Once You Understood a Lender’s Requirements, More Than Half the Battle Is Won.
Whether your small business is actively expanding its operation or in need of ongoing cash flow support, seeking external financing is the way to go. If you do not have family or friends with the means to help, a business loan is likely the most accessible source of funds for small businesses.
However, getting a small business loan can be an extremely time-consuming and daunting process. There is a lot of number-crunching and paperwork involved, especially if you’re new to small business lending.
We have compiled a list of small business loan requirements to help you better understand the lending process so you can apply accordingly, with ease.
1. Build Personal and Business Credit Scores
Credit score is an indication of your repayment capability, attitude, and behaviour. Lenders require small business owner’s personal credit score because they want to know how you manage debt. The fastest way to improve your personal credit score include making your payments on time and disputing any inaccuracies in your report.
More-established businesses will have a business credit score. Steps to keeping your business credit score strong include settling your business’ invoices on time and keeping pristine public records. If you have a less than stellar business credit score, not to worry, some lenders may look at more than just your credit score to determine your business’ financial health. Also, other factors can help you strengthen your business credibility, for example, collateral or a personal guarantee.
2. Craft A Solid Business Plan
Not all lenders will ask to see a business plan from those applying for business loans. Still, the majority of the traditional lenders, such as banks, will expect you to provide a professionally prepared business plan as part of the lending requirement. A strategic business plan determines your business’s systemic direction, which is often a sign of business success; it will give risk-averse traditional lenders a reassurance that your business is profitable, hence managing to repay debt.
Your business plan should include the following information:
- Company description
- Product and/or service description
- Management and organization
- Industry analysis
- Facilities and operations plan
- Current and projected financials
- Promotional, marketing and sales plan
3. Organize Financial and Legal Documents
Lenders will require a variety of documents when you apply for a small business loan to enable their credit team to conduct credit risk assessment on your company before approving your loan application.
The documents you might need to prepare for business loan application typically include the following:
- Copy of Directors, Owners, Partners, Shareholders, Guarantors Malaysian ID card
- Business Registration Document e.g., Form A/ Form B/Form D, Form 8 / Form 9 / Section 14 (Super Form)
- Last 6 months Bank Statements
- Latest 2 years audited financial statements and/ or management accounts (where applicable)
4. Provide Collateral
Collateral refers to any property or assets that lenders accept as security for a loan. It’s a way lenders can recover their money in case your business fails. Not all lenders require you to put up collateral to get a loan but providing collateral gives you an added advantage when it comes to chances of approval and better interest rates.
However, if you don’t have sufficient assets to offer, you might need to apply to lenders that do not require collateral but may want a personal guarantee. Each lender has its own requirements if you’re unsure.
5. Update Business Revenue and Profit Report
Lenders often have minimum annual revenue report requirements to determine your business profitability. To confirm your business’ earnings, you might need to provide your business’ bank statements and income tax returns. In addition, you might need to prepare your profit and loss statements to lenders for them to analyse your company’s cash flow.
Some lenders will also review your debt-to-income (DTI) ratio to ascertain whether you can afford to take on additional debt. You can calculate your business DTI ratio by dividing your business monthly debt by your gross income. A DTI of 43% is typically the highest ratio a borrower can have although smaller lenders may be laxer in allowing you to borrow a little bit more.
Want to know if you’re eligible for a small business loan? Talk to our advisor to find out more.
Avex Credit is a licensed money lender in Malaysia under the purview of the Ministry of Housing and Local Government and governed through Money Lenders Act 1951 and Money Lenders Act (Amended) 2003. We provide a variety of personal, mortgage and business loans that are tailored to meet your specific needs.