Loans are an integral part of businesses that you will need time and again. Whether you are thinking of buying a new office, a commercial property, an asset, or just freeing up the cash flow within your business, knowing the eligibility criteria of loans for business is essential in knowing your credibility as a borrower. Although the criteria can differ between lenders, this article is a general overview of the topic.
Business finance is used for several purposes, like buying property, funding equipment, and hiring staff. The commercial lending market is a little complicated because the eligibility criteria vary among lenders.
How Business Lenders Assess Eligibility Criteria for Business Loans?
The borrower eligibility depends on a range of factors like the loan type one applies for, credit score, time trading, operational time of business, and more. General eligibility criteria of purchasing a commercial property are as follows.
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Details of Property
Business lenders will want to know about the type of land you want to buy, including its location, features, and postcode. Some lenders might fund only in specific areas. For instance, metro properties are hassle-free to fund than rural land. LVR depends on the type of property. Some places like petrol stations have an LVR of 50%, and spaces like warehouses can have an LVR of up to 70%.
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Financials
The lender will want to see the most recent bank statements. It is proof of clear repayment history and a regular injection of cash. Also, keep the financial statements of your business ready. It includes two documents, namely the balance sheet and profit & loss statements. It will allow loans for business lenders to examine the expense and income of your business and set your net asset position. They will then let you know the amount of money you have to put forward as a deposit. In general, lenders demand a deposit of at least 20 to 30% for a commercial property loan. Instead of a deposit, some lenders demand an equivalent amount of equity within an existing property.
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Company And Personal Information
For a business finance approval, you will need to submit a few basic details like your ID and contact information for verifying your identity. To approve your application, lenders will need your ABN and other company specifications.
The eligibility criteria can also vary according to the different types of commercial loans available. Business lenders ask for a varied amount of documentation. The three main types of property loans are full-doc, low-doc, and no-doc funding.
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Full-doc Loans
When borrowers apply for full-doc loans, they should submit their complete assessment and relevant guarantors or applicants. Here you have to provide all the income and liability statements. It includes tax returns, financials, and credit card statements. As the name suggests, these loans need more documentation to be profided. So as a reward, they come with more competitive rates.
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Low-doc Loans
Low-doc loans for businesses come with lesser paperwork in comparison. Your accountant will have to submit your total income to show that you can make the repayments. If you have a business with low-profit margins, this loan type is for you because it provides more flexibility and choices. Non-bank lenders can give you more access to money. Lenders who offer low-doc loans are at higher risks by not seeing any financial statements. It results in a higher rate of interest as well. The approval and application procedure are much simple.
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No-doc Loans
In no-doc business finance, you need a strong exit plan to qualify. It means you need to show enough security to lenders to recoup the losses in case of default. It is because borrowers need not show any documents or accountant declarations. The application process is simple even in comparison to low-doc loans. Higher interest rates justify this risk.
Wrapping It Up
Different business lenders have variable eligibility criteria for loans. This article is a general idea about the same. The documents mentioned here are must-haves. You will get to know the exact criteria only from the chosen lender.