According to Global Entrepreneurship Monitor (GEM) report, the entrepreneurship levels are stable and increasing gradually across the globe. There are about 100 million start-ups launched every year worldwide. With the easy access to business loans from banks, NBFCs and online lenders, starting a new business is possible for anyone who has the determination to succeed as an entrepreneur. However, unlike a personal loan, home loan or an auto loan, getting a business loan isn’t that easy unless you are rightly prepared for it. The banks will enquire about the type of business you are into, your current financial status, credit eligibility, projected success rate of the business and much more.
Are you looking for funds to start-up a new business or expand the existing one? You should know what the lenders expect from the borrower and how you can prepare yourself in order to avoid any potential rejection and process the business loan application much faster.
Although most of the lenders provide unsecured business loan, a business loan of higher amount will obviously require a certain type of collateral as security. Banks ask for security in order to make sure that the credit risk is reduced. If you are looking for a collateral-free business loan, you must be able to prove your repayment capacity and credit eligibility. While the existing successful businesses may not require any collateral, starts-ups are risky for the loan provider and hence, the requirement of security is mandatory. You can pledge assets such as your land, home, commercial property, gold, etc. The type of collateral may vary based on the internal policies of the lender.
2. Personal & Business Credit Score
When you start up a business structure, you will have a separate account which is different from a personal account. However, for a small business, especially in a start-up, the founder becomes the face of the business. Hence, to ascertain the reliability, the lenders check your personal credit score as well. A personal credit score tells them how responsible you are with your finance. Also, when a lender does not have sufficient information about the business, your personal credit score becomes the judging factor for business loan eligibility.
In cases where there are multiple partners, the lenders may want to know about the credit details of each one involved in the business. When your company has a good relationship with the bank in terms conducting multiple transactions through business accounts and so on, the lender may just check your business credit score alone. However, the business credit score will be under the business owner’s name.
3. Your Business Plan
Lenders like to see how much you are passionate about your business and its success. Budding entrepreneurs should draft an authentic business plan that contains financial goals, future sales, cashflow, profits, income, marketing strategy, target market, number of employees, location, etc.
4. Purpose of the Business Loan
Just as you present your business plan, the lender may want to know the sole purpose of availing the business loan. You should know very well beforehand as to how you are going to use the loan. Without having and calculation about the end use of the business loan, the lender may hesitate to approve the loan as you do not have a clear vision and operation efficiency.
5. Quantum of Loan
Not all lenders will be able to lend to you the business loan amount of your choice. Every bank has a set of rules that they need to follow in approving a business loan. Moreover, they like to analyse your business plan with your desired loan amount to see whether if it fits the bill.
6. Financial Details of The Existing Business
For existing businesses, it’s a rule that the borrower must show a proof of minimum turnover per annum. It could range from Rs. 20 Lakhs to Rs. 1 Crore depending on the policies of the lender. Hence, you must compile all the financial details of the existing business as a report and submit it while applying for the loan. The complete financial statements should be audited and reviewed by a chartered account in order to get faster approval.
If you are going to start a new business for the first time, this requirement becomes nullified. In such scenario, the lender might demand a third-party guarantee or collateral to provide the loan.
7. Insurance Details
As the lenders want to be assured of their repayment, they look for ways how the risk can be reduced. Banks will ask for the insurance details of the owners of the company as they can retrieve the loan amount through the insurance in the event of any unfortunate incidents such as death and disability. Moreover, having the insurance schemes also increases the chances of the loan approval.
8. Past Track Record of Success
The lenders want to be assured that your existing business is consistent in generating revenue and the credit risk is none. Hence, they ask you to show how well the business has performed in the past. A business with a great track record of success is likely to impress the lender, which can lead to faster business loan approval.
9. Business Licence & Permits
Any business either small or big will require business licenses or permits to operate legally. The banks want to see if you have a proper business operation with the permission of the Government. Permissions such as fire, health, environmental and zonal permits may be required for submission along with your business loan application.
10. Ownership & Affiliations
You should be ready to disclose any ownership you have with other businesses and as well as any affiliations. This will ward off any potential trouble or conflict while issuing the loan amount.
Getting funds is essential for any business organization whether small or big for smooth operation. The rules and eligibility criteria may differ among the lenders and you need to prepare completely to secure the best business loan.