Unsecured business loan documentation: Assessing eligibility

Nicki Ghazi

Tuesday, 22 September 2020

In contrast to secured financing, documentation for unsecured business loans is pretty straightforward. But no matter what type of finance you’re applying for, it pays to be organised, especially when you’re running a business and wearing multiple hats.

We’ve put together this quick guide to help you understand which documents you’ll need on hand and, based on those documents, how lenders assess your eligibility for unsecured finance.

Short on time? Our lending experts are here to help you sort out your documentation (as it can get complicated quickly), and can even check your eligibility before going ahead with an application so you don’t risk any damage to your credit score.

What is unsecured finance?

Unsecured finance is a type of funding offered by a lender without needing security. Secured finance, on the other hand, requires an asset from the borrower.

Usually this asset is a property, and by putting it forward as security, you’re essentially allowing your lender to take that asset from you in the case of default.

If (touch wood) this happens, your lender will then resell the asset to recoup losses incurred.

Applying for unsecured finance

Here are the main pieces of documentation lenders will want to see when you apply for unsecured finance:

Bank statements

Your lender will want to see bank statements covering up to the last twelve months, and typically a minimum of six.

By collecting your bank statements, your lender can better understand seasonality and consistency of income as well as other important details regarding your business, including:

  • The variety of your income sources if your product or service is B2B (business to business). The more clients you have (and the bigger those clients are) the more likely you’ll be paid back. This gives your lender confidence in your business’ ability to continue trading without unforeseen issues or income drying up.
  • Average cash balance across all business accounts. It’s important for lenders to not only see that you have ample funds to make additional periodic payments, but they also want to know that you can manage your finances. For example, are you setting aside rainy-day money or funds to pay quarterly BAS (business activity statements)? If not, lenders might decline your application or lend more conservatively.
  • Deposits. Many lenders prefer (or sometimes require) four deposits per month in order to approve your finance application. The less ‘lumpy’ your income, the better.
  • Conduct on commitments. When current payments are being dishonoured due to an insufficient cash balance, affordability and reliability are questioned. A lender will want to find out if there is a good reason for the borrower’s insufficient cash balance (for example, maybe an invoice has been paid late).

A recent profit & loss statement and balance sheet

Your lender will want to view your financials, including a profit and loss statement (P&L), balance sheet, aged payables and receivables (when relevant) to determine the overall health of your business.

To give you a bit more detail on what lenders actually calculate when looking over your paperwork: on the P&L, they'll check the total revenue for the period, the gross profit (i.e. the gross margin), the net profit before tax and also work out the EBITDA.

The EBITDA refers to your total earnings i.e. net profit before interest, tax, depreciation and amortisation—in other words, the amortisation, interest and depreciation expenses (on the expenses column deducted from gross profit) are added back to the net profit.

If a business is performing consistently year on year, they can afford to borrow the same amount as their EBITDA over one year.

Regardless of having a positive EBITDA, lenders rely heavily on your balance sheet when making a final decision as to whether they’ll offer you funding.

They’ll look at your cash ratio to work out how much cash you have in the bank versus current liabilities (borrowings due within one year), and they’ll also look at the liquidity of your business.

Your lender will also look at the difference in payables and receivables and refer to the AP & AR to understand the associated due dates, or the ageing of each item.

Taking out intangibles such as directors' or related party loans and goodwill will enable your lender to work out the net tangible worth of your business, though it’s difficult to place value on a business with intangible assets (for example, an accountancy firm).

Many trade finance lenders, as well as lenders who are particularly stringent, will not lend more than the net tangible worth of a business while others will lend more generously (as long as it makes sense to do so).

In addition to looking at your financials, aged payables and receivables indicate how much money your business owes creditors (payables) versus what is owed (receivables).

There are columns on each item that show what is currently owing—or owed—within 30, 60, 90 or 120 days. The amount overdue is also outlined.

The ageing of outstanding payables can be indicative of cash flow pressure or capital constraints, however this isn’t always the case. Ageing receivables—or simply extended payment terms with a supplier—could explain this.

Personal and business credit records

Your credit score and history play a large role in determining your creditworthiness, particularly when applying for unsecured finance.

If your credit score is considered ‘excellent’ you’ll have a much better chance of being approved for funding at a good rate.

A low credit score from late payments or a high volume of enquiries, a poor payment history with a creditor, or an open default could deem finance applications or approvals redundant.

Valiant can check your eligibility for unsecured finance before applying, so you can be confident your decision won’t impact or damage your credit score whatsoever.

Identification

No matter what type of finance you’re applying for, you’ll need to bring identification with you for verification purposes. You can either bring a driver’s license or passport to prove your identity (or both when 100 points of ID is required).

Your guarantor's information

If you have or require a guarantor, which isn’t uncommon with unsecured finance, you’ll need their identification and relevant supporting documentation.

Lenders will want to understand their financial situation to determine their strength and suitability as a guarantor.

Cash flow projections

A cash flow projection, or cash flow forecast, is a detailed template or document that outlines your business’ income and expenses.

Your cash flow projection will often cover the following twelve months and is broken down into monthly columns to predict how your business will perform.

It can help business owners—and in turn lenders—make decisions around future debt, i.e. borrowing money or buying new assets.

It’s important to consider upcoming events or projects along with cash flow projections, such as a new contract commencing in three months, or the hiring of three new staff, for example.

When applying for business finance, lenders will look at your cash flow forecast to take into account the potential feasibility of the project or outcome of finance requested.

Sometimes a few versions are prepared based on different outcomes—modest to enthusiastic. The lender will most likely lend on a conservative basis and potentially increase the facility once the initial investment is proven to deliver results.

Any other supporting documents

Any documentation that proves the health and stability of your business can help to support your case for finance.

Business or strategic plans, copies of sales orders and contracts can be used to strengthen your application, though they hold less weight than your bank statements, balance sheet and financials.

Executed contracts of work with suitable legalities are very useful in conjunction with cash flow projections, and also self-standing.

It’s worth noting that before you take out a business loan, you (and anyone else involved with your application) need to be identified under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006.

The information you provide about your identity, along with any additional supporting documents, gives your lender the ability to verify your identity under the Act.

Documentation for secured vs unsecured finance

Secured finance is notorious for having a tedious application process and paperwork galore. But unsecured finance is a lot quicker and simpler to apply for, requiring less paperwork.

This is because secured finance requires your asset/s to be valued and itemised for collateral. Often, business owners are waiting for months before they hear whether or not they’ve been approved for finance.

If you need fast financing, chat to a lending expert about your unsecured options, and find funds in your account in as little as 24 hours.


Nicki is our Senior Working Capital Manager. She works with a team of talented product specialists, leveraging 25 years combined experience to help Aussie businesses find tailored finance solutions.

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