Gone are the days when applying for a business loan looked like a tough nut to crack. Due to the digital age and the government’s offers for “ease of doing business,” getting a business loan has become much easier.
The write-up will guide you smoothly through the process. It will let you know about all the necessary factors. It would be best if you didn’t miss these while applying for a business loan in India.
To turn your business idea into reality, you require funds. So, you are thinking of applying for a small business loan.
You are puzzled by the numerous loan options as you search the internet. You must undergo a lot of paperwork and procedures while applying for business loans.
You don’t need to worry anymore. Let us understand the important factors you shouldn’t miss while applying for business loans.
Which Loan Do You Require?
This is the basic question to ask while applying for a business loan. Two business loan categories are working capital loans (cash credit and overdraft facilities) and term loans.
Working Capital Loan
- This loan is for the operational activities of a business, like the purchase of raw materials, expenses for sales and marketing, product development costs, payment of salaries and wages, etc.
- These loans are generally available against collateral such as hypothecation of stocks, fixed deposits, immovable property, etc.
- As the name suggests, these loans are repayable within a stipulated term or period.
- For example, if your business requires capital investments in the form of plant and machinery, equipment, vehicles, or the construction of a factory shed or office.
- In this case, the lender provides term loans to finance these capital costs.
This is a mix of the above two loans.
- Depending on your business, you will need to figure out the type of loan that will serve you the best.
- For example, if you are a manufacturer, you may need to set up factory sheds and buy capital machines and equipment.
- Hence, you may opt for a term loan or a hybrid loan.
- You may not require capital machines if you are in the service sector.
- Hence, operational costs are the main factor. Then, the working-capital loan would be the best option.
Decide the Loan Amount
- Check the loan amount you’ll need before applying for a business loan.
- It should not lead to a shortage or excess of cash.
- There’s an easy way to evaluate this.
- Create a complete budgeting statement.
- It should include your business’s anticipated annual running costs, capital expenditures, and any surplus cash you may have.
- This will give you a good idea about the fund, working capital, or capital cost needs. Moreover, it will help ensure that you are on the right path.
Know Your Lender
- Different lenders offer different features.
- While applying for a small business loan or a larger one, it is better to be aware of the numerous terms and conditions. This will help you get the best deal.
- Here are some factors one should keep in mind:
- Interest rates play a significant role when choosing a business loan. Low-interest rates ensure lower EMIs, reducing the loan’s total cost. The interest rate also depends on the duration of the loan and the principal amount. Thus, these factors, too, have to be checked.
- Despite the low interest rate, the lenders may levy unreasonable processing fees and other hidden charges, thereby increasing the cost of borrowing. So, you’ll need to read the agreement cautiously to determine such surprising costs.
- Flexible Repayment Conditions: To maintain your creditworthiness, it is essential to repay the loan EMIs on time. Hence, choosing a lender that offers easy repayment options is vital.
- Application Process: Who doesn’t like a hassle-free loan? Online lenders often have a simpler application process as compared to traditional ones. They have the benefits of minimal paperwork, faster loan sanctions, etc.
- Piramal Finance has a simple application process that allows you to choose a business loan easily.
Ensure a Good Credit Score
- A credit score is an assessment of the loan and interest repayment history of an individual. It is used to ascertain the creditworthiness of a person or business.
- If you borrowed loans from multiple institutions (personal or housing), the lenders would examine how well you had repaid them.
- The lenders generally rely on a CIBIL report (also known as a Credit Information Report) to determine your credit score.
- The score ranges from 300 to 900 points.
- A score above 700 is usually deemed good. Always ensure that your credit history is good before applying for a business loan.
There are several aspects a lender will examine before granting a business loan. It is vital to have some documents and information ready before applying for a business loan:
- Tax Returns
- Generally, the lenders will ask for the latest 3-year income-tax returns and the current GST returns.
- This helps them determine the financial performance and status of your existing business.
- The lenders examine the annual sales, the position of receivables and creditors, inventory valuations, etc. Hence, make sure these figures are correctly reflected in your financial statements.
- Project Report
- A project report is a blueprint for your business idea.
- The report will contain the exact nature of your business idea. Also, the marketability of your products or services and financial forecasts for the next 3 to 5 years
- The lenders will study the project report to determine the viability of your business. Hence, make sure the project report is realistic and detailed.
- Other documents to be submitted include a PAN card, address proof, business proof or trade license, rent or lease agreement, etc.
The demand for business loans is rising as start-ups and entrepreneurs increase. Hence, the above factors must be studied carefully while applying for a business loan. This will help you to get an ideal loan suited for your business.
Several loans are available without any collateral or security. Piramal Finance offers non-collateral business loans ranging from Rs 3 lakh to Rs 10 lakh.