Megha had a garment store. She wanted to expand her business. But profits were a bare minimum. busHence, she decided to consider a small-business loan. However, she had no previous experience of taking a loan and did not know how to go about it. That’s when she consulted a financial expert who advised her on a 10-step process of getting a small business loan.
Step 1: Decide on the loan amount and its need
You cannot apply for a loan without knowing the amount you wish to borrow. There must also be a reason to borrow funds. It could be for expansion, or working capital, or capital expenses, or any other financial need. You are required to inform the reason and the amount to the lender.
Step 2: Know the types of small business loans
There are various types of business loans available. Evaluate all the available loans based on your need, tenor, the rate of interest, and the terms and conditions. Some basic and popular small business loan types are a credit card loan, a line of credit loan, working capital loan, and term loan. Each of these types is suitable for addressing different needs in different situations. If you are unsure of the amount of loan you need, you can take a line of credit loan and pay interest only on the amount you use.
Step 3: Study the prospective lenders
The loan market is filled with lenders. Do not choose without thorough research. Shortlist the lenders offering the loan you need at a competitive rate of interest. Some types of lenders are banks, Non-banking Finance Companies (NBFCs), peer-to-peer lending and venture capitalists.
NBFCs like Bajaj Finserv offer exciting offers and benefits from time to time which you could avail. They also have a flexible tenor so you don’t have to strain your finances for repayment. Ensure that your lender offers this ease while repayment.
Step 4: Check your credit profile
Lenders approve loan application based on your creditworthiness and the level of risk associated. Before applying make sure to check your company credit report (CCR). If you are borrowing for the first time, the lender might also check your personal credit score. Any outstanding loan and years of operation of a business are also taken into consideration. These details help lenders evaluate your repayment capacity. Existing obligations may affect your cash flow. Make sure your credit profile is well-maintained.
Step 5: Keep financial statements in order
They give an insight into the financial health of your business. Ensure to keep your profit and loss statement, balance sheet and cash flow statements updated. Lenders analyse these details to understand your business history and repayment ability. Financial records audited by a chartered accountant are given importance.
Step 6: Determine the collateral/s
Lenders may sometimes ask for collaterals as a form of security against the loan amount. This is when your loan amount is large and lender perceives it as a high-risk deal. Keeping business assets as security also makes way for better interest rates and terms. Prefer business assets over personal guarantee as collateral. Make sure to determine the actual value of the asset before using it as collateral.
Step 7: Update online presence
Social media and the internet allow lenders to check background online too. Perception and views of your stakeholders and customers about your business convey a lot. Review your website and social media sites before applying. Ensure they are updated and have a favourable tone. Lenders might want to check that just to be sure if your information has an online backing too.
Step 8: Know lender-specific loan process
The application process differs for every lender. Knowing the process thoroughly can make the actual application easier. Most lenders like Bajaj Finserv have mentioned all the details on their website. You can simply visit the website and know all about the loan process and benefits.
Step 9: Collect details for application
Before applying for a Small Business Loan, make sure to keep all the information ready. The application form will require documents supporting the details filled in the form. Being ready may save your valuable time. Some important documents required are:
- PAN card – company/firm/individual
- Proof of continuation – ITR, trade license, etc.
- Proof of type of entity
- Financial statements
- Proof of identity and address
- Business credit rating report
- Collateral details if needed
Step 10: Scrutinise the terms
Before you sign on the dotted line, make sure you have read all the terms and conditions carefully. In most cases, you may not be able to change the terms. But being aware of their existence is always better. Also, compare with terms of other lenders. Check about foreclosure charges, penalty fee, processing fee and any other hidden charges.
To sum up
Getting a business loan is not that difficult. You just need to ensure that you follow the steps mentioned above and approach the lender well-prepared. If you meet all the requirements of the lender, your loan disbursement would be quick and easy.
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