Before we delve into business loan application and how to make it perfect, we must know what exactly is this business loan and why businessmen avail them. Businesses take this loan to meet their expenses and also to expand their business. The types of business loans are bank loans, mezzanine fencing, microloans and cash flow loans. All of them are taken for different purposes. Generally, MSMEs take this type of loan to expand their business.
There are several benefits associated with a business loan that drives the businesses to opt for this loan. The most attractive part about a business loan is the rate of interest that remains constant throughout the tenure. Typically, rates vary from 11% – 19% and a business owner can borrow up to Rs. 50 lakhs as a business loan. The repayment tenure is 1 to 5 years usually. However, banks will sanction a higher loan amount based on the ability to repay and the size of the business. Startups take the most amount of business loans in India since there is minimal paperwork and they only need KYC documentation to process the loan application.
Ways of making your business loan application perfect
Credit from NBFCs is on the upswing recording an increase of around 18% in the financial year 2017-18. Hence, it is quite evident that business loan takers are also rising. Here are the ways of perfecting your business loan application:
- Adequate Cash Flow: Inadequate cash flow can be a major hazard in securing your business loan as banks will think that your business doesn’t have the liquidity to pay off your debts. Some of the liquidity ratios include the debt-service coverage ratio and the current ratio. You must make sure that those are at least 1. You must closely look at the liabilities like bills and salaries along with assets like cash and inventory and monitor them to avail your business loan successfully. This helps in understanding business income, adequate cash flow and liquidity for banks to sanction your loan.
- Credit Score: Getting a business loan can come with its hassles like the type of feedback from consumers, whether you are a loan defaulter and credit score type. Now, if your credit score is low, you may have yo shell out a higher rate of interest. You should avoid getting negative feedback from consumers and not be a loan defaulter to securely get your business loan. Another area of business loan is credit utilization. Higher business loan leads to a lower credit score and subsequently dips your loan approval chances. Equifax, a credit reporting agency okays 50% usage of your total credit limit.
- Business Plan: It is essential to have a strong business plan by having realistic sales projections, your projects that have been completed and those that are in the pipeline. Ways of increasing your customer base also goes a long way in lenders giving the green flag to your business loan application.
These are the basic points but there are many other points as well that you need to keep an eye on for your business loan approval. You must keep all your documents clear and in hand to pass the scrutiny test of banks for a successful loan application. Banks will get to know if you have lied in any of your application as they will send a specific person(s) for auditing to cross-check. Additionally, exaggerated sales projections and information can be a major drawback as that could land your dream of obtaining a business loan in jeopardy.