Being an aspiring entrepreneur, you likely have a visionary idea, a solid business plan, and no shortage of passion. However, one major problem that stands in your way is getting the funds for your business. While you may be able to start your business at first using personal savings, or investments from friends and family, most entrepreneurs need a business loan to really grow and scale their operations.
This article is a step-by-step guide to do the necessary groundwork for your business loan application and increase your chances of getting approved.
Start by Assessing Your Financing Needs
Before applying for a loan, carefully consider how much money you need, what exactly you'll use the loan for, and when you'll need access to the funds. Factors like equipment purchases, inventory, renovations, hiring staff, marketing costs, and day-to-day operating expenses will determine your ideal loan amount.
Underestimating your needs could make you take up a lesser amount for your business while overestimating could lead to unnecessary debt obligations. Be as accurate as possible when projecting costs and taking up a loan.
Also, carefully assess the timing of taking out a loan. Do you need a lump sum right away to cover startup costs, or will you require money over months or years as the business grows? These considerations will help you determine whether you need a term loan, a line of credit, or a combination of both.
Choose the Right Loan Provider
With your estimated loan needs in place, the next step is finding the right financial institution. Research different banks, NBFCs, and online lenders to compare interest rates, repayment terms, and eligibility requirements.
If you’re having trouble with traditional financial services, consider alternative online loan providers, microlenders, and RBI-backed institutions. Each lending institution will have its policies and criteria, so make sure to check your eligibility and see if you’re a good fit for your business.
Know the Business Loan Requirements
Before applying for a small business loan in India, be sure you understand the loan provider’s requirements and eligibility criteria. This usually includes factors like:
- Time in business: Most lending institutions require at least 3 years in business. For startups, an MSME-backed loan can be one of your best options.
- Personal credit score: Generally, lenders require a minimum personal credit score of 700-750 to process the loan.
- Cash flow: You'll need to provide revenue projections and demonstrate the ability to comfortably make monthly payments.
- Collateral: Most loan providers require collateral in case of default. This can include business assets, inventory, or personal assets like your home or fixed deposits.
Gather Required Documentation
Applications for small business loans require some documentation about your company’s finances, business model, and operations. Consider the following business loan documents checklist for a better understanding:
- Business plan: This document covers your company overview, products/services, target markets, operations, management team, and financial projections.
- Financial statements: Past 3 years of profit/loss statements, balance sheets, and cash flow statements. New businesses will need to provide detailed projections.
- Owner information: Personal financial statements, tax returns, resumes, and background checks on principal owners.
- Collateral details: Documentation for any business or personal assets offered as collateral, including values and proof of ownership.
Improve Your Chances of Approval
With your loan documentation in order, take these additional steps to improve the chances your application will be approved:
- Only apply for the amount needed: Match the requested loan amount to the business's need and do not choose more than what your business requires.
- Make a sizeable down payment: Put down 20-30% or more as a down payment to demonstrate the ability to manage payments.
- Highlight growth potential: Provide strong business plans to increase profits and pay off the loan quickly.
- Manage your personal finances: Pay off credit cards and resolve issues that could appear on your personal credit check.
- Add a co-applicant: If there are any issues with your credit profile, you can consider adding someone who has a good credit history and can be your co-applicant.
With proper preparation, a solid business plan, and strong application materials, your chance of getting approved for your first small business loan will be much higher.
Conclusion
With a carefully prepared loan application, you will greatly improve your chances of securing the loans you need to turn your business vision into reality. Do your homework, start early, and partner with the right loan provider to make your new entrepreneurial venture successful.
