Money is vital for businesses to run their operations smoothly. However, the obstacle that gets in the way is the shortage of funds in hand. This is not substantial to wade through all the financial requirements of the businesses.
Hence availing of a loan is the best solution. The process of getting funding is through banks or financial institutions. Availing a small business loan is tricky due to the financial-economic turmoil that changed the scene a couple of years ago.
Banks have restricted their lending for small businesses hence all the mandated steps must be fulfilled to the hilt. This improves the chances of acquiring a loan.
The approval process begins with the business owners opting for a tender of their preference and filling out an application form. The process for availing of a small business loan also requires furnishing the required documents.
The step that precedes this is satisfying the eligibility criteria for a given tender. Once submitted, the furnished documents are verified to put validation on the claims.
A face-to-face meeting is arranged for a negotiation on the table related to the repayment clause. Upon finalization, a loan agreement is prepared to approve the loan and after the required signage, the loan amount is disbursed.
The documents and the steps for fulfilling the eligibility criteria dictating how to get a business loan in India are given below:
Table of Contents
Presenting a Business Plan
A sound business plan must combine components that allow the lenders to gauge the financial health of the borrower. This is done to decipher the creditworthiness of an applicant. Presenting a business plan is one of the foremost things to do.
An effective business plan must include a multitude of constituents for a favorable evaluation. This includes a bit of the company description, business objectives, projected financial statements, profit, and loss statements as well as the cash flow and balance sheet details. The required funds for the strategies involved in the management of the borrowed capital are covered in a business plan.
The balance sheet must date back to three years. For applications without enough history, a high credit score acts as a substitute. Audited financial statements are necessitated to increase the accuracy of the documents.
Since a CPA takes up the onus of evaluating the documents and any bad audit can lead to them being sued. This is an elaborative process requiring a lot of money. If one wants to opt for cheaper options, one can get their statements reviewed before applying for a loan. Here the liability quotient is much less for CPAs.
Business’s Financial Detailing
The financial details must corroborate the past and current loans to the debts incurred. The details of bank accounts, investment accounts to the credit card accounts must be disclosed. Tax ID numbers to complete address and contact details must be furnished for the evaluation process.
Business Credit Score
The financial health of the business is gauged through financial history. Guaranteeing a business loan is heavily reliant on a credit score above 700. This determines the applicant’s repayment capacity.
Whereas a low score devalues the applicant’s eligibility. Hence raising the credit score before applying for a small business loan is mandated.
Personal Credit Score
Inaccuracies in credit reports lead to the rejection of loan applications. Hence this is an important step in the application process. Before submission of the loan application to any lending institution, one must be up to date with the credit report.
How to get a business loan in India is a critical step that enlists a dozen of procedures to get the ball rolling in your favor. To increase the odds, one must ensure the credit history is black and white.
The lenders must have thorough information about the inside out of a business. This includes providing enough detailing about the cash flow, turnover as well as business objectives. The more transparency in financial dealings, the better the approval chances.
A few clauses are laid down for transparency. This includes the type of business loan opted for and whether the same fulfils the business requirements. Updating the necessitated financial records entails keeping a clean credit history with zero inaccuracies.
Full-fledged documentation gives a peek into the reliability of loan repayment as well as the business’s financial stability. This can be done through a business loan calculator to give an estimation of the loan account. Thus, matching the repayment credibility.
Lenders usually provide two types of funding that constitute secured and unsecured business loans.
Banks and financial institutions as well as credit unions have mandated loan applications to give a gist of the collaterals. This is especially the case for secured loans.
Wherein a loan application sees getting a further go ahead where collaterals are put up. These can be liquidated in case of non-payment of loans. The major goal behind pledging assets is to incentivize the borrowers for timely loan repayments.
Putting up personal property decreases a bank’s risk. The guaranteed items being tangible and their asset valuation over and above any audited or reviewed financial documents. The pledging of hard assets is the best way to back up a loan application process.
The collaterals include a variety of items. From stocks & bonds to equipment, inventory, receivables as well as home equity. The collaterals must be defined with the cost and the current market valuation. Documents and paperwork of the collaterals are the most crucial element for getting a business loan approved.
Whereas unsecured loans do not require any form of security. The only form of backing is the loan applicant’s creditworthiness. Of course, this comes with its own set of clauses that include an extremely high rate of interest.
Information on Insurances
This is an aspect that aids in reducing a bank’s specified risk when disbursing a loan. The same entails having insurances in place in case of death of any one or more founder members. The listing ensures direct pay-out to the banks for paying off loans.
Business owners can avail of loans with bad credit as well. However, a good credit score ensures more options as well as increases the odds of an application being approved.
Planning is mandatory before opting for a tender. Following these steps ensures guaranteed success in getting the loan approved in one go. Irrespective of the size of the business, one must choose the right lender depending on whether they are best suited.