You may need monetary assistance to start your business, fund your working capital requirements, or buy new industrial
equipment. Whatever the reason, the liquidity needed to improve your business can be met by applying for a business loan at a
bank or a financial institution.
Big corporates and established entities will find it easier to avail business loans. But if you’re a new business, or operate your business on a small to medium scale, you need to be well-prepared before you approach a lender for a business loan. With SME loans, you can fund smaller operations, like setting up the business or starting a new venture. But you need to keep a few things in mind.
Estimate your Needs
The first thing that you must do before applying for a business loan is to make an estimate of the cash requirements for your business. A monthly cash flow projection will help you estimate your cash needs with precision. This estimation is essential when applying for a loan, else you may end up borrowing too little, resulting in a shortage of funds. And if you take a higher loan, the interest charges will pile up.
Value of the collateral
A loan can be obtained only after you provide some form of collateral as security. No lender will offer you a loan that equals the market value of your collateral, so you need to take this factor into consideration as well. Normally, you will be granted 70% of the value of the collateral as the loan amount.
So you need to provide a collateral that’s valuable enough for you to receive the amount you’re looking for
Assess your cashflows
Your liquidity will be in focus when you apply for a business loan. The financial statements that project your liquidity over the next 12 to 18 months will have a bearing on the sanctioned loan amount.
Remember to take into account all your liabilities including debt repayments when you’re planning out your cash flows. This will prove handy in planning your loan repayment schedule as well.
Cost vs. benefit
You pay the lender back in the form of interest when you take a business loan. So once you’ve applied for the loan, you need to generate revenue that is over and above the cost of the loan. Before applying for a business loan, you should clearly analyse the cost and compare it with the benefits you’ll receive
Credit scores
Both your personal credit score as well as your business credit score have a significant role to play in determining your loan eligibility. By reducing your liabilities and making payments on time, you can improve your credit score, which will help you with better loan prospects.
Choosing the lender
The next step is to choose the right lender. While various banks and financial institutions offer SME finance, you need to find a lender with terms and conditions that suit your requirements. This will help your business flourish. Here are a few tips to choosing your business-loan lender.
Look for Transparency
As you all know, loan rates vary across lenders. From unorganised lenders to organised banking, there is a wide gap in the rates as well as the procedures involved. There is always some ambiguity if the loan contract is not put in writing. While you may orally agree on a certain amount, what you actually get on hand after deducting charges might take you by surprise. So it’s in your best interest that the loan terms are put forth in black and white, to ensure transparency in the deal.
Conduct an online Search
A click of the mouse is all you need for an insight into the credibility of your lender. Of course, you could be swayed easily by other lenders in the process. So be clear about your financing requirements, and you’ll find the right source of finance.
Referrals
The process of financing involves many nitty gritty including hidden costs and clauses. For a startup or newly established firm availing a business loan, it’s often difficult to be aware of the specifics. In such circumstances, it helps to take referrals from friends and business associates who have previously dealt with a lender. This way you can be very clear if choosing a particular lender would expose you to any risks like delayed loan processing and hidden fees.
Documents Needed to Avail Business Loans
The following documents are essential to avail a business loan:
Identity Proof: You can show proof of your identity through your PAN card, passport, driving licence, and voter’s card. The same documents can be used to give proof of age.
Proof of Residence: You can show any utility bill or a rental agreement Proof of signature: Banker’s verification, passport, or PAN card
Income Proof: Bank statement for the last 6 months, Income tax returns of the last 2 years along with the certified/audited financial statements and proof of turnover as supported by service tax returns.
Proof of Continuity of the current profession/business: This can be evidenced by a certificate of business continuity issued by banks or Income Tax returns.
Security Documents: Most business loans are advanced against collateral security. These include mortgage deeds of immovable property, government bonds, bank term deposit receipts, and national savings certificate. You’ll need to provide legal documents pertaining to the collateral that you’ve offered.
Putting your Business Loan to use
Funded by a business loan, you can set up a new business, or use it to expand your existing one. You can also use it to meet your working capital requirements, purchase a fixed asset, or modernise your means of production.
Inshort, a business loan can be used to finance any type of expense that helps a business to grow and prosper.
Business loans are the simplest way to finance your business needs. If you have a small business, you can obtain even unsecured loans from various sources to the extent of Rs.1 crore.
Small businesses are integral to economic growth and on a global level they account for over 95% of businesses creating employment opportunities. Thus, by increasing the funding for SMEs every country is poised for balanced economic growth.
Now that you aware of the technicalities involved with a business loan, make an informed decision by looking at your requirement and the options available in the market. The right selection at this stage can take your enterprise to unprecedented heights.
Big corporates and established entities will find it easier to avail business loans. But if you’re a new business, or operate your business on a small to medium scale, you need to be well-prepared before you approach a lender for a business loan. With SME loans, you can fund smaller operations, like setting up the business or starting a new venture. But you need to keep a few things in mind.
Estimate your Needs
The first thing that you must do before applying for a business loan is to make an estimate of the cash requirements for your business. A monthly cash flow projection will help you estimate your cash needs with precision. This estimation is essential when applying for a loan, else you may end up borrowing too little, resulting in a shortage of funds. And if you take a higher loan, the interest charges will pile up.
Value of the collateral
A loan can be obtained only after you provide some form of collateral as security. No lender will offer you a loan that equals the market value of your collateral, so you need to take this factor into consideration as well. Normally, you will be granted 70% of the value of the collateral as the loan amount.
So you need to provide a collateral that’s valuable enough for you to receive the amount you’re looking for
Assess your cashflows
Your liquidity will be in focus when you apply for a business loan. The financial statements that project your liquidity over the next 12 to 18 months will have a bearing on the sanctioned loan amount.
Remember to take into account all your liabilities including debt repayments when you’re planning out your cash flows. This will prove handy in planning your loan repayment schedule as well.
Cost vs. benefit
You pay the lender back in the form of interest when you take a business loan. So once you’ve applied for the loan, you need to generate revenue that is over and above the cost of the loan. Before applying for a business loan, you should clearly analyse the cost and compare it with the benefits you’ll receive
Credit scores
Both your personal credit score as well as your business credit score have a significant role to play in determining your loan eligibility. By reducing your liabilities and making payments on time, you can improve your credit score, which will help you with better loan prospects.
Choosing the lender
The next step is to choose the right lender. While various banks and financial institutions offer SME finance, you need to find a lender with terms and conditions that suit your requirements. This will help your business flourish. Here are a few tips to choosing your business-loan lender.
Look for Transparency
As you all know, loan rates vary across lenders. From unorganised lenders to organised banking, there is a wide gap in the rates as well as the procedures involved. There is always some ambiguity if the loan contract is not put in writing. While you may orally agree on a certain amount, what you actually get on hand after deducting charges might take you by surprise. So it’s in your best interest that the loan terms are put forth in black and white, to ensure transparency in the deal.
Conduct an online Search
A click of the mouse is all you need for an insight into the credibility of your lender. Of course, you could be swayed easily by other lenders in the process. So be clear about your financing requirements, and you’ll find the right source of finance.
Referrals
The process of financing involves many nitty gritty including hidden costs and clauses. For a startup or newly established firm availing a business loan, it’s often difficult to be aware of the specifics. In such circumstances, it helps to take referrals from friends and business associates who have previously dealt with a lender. This way you can be very clear if choosing a particular lender would expose you to any risks like delayed loan processing and hidden fees.
Documents Needed to Avail Business Loans
The following documents are essential to avail a business loan:
Identity Proof: You can show proof of your identity through your PAN card, passport, driving licence, and voter’s card. The same documents can be used to give proof of age.
Proof of Residence: You can show any utility bill or a rental agreement Proof of signature: Banker’s verification, passport, or PAN card
Income Proof: Bank statement for the last 6 months, Income tax returns of the last 2 years along with the certified/audited financial statements and proof of turnover as supported by service tax returns.
Proof of Continuity of the current profession/business: This can be evidenced by a certificate of business continuity issued by banks or Income Tax returns.
Security Documents: Most business loans are advanced against collateral security. These include mortgage deeds of immovable property, government bonds, bank term deposit receipts, and national savings certificate. You’ll need to provide legal documents pertaining to the collateral that you’ve offered.
Putting your Business Loan to use
Funded by a business loan, you can set up a new business, or use it to expand your existing one. You can also use it to meet your working capital requirements, purchase a fixed asset, or modernise your means of production.
Inshort, a business loan can be used to finance any type of expense that helps a business to grow and prosper.
Business loans are the simplest way to finance your business needs. If you have a small business, you can obtain even unsecured loans from various sources to the extent of Rs.1 crore.
Small businesses are integral to economic growth and on a global level they account for over 95% of businesses creating employment opportunities. Thus, by increasing the funding for SMEs every country is poised for balanced economic growth.
Now that you aware of the technicalities involved with a business loan, make an informed decision by looking at your requirement and the options available in the market. The right selection at this stage can take your enterprise to unprecedented heights.
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