The Importance of Business Experience

You will no doubt be aware that banks have developed complex assessment criteria over the years that help them determine whether a borrower is a safe risk when it comes to granting a home loan. They will ask every applicant to provide adequate information to allow the assessment to proceed and this includes things like:

Proof of income. This means supplying things like payslips and PAYG summaries, and possibly tax returns or tax office assessment notices.

Proof of continuity of employment. This means providing a letter from an employer confirming the date the position started as well as special conditions of employment.

Credit history. This will involve the obtaining of a credit report from a major reporting agency to check an applicant's previous credit history.

Savings history. For first home buyers this is a vital element of the home loan Asst process, applicants must be old to demonstrate a capacity to save money and place the money in a savings account over a period of time.

A self-employed borrower has to provide the same proof but banks will ask for different forms of documentation such as:

Tax returns for the last two trading years.

Full financials for the last two trading years.

Tax office assessment notices for the last two years.

Where a company is involved, tax returns have to be provided for the company as well as the individuals applying for the loan.

If a trust is involved, a copy of the Trust Deed will need to be provided.

Explanations may be required in respect of some elements contained in the tax return such as depreciation schedules and the likelihood of replacement equipment being obtained.

Copies of loan statements of all facilities held by the company to check loan conduct.

What about a person wishing to start a business?

In the case where a person wishes to start a business from scratch or where they have been trading for only a relatively short time, say one year or less they may wish to apply for a loan to expand their business or even to purchase a home.

Let's look at how bank would assess each of these cases.

Starting a business from scratch requires an applicant to prove to a bank that they have sufficient experience to justify a loan approval. This scenario often arises where a competent employee in a business decides to start his or her own similar business, for example a builder who has served his apprenticeship over a number of years and then worked as a carpenter on dozens of projects.

In this case, the bank will require proof of this experience, usually by way of a statement from an accountant and possibly from the previous employer who can testify as to the applicant’s skill and expertise and duration of employment. Tax returns and group certificates from the previous employer may also suffice in this respect.

Even when this experience can be proved, the bank will still want security for any loan advanced to the applicant. This means that the borrower will have to have real estate assets which can be mortgaged.

In Australia, it has been a common occurrence over the last 10 years for property development companies to start this way and the banks rely upon the experience they have had with similar borrowers to determine an appropriate assessment policy.

The importance of previous business experience cannot be overstated as the bank relies upon this quite heavily even when borrowings are modest and the asset position is strong. It is a commonsense approach when you think about it because statistics show that most new businesses fail within 18 to 24 months of commencing, but, by and large, these start-up enterprises are started by inexperienced operators who think they know more than they really do.

Another vital element of the application process for a start-up business is to provide a well thought out business plan and a detailed cash flow analysis provided by an accountant. The more detail you can provide the better because this goes a long way to convincing a bank of the business’s viability.

Experienced business bankers can read cash flow analyses with a very critical eye and can come to grips with cash requirements in the business with great clarity. This means you should have your plan written by an expert.

In a nutshell, here are the things you need to provide a bank applying for a start-up business loan.

A fully costed twelve-month analysis of the businesses first year of operation.

A fully detailed cash flow analysis of the same period of time with care taken to include every possibility and the assumption of a worst-case scenario.

A fully detailed business plan which includes not only cash requirements but also marketing plans, market analysis, product details, product development proposals and suchlike to give the bank a complete picture of the entire business operation. This needs to be details enough to allow a banker to get a very clear picture of how the business will run on a day-to-day basis along with contingency plans for poor trading periods.

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