Planning to Avail a Business Loan? Important Things to Consider
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Business loans are a boon for businesses looking to expand and charter new territories. However, applying for a business loan may not be all plain-sailing.
Here a few things you ought to know about a business loan to make the process simpler and more efficient.
Know the Types
There are mainly two types of business loans available, secured loans being the type protected by an asset or collateral. This type of loan requires collateral or a guarantor.
The second type of loan is an unsecured loan; the lender is at risk in case the business owner becomes a defaulter. For this reason, banks are hesitant to approve unsecured loans without a good credit history.
Do your research and find the right business loan for your company. There are a plethora of options available in terms of eligibility, the rate of interest and tenure. Take your time and compare different business loans to find the optimal business loan for your business.
It is of paramount importance to be clear and transparent about the purpose of using a business loan.
Cost of the Business Loan
The tricky part is knowing how much the business loan costs you, including all the interests and fees. Check for possible loopholes and the fine print before finalizing a business loan.
The Loan Amount
There are various factors influencing the quantum of business loan available to a business. For example, a public limited company is more likely to get a larger amount than a proprietorship due to the shared liability between the different business owners.
The track record of the business and the annual cash flow also counts towards the loan approval. However, the profitability of the company and the annual turnover determine the final fate of the loan application.
The Requirement of Collateral
Your business needs to have assets as collateral for a business loan. It is a major point of concern for banks as they measure the risk reduction offered by the assets stated by the loan applicant. For instance, if a business owner pledges account receivable against a business loan, the bank will check for the solvency of the company and will often accept 75 % of the receivables to back a loan.
The Financial Details of Your Company
This includes the balance sheet of your company which should include the liabilities, assets and the business capital of the company. The profit and loss accounts of your company for usually a minimum of three years are critical for credit appraisal.
This is however not an ironclad rule and can be mitigated with a good credit history and assets to be pledged as collateral.
Audited statements or reviewed financial statements are not a necessity. These are, however, a plus as banks are more concerned about the value of assets pledged by you.
Your Personal Financial Details
In the Indian financial system, Aadhar card and PAN card number are important for KYC norms. Also net worth, details on assets and liabilities, various investments done, the credit card accounts, vehicle loans, etc. are important personal financial detailed required for a loan.
If your business comprises of more than one owner or is a partnership, the bank requires separate financial statements from owners with shares, corporate tax returns, and insurance details.
The new breed of digital lenders is offering loans using diverse data sources such as credit bureaus, utility payments, and social media. Since the Micro and small enterprises are underserved by traditional channels, these lenders are now filling in the gap. With automated underwriting and risk analysis, these lenders can offer faster processing of loans at a low operational cost.
Bank on these handy tips to prepare yourself better for applying for a business loan. While there are plenty of business loan options out there, opt for a lender that offers flexible loans with faster documentation.
So, What Lies Ahead?
Over the last few years, the government has taken multiple steps to provide credit for small businesses. However, the documentation process for loans from banks is very long. This is where peer-to-peer lending has emerged as an intermediary to provide loans through online platforms. This disruptive change in small business lending could very well be the future.