A business is any activity that generates profit for the stakeholder. It can be in the form of manufacture, goods, and services. A business entity can be Proprietorship, Partnership, Limited Company or a body corporate. The governance of business is related to its ownership, as the proprietor is personally liable for the affairs of his business, while the rules framed under corporate law governs the company. A company is independent of the founders, who cannot be made personally liable for the affairs of their enterprise. In the present scenario, the business loan has become integral to any business, whether it is for the establishment, running the business or expansion. The clamor for business loans and the limited number of lenders, make it incumbent upon the applicant to be prepared with fool-proof plans so that the proposal for a business loan does not face rejection.
The contours of a Business loan:
Lenders which primarily are banks and NBFCs provide the funds needed for a business. The Government of India has initiated some programs to facilitate business loans to the SME and MSME sector, who contribute almost 45% to our GDP. While preparing for a business loan, it is imperative to be familiar with the key pointers in the loan.
|Key business loan parameters|
|Category of loans
||Short, Intermediate, Long Term and Flexi
||Proprietorship, Partnership, Limited Company, Body Corporate.
|Cost of capital||Rate of Interest
||It varies from lender to lender, mostly relative to the MCLR
||It is normally in the range of 1% to 2%
|Security||It depends on the lender, but there are many who offer unsecured business loans.
||Many lenders have created a digital interface for applications
||A good score is a must to establish creditworthiness
Benefits of Business Loan:
The business loan can be useful for a variety of purposes, suiting the operations of the enterprise. The key benefits are:
- Take care of the cash flow signifying the health of the business.
- Lease or rent adequate premises.
- Upgrade or purchase of new machinery.
- Induct new technology.
- Build sufficient stocks and inventory.
- Hire requisite personnel, which may also be seasonal.
- Stock enough raw materials to cater to bulk orders.
- Help execute expansion plans.
- Augment the scale of operations.
Tips to increase the chances of getting a business loan:
Having comprehended that a business loan is intrinsic to the operations of an enterprise and also being aware of the requirements, it becomes imperative to be methodical in seeking a loan. Key to the strategy to evolve for a business loan is to work with well-defined plans. It is also incumbent to show that the business you are running is healthy with a good cash flow record ensuring liquidity. The best way to proceed would be to ask yourself if the investor would be comfortable extending credit to you with the information you are providing. The idea is to work out a viable strategy to clear the roadblocks before approaching a prospective lender. The following are the key to your success:
Create a viable business plan: The import of a workable business plan is a reflection on your capabilities. It is here that you put in place a project that sensibly assesses the facts as they are. The proposal must be cogently creating an impression of its success. The critical components of the business plan ought to cover these aspects.
• Experience of the management.
• A realistic overview of the enterprise.
• Projected financials.
• Market analysis report.
- Smooth cash flow management: Repayment of the loan is of prime concern for the lender. A good Debt Service Coverage Ratio (DSCR) is the indicator of the availability of liquid cash to service the loan. It thus makes sense to monitor the cash flow and increase it, to ensure that you score a point for eligibility for a business loan. The key to a good cash flow position is:
- Prudent payment discipline.
- Shun unnecessary expenses.
- Reduce overheads, as far as possible.
- Groom your credit score: An important indicator of your financial management skills is your credit score. Since it is a vital input to the investor to evaluate the credit score for your creditworthiness, it needs your attention for proper health. The factors that determine your credit score are:
- Credit history length.
- Outstanding debt and liabilities.
- Repayment history.
- Size of operations.
- Credit utilization ratio.
Once you are aware of the factors that you need to nurse, you can work on a plan to sustain and improve upon it.
- Timely payments of bills and expenditure.
- Open multiple credit accounts, for a wider distribution of liabilities.
- Maintain a credit utilization ratio at a minimum of 25%.
- Prime the documentation process: One of the major hindrances to the smooth approval of your business loan could be improper documentation. It is wise to be aware of all the document requirements and keep them handy for a seamless application and approval process. Prepare a checklist of the documents required. There can be insignificant variations depending on the type and constitution of business. Some of the primary documents common to all are.
- Valid photo ID Proof.
- Valid address of the applicant as well as the business.
- Registration certificate or copy of the partnership deed, memorandum of articles of association, etc. where applicable.
- Valid Trade license from the appropriate authority.
- Bank statement for the period specified by the lender.
- Latest ITR.
- Balance sheets, P & L statement, Income, etc. for at least the last 2 years.
- Tax registrations including GST and VAT.
- Repayment strategy as the final salvo: A detailed repayment strategy to service the loan and repay it in totality goes a long way in building the trust and confidence in the minds of the lender. You can use the EMI Calculator and be ready with the homework defining the strategy. It should be in such a way that it matches with the operations of the business in a way that it does not burden its existence with unbearable liabilities. If necessary, have a back-up plan ready to repay and thus earn the trust of the creditor.
Conclusion: It needs no emphasis to state that a business mandatorily needs funding. The lenders are ready to provide credit to those who are creditworthy, and the proposal is abundantly viable. Key to the seamless application and approval process is how well you prepare yourself. You can clinch the deal and increase your chances of a suitable business loan provided you have meticulously planned the process with all diligence and transparency.