Business Loan Application Food for Thought
Every person who wishes to start his/her own business may or may not have the funds required to meet all their needs. Some people resort to borrowing money from friends and family to kickstart their own ventures, but more often than not, these funds are rarely enough to satisfy all their business needs.
In such cases, business owners, in order to provide working capital for the smooth functioning of the company, tend to take a business loan. It allows companies to tackle all sorts of financial problems and crises that they face in their entrepreneurial journey.
What Is A Business Loan?
A business loan is a small loan that companies avail from commercial banks with the hope of using the borrowed capital to generate more income and profits for the company. These loans can also come from sources other than commercial banks, such as credit unions, public funds, or private investors.
In exchange for the money, business owners will be charged interest on top of the loan amount, with or without collateral, depending on whether it is a secured or an unsecured business loan. Usually, business loans are paid back in regular instalments of a period of time mutually agreed upon by the lender and the borrowing party.
How Does Business Loan Work?
Unlike personal loans, business loans have a much higher risk factor for the lender, which translates into stricter eligibility criteria and longer applications. To apply for a business loan, business owners are now required to submit a whole lot of documents and financial details to complete the loan application.
However, with a little prior research, companies can speed up their approval process. Here is a list of eligibility factors that will help companies get faster loan approvals:
- Credit score: Any lender would first examine an applicant’s credit score before processing it further. A credit score of 650 and above is typically needed for a successful loan application.
- Age of the business: In most cases, irrespective of whether it is a secured or an unsecured business loan, companies need to have been in business for at least a year before application. For some banks, the limit may even be up to two years.
- Annual revenue: Lenders typically require the borrowing business to bring in annual revenues of $50,000 to $150,000.
- Usage: One important factor that companies need to keep in mind before applying for a loan is to have a clear idea of how they’re going to use the money. This is an important eligibility criterion for lenders because they want specifications on how the funds would be spent.
10 Things To Consider Before Applying For A Business Loan
In recent times, the most common alternative for procuring funding are either banks or Non-Banking Financial Companies (NBFCs) that offer a variety of business loans. But all companies need to keep in mind that the most essential factor for getting a business loan lies in how you negotiate the terms and rates with the lender.
However, in case you are thinking of applying for a business loan, here are a few things to keep in mind:
A Solid Business Plan
The first thing that a loan manager would look at is your business plan, so make sure you put maximum effort into presenting a stellar business proposal. It is important for lenders to know that your business is credible enough to churn out profits in the future.
The business plan has to include every crucial detail of your venture, such as your goals, competitors, revenue, expense projections (both past and future), market analysis, and your plan of action. These details will form an attractive executive summary to present to your potential lender and impress your way in.
Assemble Your Financial Statements
The most critical aspect of getting fast no security business loans, or others, is to assess the feasibility of the business. Therefore, it is imperative for the borrowing party to submit cash flow statements, income statements, and balance statements for the decided time limit, which can vary from two to five years.
When computing these statements and reports, make sure you take all the seasonal business changes into account. Offer an attainable plan of action and support it with projected numbers to make the lender understand your vision.
Clearly State The Purpose Of The Loan
No matter what kind of business loan you apply for, any bank or NBFC would want to know the exact details of how you plan to utilize the funds upon receiving them. This knowledge helps them assess the viability of your loan application.
Therefore, to submit a successful application, make sure your loan proposal has the details of:
- How much funds you require
- How will you channel the funds for business development
- What is the plan of action for repayment of the loan
- If you have a safety net in the event that your business does not give enough returns to repay the loan
Quote The Number Wisely
When applying for a business loan, it is of prime importance to cite the right number. Do in-depth research so that you neither underestimate nor overestimate the required amount, as it can mean serious implications for the business.
Overvaluing the amount may result in you being portrayed as an inexperienced and unprofessional borrower while underestimating the value will lead to a financial crunch in your business even after availing the loan.
Credit Score Is Crucial
If you have a new business that hasn’t had enough time to build up a stellar credit history, then your credit score is your only saving grace. Lenders tend to look for a loan candidate who has a proven track record of being financially responsible.
Lenders fall back on the credit score to ascertain your creditworthiness. Therefore, in case you notice any discrepancies in the credit report, have them rectified immediately. Failure to take corrective measures may result in rejection of your business loan by credit authorities.
Get Your Collateral In Line
Some business loans, like secured business loans, need some collateral to further the application process. Businesses should, therefore, know the exact value of their assets that might be offered up for collateral. Lenders want to make sure that you have enough funds to guarantee, and you too should be aware of what you might be losing if you default on the loan.
In case you don’t have collateral, you can go for an unsecured business loan to fund your business. However, it is important to find a service provider who grants fast unsecured business loans solely on the basis of your creditworthiness, and with low Unsecured Business Loan Interest Rates.
Get Set For High Expectations
In recent times, the qualifying factors for a business loan approval have become quite stringent. Lenders extend credit to businesses with extreme caution, so they might ask for additional paperwork or even collateral as a precaution.
Therefore, you need to have all that is required for the lender to satisfy their high expectations and lend you the amount that will take your business to the next level.
Speak To Your Financial Advisor
If this is your first time applying for a business loan, you might find it challenging to assess the right amount needed for your business venture. Usually, new companies need an unfiltered amount of constantly flowing funds to run their operations smoothly.
Therefore, it is wise to speak to your financial advisor before applying for a business loan. Have a detailed discussion with them (you can even rope in your accountant) and chalk out all the details pertaining to your application, eligibility, requirements, etc.
Do A Background Check On Your Lenders
All banks and lenders may not follow the same policy when it comes to handing out business loans. Before applying for a business loan, make sure you do a thorough assessment of your lenders before zeroing in on the right one.
Here are a few questions that you can ask your potential lenders in order to judge them correctly:
- The average loan amount awarded
- The lender’s standing in the market
- Duration of the loan process, from application till acceptance/rejection
- Repayment schedule and tenure
- Their track record
Calculate The Costs
Taking a business loan is a huge responsibility for an enterprise of any size, and calculating the cost of the loan is crucial to ascertain the financial position of the company. Determine the potential interest rate of the loan, the projected instalments of your repayment, the time period to repay the loan, etc.
Remember, taking a business loan comes with a huge price attached. Hence, it is better to double-check your assets and finances and then go for it, instead of impulsively applying for a loan.
Although the aforementioned factors will help a business correctly assess its creditworthiness before applying for a business loan, it is important to take a look at how the loan will affect the company’s financial well-being. Therefore, calculating the time to pay back the loan is crucial, so compare interest rates and timelines before approaching any lender.
Moreover, businesses need to know all the terms and conditions set forth by the lender and choose accordingly. But with the advent of new technology, getting a business loan has become extremely straightforward, and if the company’s credit score is in check, along with organized financial statements, then getting a loan is a piece of cake.
Jack, A content enthusiast who always keeps a tab on the latest happenings in the different niches, especially Finance, Marketing, Travel, etc., Interested in working different niches to explore knowledge. He is incurious to work on the same niches for a long time.
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