You have found an opportunity to grow your business. It might be a new piece of equipment, larger premises, additional stock or the chance to take on a substantial contract. Borrowing could help you move forward, but the question is bigger than whether a bank will approve the application.
Will the funding help the business achieve something worthwhile, and can the business comfortably meet the repayments?
Those are questions worth answering before you approach a lender. Clear, current financial information helps you explain your plans. It also helps you decide whether borrowing is right for the business in the first place.
For many New Zealand business owners, preparing a loan application means gathering reports they have not looked at closely for some time. That work can be valuable even if they eventually choose another way to fund their plans. It can uncover an outdated forecast, a pressure point in cash flow or an assumption that needs testing.
This guide covers how to define your funding need, prepare your financial information and build a realistic case for borrowing.
Start with the purpose of the loan
Before thinking about loan products or application forms, write down what you intend to do with the money.
“I need $100,000 for growth” leaves too much unanswered. A more useful explanation is: “We need funding for a specified piece of equipment, installation and the additional working capital required while we take on two confirmed projects.”
The details matter because different needs have different timelines. Equipment may generate income over several years. Stock may turn into sales within months. A temporary gap between paying suppliers and receiving customer payments calls for a different discussion from a long-term expansion project.
List each proposed use of the funds and its estimated cost. Include related expenses that may be easy to miss. For equipment, these might include delivery, setup, training, maintenance or changes to premises. For a new location, consider fit-out costs, deposits and the period before it reaches expected sales.
Then ask what happens after the money is spent. How will the investment increase capacity, reduce costs, improve margins or support an existing source of income? How long might it take for that benefit to appear?
A well-defined purpose makes it easier to decide how much to borrow. It also helps you avoid taking on more debt than the plan requires.
Decide whether borrowing addresses the real problem
A loan can support a sound business investment. It can also temporarily cover a problem that needs a different solution.
If cash is tight because profitable work must be funded before customers pay, finance may be one option to explore. If cash is tight because prices do not cover costs, customers regularly pay late or the business repeatedly spends more than it earns, borrowing alone will not resolve the cause.
Look at what has created the funding need. Is it a one-off purchase? A predictable seasonal pattern? A delay in collecting invoices? A change in the profitability of your work?
For example, a business may think it needs additional funding to cover wages while completing larger jobs. A closer review might show that invoices are not issued until weeks after each job is finished. Improving billing could release some of the cash the business needs, whether or not it also decides to borrow.
There is no universal answer. The useful first step is to understand the issue clearly enough to compare the cost and benefit of borrowing with other changes you could make.
Bring your financial records up to date
A lender needs a clear picture of the business as it stands. You need that picture too.
Make sure your accounting records are current and transactions have been correctly recorded. Review bank reconciliations, outstanding customer invoices, supplier balances, existing loans and any transactions that need explanation. If the records are several months behind, reports generated from them may not be a reliable basis for a decision.
The financial information requested will depend on the lender, the finance product and your circumstances. As examples, business.govt.nz suggests bringing financial records, a cash flow forecast and a business plan when approaching a bank. BNZ says it may ask applicants for an income statement, balance sheet and business account transaction history for one of its lending products. Ask your prospective lender for its current requirements before assembling an application.
Do more than gather the documents. Read them. If the accounts show a drop in profit or a rise in borrowing, be ready to explain what happened and what has changed since. An unusual result may have a straightforward explanation, but it should not come as a surprise during the lending conversation.
Understand what your reports are saying
Three pieces of financial information are particularly useful when assessing a proposed loan:
Your profit and loss statement shows income, direct costs, expenses and profit over a period. Look at whether the business is earning enough from its work after costs, and whether the result is consistent or heavily dependent on one-off projects.
Your balance sheet shows assets, liabilities and equity at a point in time. It can help you understand existing debt, unpaid obligations and how much of the business is funded by its owners.
Your cash flow forecast looks ahead to when money is expected to enter and leave the bank account. This is where you can test the timing of repayments alongside wages, suppliers, GST, tax and other commitments.
Each answers a different question. A profitable year does not, by itself, show that cash will be available on every repayment date. A healthy bank balance today does not tell you what is due next month.
If you are unsure how to interpret a figure, ask your accountant to explain it in terms of your business. You should be able to discuss your numbers in plain language without having to memorise accounting terms.
Build a forecast that includes the loan
A forecast prepared before you had plans to borrow may no longer be useful. Update it to show both the proposed funding and its effects.
Include when you expect to receive the funds and when you expect to spend them. Add any new running costs associated with the investment. Then include the proposed repayments using the lender’s terms or a clearly labelled estimate while you explore options.
Consider the timing of the benefit. If a new machine arrives in October but cannot be used until staff have completed training in November, do not assume it will increase revenue in October. If an expanded service will need time to attract customers, allow for that period rather than forecasting immediate full capacity.
Test the assumptions behind the forecast. Which sales are already contracted? Which are likely but unconfirmed? Which depend on winning new customers? If the borrowing is intended to support a major project, what happens if that project starts later than planned?
ASB recommends incorporating repayments into a cash flow forecast and considering a range of sales outcomes when preparing for a loan. That exercise helps you judge the effect of borrowing on the business, regardless of which lender you approach.
Test whether repayments remain manageable
The first version of a forecast often reflects what you expect to happen. The next step is to ask what happens if trading is less favourable.
You might model a delay in receiving payment from a large customer, a slower start to a new service, an increase in a major cost or an unexpected equipment repair. Focus on risks that are plausible for your business.
Suppose your forecast shows enough cash for repayments when every expected invoice is paid on time, but a shortfall if one major customer pays a month late. That does not automatically rule out borrowing. It does tell you that you need to address the exposure before making a commitment.
Look at how much room the business has after paying its regular obligations. Can it still meet payroll and tax payments? Is there cash available for ordinary maintenance or an unexpected expense? Would the owner need to put more money into the business if the plan takes longer to deliver?
The aim is to find a repayment level that fits the way the business actually earns and receives money. An application should reflect a sustainable plan, not only the largest amount a lender may be willing to offer.
Show how the funding will improve the business
A strong funding case connects the proposed spending to a realistic business outcome.
If you want to buy equipment, explain what it will allow you to do. Will it reduce the time spent completing a job? Replace costly outsourced work? Improve capacity where you already have customer demand? Set out the expected benefit and the assumptions behind it.
If the loan will support additional stock, show how the stock has sold previously, how long it normally takes to turn over and when you expect customers to pay. If you plan to open another location, distinguish between the cost of setting it up and the time it may take to produce enough revenue to support itself.
You do not need to promise that the investment will perform perfectly. A credible plan recognises costs, delays and uncertainty. If the figures show a modest return rather than a dramatic one, it is better to understand that before borrowing.
ASB says a business finance application may require information about the amount sought, how it will be used, expected income for repayment and any relevant contracts. Preparing those answers helps you evaluate the decision as well as explain it.
Review your existing commitments
New repayments do not arrive in isolation. Before applying, list the financial commitments the business already has.
These may include other loans, vehicle or equipment finance, leases, regular supplier payments and planned purchases. Consider obligations that may not be obvious from this month’s bank balance, including upcoming tax payments and work you have committed to deliver.
Also think about the owner’s circumstances where they are relevant to a proposed lending arrangement. A lender may ask questions about who is borrowing and what security is being offered. Those details have consequences beyond the monthly repayment, so make sure you understand them before agreeing to any terms.
If a loan offer looks affordable only when viewed on its own, return to the full forecast. The decision should account for all the other uses of the business’s cash.
Compare the total cost and conditions
The interest rate matters, but it is only one part of a borrowing decision.
Review the repayment schedule, loan term, fees and any security requirements. Consider whether the arrangement gives your business suitable flexibility if income varies during the year. Ask what happens if you want to repay early or need to change the arrangement later.
A longer term may reduce regular repayments while increasing the amount paid over time. A shorter term may cost less overall but put more pressure on monthly cash. The appropriate balance depends on what the money is funding and how reliably the business can meet each payment.
Compare offers on a consistent basis. For each option, show the cash required at the start, the expected regular payments and the total projected cost under the proposed terms. If a condition is unclear, ask the lender to explain it before signing.
Business.govt.nz advises owners to model different terms and interest rates, include repayments in their forecast and understand the conditions of a loan.
Prepare a concise explanation of your business
Financial reports provide evidence, but they cannot tell the whole story by themselves. Be ready to explain how your business earns money and why the borrowing supports its plans.
You should be able to describe your main products or services, your customers, your sources of revenue and what has changed recently. Explain the opportunity you want to fund and the steps you will take to deliver it. If a large part of expected income depends on one customer or contract, say so and show how you have allowed for that in your forecast.
Keep the explanation direct. A lender should be able to follow the connection between the funding requested, the planned spending, the expected result and the source of repayments.
This preparation often improves your own thinking. If it is difficult to explain exactly how the loan will benefit the business, the plan may need more work before you apply.
Give yourself time before you need the funds
It is harder to assess lending options when a payment is already overdue or an opportunity requires an immediate decision. Where possible, begin preparing while you still have time to improve the information and test different choices.
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