Business finance is necessary for both new and existing firms. Funding becomes essential across different phases of setting up and expansion of any venture. A suitable business loan could be the solution.
Before applying for the loan, it is first important to explore the different channels through which a business loan could be obtained. This involves a thorough search for lenders in the finance market and analyzing the eligibility criteria and other terms and conditions stated by them.
Although several lenders are willing to offer a business loan in today’s scenario, the loan option whose conditions and eligibility criteria meet one’s case should be selected.
Points to Consider before a Loan Application
There are some important considerations to be deliberated before applying for a business loan. These need to be checked before going through the eligibility criteria stated by lenders.
1. Know the Exact Need
There are various types of loans in the financial market for a wide range of business needs. This includes ‘working capital loan’ which is meant for fulfilling the need for working capital in a business venture, ‘machinery loan’ which is meant for purchasing new equipment or machinery for the firm.
It is important to analyze the precise requirements of the borrowing company before applying for a business loan. All the suitable, required documents need to be submitted as proof to back up the loan application. A proper justification should also be given for the procurement of the loan. All these need to be prepared in advance before applying for a loan.
2. Focus on Business Financials
Cash flow is a primary factor that needs to be paid attention to. A lender evaluates the business’s repayment ability by considering the cash flow of the business applicant. A poor cash flow usually works to the borrower’s disadvantage in availing of a business loan.
Creditors determine how financially sound the business is by going through financial statements. Hence, this is also an important document to submit at the time of applying for a new business loan.
A detailed plan about how the loan amount is proposed to be utilized must also be drawn up. This is usually expected to be done to sufficiently convince the creditors that the business startup is developing, and it is financially established.
3. Evaluate the Credit Status
A track of the payment history, new credits, types of credit that are in use, amount owed, credit history must be maintained by any business owner. This would be used in computing the credit score of a business organization. By evaluating the credit score, lenders obtain information about the loans taken by the applicant in the past, their credit card usage, and repayment history. Therefore, upon receiving the business loan application, the first step carried out by the lending institutions is conducting an inquiry into the credit score of the loan applicant.
4. Research Eligibility Criteria
Before applying for a business loan from a lender, it is advised to perform comprehensive research about the various options available. In today’s market, there are different types of institutions offering different types of loans. The application process and eligibility criteria also vary with each, accordingly.
Some lenders offer quick loans for businesses. Some provide loans specifically for small businesses. Some prefer giving away loans only for well-established businesses. Thus, it is necessary to explore the options before selecting the most suited institution and type of loan.
Once this is finalized, the eligibility criteria used to evaluate the eligibility of a business loan applicant, along with the documentation and collateral required during the loan application process need to be checked.
This will assist in preventing a business loan application from being rejected, as this can negatively impact the credit score.
Basic Business Loan Eligibility Required by Lenders
The fundamental eligibility criteria of most of the creditors are the same. To apply for a business loan, the following criteria need to be checked:
1. Applicant’s age
It is generally required that the age of an applicant must be between 25-65 years.
2. Business Activity
Most lenders require that a business must have been active for three years at the least. Some lenders state that business activity of one year is acceptable enough to fund a business loan.
3. Business Turnover
A turnover that is between Rs. 15 lakhs to Rs. 2 crores is widely accepted to be eligible for a business loan by most lenders in the market.
4. Credit Score and Credit History
Evaluating the credit score is a mandatory step while applying for a business loan with any lender. A credit score is a 3-digit number that can be referred to as CIBIL. Some businesses give their own custom credit estimation methodology. A credit score lying between 750-900 is estimated to be acceptable and good when applying for a business loan. Having a high credit score improves the odds of a loan being granted, whereas a low credit score will impact even future loan applications.
Contents of a Business Loan Application
A business loan application includes the following details:
A request letter contains a brief description of the business. This is addressed to the manager of a bank or any financial institution, requesting to be considered for a business loan, mentioning the loan that is required.
2. Loan Amount
The amount of loan that is required must be mentioned along with the reason for availing of the loan. The way the money is planned to be used, along with its purpose, must be written down in detail.
3. Business Plan
A business plan provides an overview of different aspects including the mission and vision of the business, products, and services offered by the business, the team members, the competitors, and how this business is different. It also holds other important information such as marketing strategies applied in the past, financial statements and projections, milestones to achieve, etc.
4. Financial Projections
A balance sheet, cash flow statement should be provided to ascertain the loan repaying capability of the applicant.
5. Credit Report
The chances of a loan being sanctioned at the desired interest rate increase with a good credit score on a credit report.
6. Other Debts
Outstanding loans of the borrower need to be specified to let the creditors know the current debt status and hence, the ability to pay back the additional loan.
What to Avoid
It is crucial to take note of the points listed below to dodge rejection of a loan application:
1. Lack of Financial Strength
If the company is new, the lender may not have enough confidence in its loan repaying capacity.
2. Bad Credit Report
If the credit report states that the applicant has defaulted in the past, it can lead to rejection.
3. Guarantor for the Defaulter
CIBIL score is negatively impacted if the applicant is a guarantor for someone else who defaults on the loan. This could be a possible reason for rejection.
A successfully approved loan can prove highly beneficial for the growth of a business. The funds would help in the increase in working capital, expansion of operations, and investment of infrastructure. It is thus important to take careful note in the preparation of a perfect business loan application, on your venture’s path to scale new heights!