch our next article on the 5Cs of credit, coming next week.
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Disclaimer: The information contained is general in nature. Professional advice should be sought before acting on any aspect on this page. Financial planning services provided by TAG Financial Advisors Pty Ltd (ABN 77 154 205 017 AFSL 415632), a wholly owned subsidiary of TAG Financial Services Pty Ltd (ABN 67 075 374 686). Copyright 2022. Please do not reproduce without the expressed written consent of the author.