Business financing is one of the most sought after and feared subjects. ‘Sought after’ because most businesses, whether flourishing or established, need it to scale up. And ‘feared’ because there is no foolproof SOP to get it through.
Do you really need a business loan? The answer is yes, irrespective of the stage your business is in. You will need it to scale up, accelerate your operating cycle or shore up your working capital. You may or may not have the funds to set up your business, but you have a plan, which you firmly believe in, and simply need a lender who supports it by providing the bridge of finance.
At the time of appraisal, the lender assesses your application for risk profiling on a few parameters. To facilitate and meet your business loan requirements, follow these steps mentioned:
- Credit: When a business owner requests funding, the lenders check the credit score of the promoters to ascertain the creditworthiness. Better credit scores have a direct bearing on the interest rates offered. Keep in mind that lenders look at both personal and business credit scores and history. And because most small-business owners don’t have business credit, personal credit score becomes much more important in such situations.
- Age of Business: The time you have been in business has a great impact on lending decisions as you have a performance track record backing your business plan. However, if you are setting up a business and looking for finance, always remember to have the funds routed through an account instead of dealing in cash. Many lenders look at the credit summation of your business accounts before arriving at a lending decision.
- Cash Flow: The cash flow of a business says a lot about its sustainability and profitability. Simply put, it is the EMI/NMI ratio in the context of businesses, indicating how much additional leverage your business is capable of taking. Cash flow can make or break your business. A steady and healthy stream of cash shows lenders that you’re capable of sustaining the loan payments.
- Collateral: Bringing in collateral to secure a loan gives the lenders a certain amount of security. And loans backed by assets are perceived to be less risky, hence attracting lesser interest rates.
- Debt to Equity Ratio: Lenders typically look at this ratio to ascertain the company’s capability to service additional debt. A standard debt equity ratio of 1.33 and 2 is recommended for manufacturing and trading companies, respectively.
- Industry: Industry in which the business operates also plays a critical role in the loan appraisal process. Some industries qualify under Priority Sector norms backed by the Government.
- Projected Financials: This forms a very important part of your business plan. Make sure you give a realistic estimate, as unrealistic projections may get your business loan approved, but under-achievement may lead to a reduction in limits at the time of annual review.
With the onset of the digital age, you can also apply for an online business loan, which is processed instantly.
So, what’s next?
Now that you know what most lenders require, what comes next? We recommend taking these steps to help you secure the loan you need.
- Check your credit score.
- Fine-tune your business plan.
- Look for a lender that matches your requirement at the best interest rates.
- Decide if you’re okay with collateral, as that will help you lower interest rates.
- Put together your balance sheets, tax returns, registration documents, and account statements.
Once you have your business plan in place, click here to take the first step towards transforming your dream into reality.
