For an entrepreneur, one of the worrying areas of growth is the constant search for sources of working capital. If you run a small and medium-sized business (MSME) with relatively limited business assets or collateral, it can be difficult to find ways to raise funds.
To improve your chances of getting a business loan from a bank or non-bank financial company, here’s what you need to know before you apply to them.
Who can get a business loan?
The first step is to check if you can qualify for a loan. Can apply for a loan:
- Partner companies
- Limited liability companies involved in the manufacturing activity
- The people who take care of the services
Some general loan eligibility criteria to keep in mind to make the process transparent are:
- The candidate must be 21 years of age or older at the time of applying (this figure is generic and the minimum age differs from 18 to 25 years according to the standards followed by the different organizations).
- The applicant must not be over 65 years of age at the time of loan maturity.
- The applicant’s business must be profitable for at least the past two years.
- The applicant’s business must have been in existence for at least two years and the applicant must have at least five years of business management experience.
How To Make Sure Your Loan Is Approved?
Qualifying for a business loan means successfully demonstrating your repayment capacity. Here are some ways you can do it.
- Maintain a good credit rating
The payment history of the person or business is quantified in a credit score to assess the creditworthiness of a person or business. The personal credit rating of business owners or founders and the payment history compiled from several institutions can significantly affect a business’s eligibility for a loan. Having a good credit rating indicates that you are financially disciplined and that you are unlikely to default on your repayments.
It also reflects your ability to make sound financial decisions. Although the minimum personal credit score required to obtain a business loan varies and depends on the lender, a credit score (a numerical parameter for an individual’s creditworthiness) above 700 will improve your credibility, and therefore creditworthiness.
- Demonstrate sufficient cash flow in the business
While deciding your eligibility, the financial lender will investigate your business’s cash flow (past and future projections) and see if it is adequate for the loan amount you are seeking. Your previous tax returns and existing debts will also be reviewed to determine if you will be able to pay the monthly loan payments without default.
Therefore, make sure that you are able to demonstrate sufficient cash flow that the lender will find convincing because cash loans do not require you to use your business assets as collateral.
- Keep your documents ready for the loan application
This is an important process that must be given importance. To streamline the loan application process and make it easier for you and the lender, be sure to gather all the relevant documents.
Depending on the lender you choose, you will need to submit some of the following documents for verification:
- Proof of identity
- PAN card
- Proof of address
- Proof of business
- Business and personal bank statements (last six months)
- Business and personal income tax return files
- Company financial statements
- Company legal documents such as commercial lease and franchise agreement.
Your eligibility for a loan is directly related to the risks associated with you and your business. The less risk, the better. Personal or professional insurance is essential so that the loan can be repaid in the event of premature death. If you are sufficiently insured, your chances of getting a loan will increase.
When is the best time to apply for a loan?
There really is no better time to apply for a loan because the timing of the application has minimal effect on your application approval. Many business owners believe that the best time to apply for a business loan is when there is a financial need.
What if your loan application is rejected?
- Request the reason for refusal
The rejection of your loan application can be the result of several factors. Once your loan application is rejected, there is little chance that your application will be reviewed again within a short period of time by the same lender. However, it is important to learn about the reasons for the rejection.
Some common reasons for rejection include low credit score, high debt to income ratio, among others. Eliminating and improving these specific parameters can help you get a loan the next time you apply.
- Improve the overall financial situation of your business
The cash flow, annual income, business savings, assets and debt of your business are critical factors that determine if you qualify for a loan. Lenders will look at these factors and if they are not impressive, your loan eligibility will suffer. The next time you apply for a loan, try to improve on these determinants.
- Take a more careful approach next time
The number of times your loan application is rejected will negatively affect your eligibility. The next time you apply for a business loan, make sure you fully meet the lender’s eligibility criteria and have a solid credit rating.
Should you apply for a loan online or offline?
Applying for a loan online is convenient. Some factors include:
- With a technology-backed loan approval process that many lenders have, an online loan application can speed up the entire loan verification and approval process.
- Applying for a loan online makes it easy to compare loan rates from multiple lenders, and you can also take advantage of pre-approved loans up to a certain limit with some lenders.
- There are many loan eligibility calculators online that make the process easier.
- Some lenders are also known to offer additional benefits if you apply for a home loan.
On the other hand, the advantage of applying for a loan in person is that by communicating directly with a loan officer, you will have a better opportunity to explain your needs, demonstrate your loan repayment capacity and benefit from the right loan product. ready.
Apply for a loan after weighing all the pros and cons required to make your business creditworthy and attractive to lenders, evaluate all available options, and always choose a lender who offers you the best deal.
Taking the right kind of business loan at the right time from the right institution can not only save you a lot of hassle, but also help you grow your business exponentially in the future.