In the SME sector, there are multiple types of loans that a business owner can opt for when he or she needs one. Some businesses run for a couple of years, become an established business, and then opt for a loan for a major investment, new project, or acquisition. It is easy for these businesses to secure loans. Many a time, securing the first loan for an SME is not an easy task and can get very tedious for the entrepreneur.
A strong credit score, many years of being in business, stable revenue & profits, etc. are generally analysed by banks before approving a business loan. Some businesses do not have any of these strong points and hence, have a particularly stressful time securing the loan. According to the banks and other lending institutions, loaning funds to a small business is high risk. They will be unsure if the business will run successfully or shut down in a couple of years.
Therefore, the main concern will be whether the loan will be repaid or will they have to write it off as another bad debt. Business owners need not be discouraged since many institutions are willing to take a chance and provide small and medium enterprises with loans provided a certain set of parameters are in place.
Credit Score
An entrepreneur, based on his personal credit score, can qualify for a small business loan. Just like how an individual secures a personal loan, car loan, or a student loan basis, the credit score, he/she can secure a business loan as well. The personal credit score will help the loaning agency understand how reliable the business owner is, based on the clearance of past debts.
It is safe to assume that one who is law-abiding and responsible with their personal financial matters and will follow the same in business as well. In this way, a good personal credit score will open doors for the entrepreneur looking for a business loan, and a poor credit score will limit their options. A business owner can build a good credit score by paying off all credit accounts in full and on time.
Loan amount
The business owner needs to make an analytical decision regarding the amount of the loan. It is very easy to go overboard on these cases because the more funds received, the easier to operate the business. This makes for unnecessary debt. The company owner should have a business plan in place which includes the initial capital needed and what exactly is it needed for. If there is no specific reason given to the lending institution, they will be unsure of granting the loan.
Similarly, if the reason isn’t good enough and is something that the business can afford, again, the lender will be sceptical. Some of the main reasons for securing a business loan include plant & machinery, rent, payroll, initial fees and inventory, etc. A business owner must never take more than required because at the end of the day it is a debt.
Apply online with the Correct Paperwork
Banks, financial institutions, and other loan agencies are the external sources of support to the SMEs. For a hassle-free process, all business owners must submit a few basic documents. Each loan agency has its own set of guidelines in place. Hence, the documents required and the verification process will differ from institution to institution. However, generally this list includes the certificate of incorporation or certificate, financial statement of the past 3 years that has been audited, the current list of shareholders, details of the directors or partners, IT returns or wealth tax assessment order of the past 3 years, sales tax returns and assessment order of the last 3 years, certified true copy of an identity proof of the directors or partners, passport size photographs of the partners or directors or guarantors, resume and net worth statement of the directors or partners, documents of the premises on which the business is operating, government order to use the premises for commercial use, site map of the land, blue print and the building plan, architect’s estimate of the building, estimated budgets submitted by the suppliers for plant and machinery in case of a manufacturing unit, marketing plan, copy of the sanction letter in case of any current credit facilities, the SSI registration certificate, an NOC that has been received by the pollution department, proof that power has been installed and sanctioned, a project report, employee list including key managers and technical personnel, flow chart of manufacturing process if any, collateral securities lease or sales deed, detailed list of assets and finally if there is any kind of collaboration agreement.
If it is a first-time business loan, a business plan is an essential part of the paperwork. A business plan will help the lending agency see that the business is ready to secure the loan; it will be used to achieve the said goals and repay the loan. This business plan must include the company profile, nature of the business, the target audience, the various expenses, competitor analysis, estimated growth in the next five years and the strategy.
Having said that, several NBFCs such as ZipLoan are operating in the market that offers business loans at minimal documentation. This makes it easy for the borrowers to avail business loans. In this way, small businesses can secure their first business loan after it has been running just for a couple of years.
A small business loan is the best way to test the business owner’s credit handling skills. If this is handled with ease, the business will be on the road to becoming a bigger, more established company. Entrepreneurs must ensure loan repayments in full and on time, that the loan guidelines are being adhered to and that the purpose of the loan remains the same and the company hasn’t strayed away from its goals. Loaning agencies will be happy to renew the loan at a lower rate as well as propose new financing options to the business owner once they confirm that he or she is abiding by the process efficiently.