Escaping the 9-5, becoming your own boss, and building your business, that’s the dream for so many of us!
All this sounds interesting until you realize there’s significant capital required to start a business, let alone sustain it. But, don’t give up on the entrepreneurship dreams just yet. Business loans are a great way to secure financing for your ventures. They help you hire a great team, get the latest machinery, and fund day-to-day operations. Established businesses use business loans to fund their growth and expansion strategies. Moreover, business loans offer tax benefits that reduce tax liability, increasing your overall ROI. However, finding and securing the perfect business loan is confusing for first-time entrepreneurs due to the available options and varying requirements.
Here, we simplify how to apply for and get a business loan, especially for entrepreneurs.
Business loans are designed for your company’s use. Some lenders allow the borrower to use the loan for personal use, but it comes with higher interest rates. Business loans are better than other types of loans such as personal loans as they have:
On the other hand, business loans have stricter eligibility criteria.
For example, it is a challenge to get a loan with no credit history or business credit score. In such cases, loan providers ask for a personal guarantee that transfers the liability to the borrower if your company fails to repay the installments. But, here’s the secret – we have the cheat sheet that bank officials use to evaluate your business for a loan.
Here’s a list of everything loan officers will ask for to check your business’ eligibility.
Essentially, you provide a business roadmap to gain the bank’s confidence.
Debt history shows any ongoing loans the business may have and reflects on your ability to repay the loan amount on time.
Simply put, a cash flow statement shows the net cash inflow and outflow of your business.
The cash flow statement is divided into three sections:
Annual revenue, or gross business income, helps bank officials decide the loan amount. Some banks have minimum annual revenue eligibility criteria for a business loan.
While some banks offer unsecured loans, most banks need collateral to issue a secured business loan. A collateral is an asset that bank officials might seize and sell to recover an outstanding loan amount. However, you don’t have to worry about this as long as you are paying the dues on time.
Yes, businesses do have a credit score that is separate from your own. However, in the case of a new business, the bank might consider your credit score before approving the loan.
Also, Read: How to Get a Business Loan on Low Credit Score?
Getting a business loan is much like preparing for a marathon – it is exciting, requires detailed planning, is slightly nerve-wracking, and has a huge payoff.
Note: We recommend working with a finance professional before you opt for a business loan.
Here are a few things to consider when applying for a business loan.
Some reasons why you seek a business loan are:
A few other reasons have slightly negative connotations to them. Yet, they are perfectly permissible for legitimate loan purposes and include:
Furthermore, mention your venture’s future vision, values, mission statements, and historical activities. Mention your management team and their business goals to add credibility and give more clarity regarding your business.
There are a few different loan types, depending on your business model and loan amount. Let’s look at some types of business loans.
Traditional loans from banks are expensive and often come with shorter repayment tenure. However, you can negotiate for lower interest rates and longer repayment terms if you have a long-term, working relationship with the bank.
Most organizations opt for term loans as they have longer repayment periods. For one, a secured term loan has a repayment period of 20 years. And, unsecured term loans have a repayment period between 1-5 years.
Startup loans are great for new businesses without any credit history. Consequently, the eligibility criteria are based on the borrower’s credit profile.
Small businesses use working capital loans to run daily operations during the off-season, or to fund the increased activities during the peak season. Naturally, this is a short-term loan with a high interest rate. Working capital loans are best for businesses in retail, manufacturing, export/import trading, wholesale, and service industry.
Most governments offer loan schemes to micro, small, and medium-sized businesses. These schemes have flexible repayment terms, lower interest rates, and a shorter tenure. However, the loan amount is also smaller.
There are a few government schemes, like MUDRA loans and the Stand-Up India Scheme, that offer up to ₹1 crore. Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGFMSE) offers working capital loans up to ₹2 crores.
Lenders, as well as the Indian government offer special loans with low interest rate to women entrepreneurs. The simple loan process encourages women from rural areas to acquire funds for their venture and participate in the economy.
Different loan types and lenders have different criteria, so it’s better to check with the officials before proceeding with a loan. The criteria include minimum turnover, borrower’s age, business age, business experience, profitability, and ITR.
Here’s a list of generic eligibility criteria that most lenders look for.
Again, we can’t stress this enough, check the eligibility criteria with your lenders before moving forward with a loan.
Identify proof |
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Address proof |
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Income proof |
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Business income proof |
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Continuation proof |
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Signature proof |
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Other documents |
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Unlike personal loans that are disbursed within a few hours, business loans take two to four weeks to receive approval. Consequently, exercise patience and continuously take status updates from the lenders. If the process is still getting delayed, ask if they require additional paperwork and promptly provide them with the same to ensure timely loan disbursal.
Also, Read: Pros and Cons of Business Loan
Even with everything outlined, getting an approved business loan can be time-consuming. Credmudra is a loan matchmaking platform that does the heavy lifting for you.
The benefits of using Credmudra for getting business loans are:
Credmudra also offers a low turnaround time, with a promise to disburse the loan amount on the same day. So, if you ever face a cash crunch in your business, you know who to approach.
Yes, the borrower’s income matters for new businesses with a non-existent credit history. In such cases, banks base their assumptions on the borrower’s repaying history.
The minimum annual turnover for a business loan varies from bank to bank.
Ideally, a 750 credit score is the best way to get a business loan. However, some banks offers loans to borrowers with a 650 credit score.
Yes, the bank verifies the authenticity of all the submitted documents before approving the loan.
Penal interest is an extra charge levied on borrowers who fail to pay the installments on time.
Credmudra is a digital platform designed for financial services leaders in India to share their insights and perspectives beyond the limits of social media. It is a purpose-built platform for experts from banking, NBFCs, fintech and others to reach the right audiences and transform finance. With Credmudra, finance professionals can establish themselves as thought leaders and engage meaningfully with India's top money minds and those shaping the future of lending. Unlike social media, this platform offers a space for compelling discussions and community building within the industry. Credmudra can elevate the quality of discussions and collaboration among influential authors in Indian finance.
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