Every business owner might have a loan requirement at some pint in time during the whole business life cycle. Sometimes it becomes important to go for a loan for the business to move forward. For availing a loan, the business owner has to make a business loan application to give to the lender.
In order to get the loan, the business owner first has to conduct research on the various lenders in the market along with their eligibility criteria and other terms and conditions.
Every lender might have their own eligibility criteria for the loan application process, the lender whose eligibility criteria can be met should be selected. The basic eligibility criteria of most of the lenders are the same.
Some basic eligibility criteria of every lender:
1. Business turnover
Lenders consider a turnover which is between Rs. 15 lakhs to Rs. 1 crore to be eligible for a business loan.
2. Age of the applicant
Age of the applicant should be between 21-65 years.
3. The activity of the business
A business should be active since at least 3 years, and some lenders even consider a business activity of one year to grant a business loan.
4. Credit score and credit history
A credit score is a 3-digit number which when ranges form 750-900 is considered to be good when availing a business loan. Checking the credit score of the applicant is also a step which the lenders follow. Most of them refer to CIBIL, and some even gave their own credit evaluation methodology.
Having a good credit score increases your chances of getting a loan, while a bad one has an impact on every future loan applications.
Higher the credit score, higher the chances of loan approval.
But before you consider the eligibility criteria and apply for a loan, there are certain things you should consider:
1. Know what exactly you need
Evaluate the exact requirements before taking the step of applying for a loan. You must also be able to provide the required documents and proof to back up the loan.
Also, there are different loans in the market for different business needs, like the machinery loan for buying new machinery or equipment, working capital loan to meet the working capital needs, etc, the only thing is that there should be a proper justification for the same.
2. Know about your credit status
All of the lending institutions/lenders will conduct an inquiry about your credit score after they have received your loan application. Through the credit score, the lender can come to know about the loans taken by you in the past, repayment history, and credit card usage.
Every business owner must have a track of the payment history, amount owed, credit history, new credits, and types of credit that are in use.
3. Do research on the eligibility criteria of various lenders
Different lenders have different criteria that they use to evaluate the eligibility of an applicant for a small business loan along with the documents required.
It is advisable to conduct thorough research on the eligibility criteria of different institutions, with the kind of industry each lender prefers the business should be in in order to invest, and also if they prefer an established business or even a new business, along with the collateral, if any.
This will help in avoiding any rejection for a loan application, as this can affect your credit score negatively.
Also, if you require quick loans for your business, check the institutions which offer such loans, and also their application process.
4. Focus on the financials of your business
Financial statements are important at the time of business loan application. These help the lender evaluate how financially sound the business is.
Apart from this, it is also necessary to have a proper plan of how you want to utilize the loan amount. This has to be done so that the lender is convinced that the business is growing, and is financially strong.
Cash flow is another thing that needs to be paid attention to. If there is poor cash flow, it might create a problem when the lender is evaluating the business’s repayment ability.
When you want to apply for a loan, there are certain things that should be included in a business loan application:
1. Request letter
A request letter has to be written and addressed to the manager of any financial institution or a bank to tell about the loan that you require. This is a request to consider your application and should also contain a brief description of your business.
2. Business plan
A business plan includes the mission and vision of the business, information about the team members, information about the products and services that are offered by the business, some information on the competitors and how your business is different, it should also contain the financial statements & projections, the marketing strategies applied in the past, and milestones the business wants to achieve.
3. Credit report
A good business credit report increases the chances of getting a loan at the desired interest rate.
4. Financial projections
Balance sheet, cash flow statement, etc should also be provided as it gives an idea whether the business has sufficient funds to pay the loan amount.
5. The loan amount you need
Specify the loan amount you need, and the reason you need this much amount for. Break it down and write in detail about how the money will be used and for what purpose. For example, if you are planning to buy a piece of new equipment, mention that.
6. Other debts
It is possible that you might be having some previous debts. When you mention them, it lets the lenders know the current state of any debt you owe.
This will tell about any outstanding loans and other credit amounts with the monthly dates for payments to the borrower. It also outlines the monthly payments with interest and payment dates to the borrower.
All this is also to make sure whether the borrower will be able to pay the additional loan amount or not.
If you want to avoid loan application rejection, here are certain things to be careful about:
1. A credit report showing that you had defaulted
If you have defaulted in the past, it can turn against you and can lead to rejection.
2. Your company is new
If your company has just started, the lender might not have the confidence that you can repay the loan due to a lack of financial strength in the business.
3. If you are a guarantor for somebody
If you are a guarantor for somebody who defaults in the loan, then it can negatively affect your CIBIL score which is not a good thing in the eyes of the lender.
If you require an unsecured loan for your business on an urgent basis, you can contact Gromor Finance for a loan at an affordable interest rate!