Things to Consider Before Applying for Business Loans

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What is Business Loan

One of the biggest hurdles an entrepreneur faces in their business is the cash hurdle. Having working capital is one of the primary requirements for the smooth functioning of the company. Often, the answer to these hurdles is a business loan. It aids in tackling severe financial problems and crises a business person faces in their entrepreneurial journey.

Process for Getting a Business Loan

The most common alternative available nowadays for funding are the banks or Non-Banking Financial Companies (NBFC’s) that offer a variety of business loans. As the nation’s current situation is witnessing the rise of many start-ups and companies, there are many ways through which an entrepreneur can receive funding for their business.

But, given the amount of paperwork and eligibility requirements, getting a business loan might seem like a complicated process. The vital key to getting a business loan successfully lies in how you negotiate the terms and rates with the lender.

However, before you go for a business loan, you need to consider certain things for the quick approval of the loan:

Present a Good Business Plan

The first you need to convince the lender is by presenting a solid business plan. Lenders will want to know that you have a credible business plan that is capable of churning out good profits. Your business plan has to showcase your knowledge and skill level of operating a business.

Include every detail of your business, including your goals, competitors, revenue, and expense projections- past and future, market analysis, and your plan of action. You need to convince the lender that you are the best candidate for the business loan. Ensure that you attach an executive summary that will convey your vision to the lender.

Prepare your Financial Statements

As detailed above, it is a must to include your financial statements for the investors to assess your business’s feasibility. Include all your cash flow statements, income statements, balance statements for the past three to five years. You should also take into account all the seasonal changes in your business when computing the reports. Present a doable plan of action along with the projected numbers, so that the lenders can understand your vision. It also gives them the confidence that you will be able to churn out enough profits to cover your loan.

State the Purpose of the Loan

Be it a bank or NBFC; lenders will want to know the exact details of how you will utilize the funds of the business loan. This knowledge will help them assess the viability of your business loan application. So, it is a prudent practice to create a detailed loan proposal. The loan proposal should include the details of:

  • How much funds do you require?
  • How will you channel the funds in the development of your business?
  • What is your repayment plan of action?
  • What is your safety net if your business does not give enough returns to repay the loan?

For example, if you want to purchase a piece of equipment for your business, then it is best to apply for equipment financing. You can go a mile further by researching the price variations of the same machine in the market. Include that research as well to show the lender how serious you are about developing your business.

If you are looking to fund your business or bridge your working capital gap, then a business loan is a better alternative. So, by clearing stating for what you need the funds for, will help the bankers decide whether the applied loan amount will fulfill your needs.

Don’t Falter When Quoting a Number

When applying for a business loan, citing the right number is of prime importance. You need to undertake thorough research so that you do not overestimate or underestimate the amount. Overestimating and underestimating the amount can cause severe implications for your business.  Overvaluing the amount required can project you as an inexperienced person while underestimating will lead to financial crunch. Hence, to avoid these road bumps, make sure you present proper financial projections backed up by sound research.

Pay Attention to Credit Score

If your business is new and hasn’t had the time to build up a credit history, then you will need to have a look at your credit score. Lenders will want to ascertain that they are lending money to an individual who has a proven track record of being financially responsible. They will fall back on your credit score to do so as it shows your creditworthiness. In case there is a slight hinge in your credit score, wait till it improves and then apply for the business loan.

On the other hand, if you notice some discrepancies or errors in the credit report, get them corrected immediately. If you fail to address these errors, that could result in the rejection of your business loan by the authorities.

See Whether You Need Collateral

Some kind of business loans might require some collateral, then make sure that you know you the exact value of your property or asset that you are offering as collateral. Lenders will want to know the precise worth of the guarantee along with associated costs. Ensure that you don’t default on the loan that could cause you to lose the collateral.

Be Prepared for Higher Expectations

The qualifying criteria now lenders prescribe are quite stringent. They want to lend money but are still very cautious about who they are backing. They will often ask for additional paperwork or collateral as precautionary measures. If you don’t have collateral, you need to prove yourself as a worthy candidate on paper.

Talk with Your Financial Adviser

If you are applying for a business loan for the first time, it might be challenging to assess how much exactly you need. Usually, new businesses need an uninterrupted flow of funds to establish and run their operations smoothly. It is wise to have a detailed discussion with your accountant to chalk out the exact needs of the business. They can also help you with drawing out the projections and advise you on the best course of action.

Be Ready with all Documents

While all your projections and documents can provide evidentiary support to your loan requirements, you must impress the lenders with your knowledge. Be well-equipped to answer any and all questions they might have. Before filling out the paperwork, it is vital that you have all the information. Obtaining a business loan gets a lot easier if you have all the documentation in order. The most common ones include your ID and address proofs, balance sheets, TIN number, PAN number, income statements, and so on. They will prove your credibility and creditworthiness.

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Assess Your Lenders

Not all lenders and banks offer the same kind of business loan. Before going for a business loan, make sure you assess all the lenders before zeroing on one of them. They should be well-equipped to serve your vertical’s business, industry, and financial needs. You can visit their official websites to know about them, and as well as other review sites or lending sites to understand their stats.

For instance, the below-given questions will help you gauge the lender’s ability to support your business:

  • What is the average loan amount awarded?
  • What is the standing of the lender in the market, specifically in your industry?
  • How long does it take to get the applications accepted?
  • What is the time duration for the whole loan process?
  • What is the repayment schedule and tenure?
  • Are there any flexible terms of repayment?
  • Do they often ask for a personal guarantee?
  • If it is an NBFC, how do they handle the process?
  • What is their track record? And so on

Understand the Impact of the Business Loan

While the above point assesses the lender’s credibility, you should also pay attention to the fact as to how the loan will affect your financial well-being in the long run. You need to know how long it will precisely take for you pay off the loan. Compare that timeline by using different interest rates and tenure offered by different lenders in the market.

You also need to estimate your monthly payments and see if your monthly budget still functions without a deficit. You need to add the amount you will pay as Equated Monthly installments (EMI’s) in the financial statements you submit to the lender. Along with this estimate, you can add all your monthly expenses and see how it will cost you and what measures you need to take for handling that expense.

At the same time, it is essential that you know all the terms and conditions set forth by the lender and choose accordingly.

By considering these points, you can quickly obtain a business loan. Moreover, with advances in technology, getting a business loan has now become a straightforward process. Get your personal credit score in check, organize your financial statements, and be prepared to answer and ask questions when meeting with your potential lender.

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