Applying for a business loan doesn’t need to be a stressful process. Here are our top tips for making your business more attractive to lenders when applying for a business loan.
Perfect Your Business Plan
When it comes to traditional business loans, lenders want to understand your business plan fully before agreeing to lend you money. You want to ensure your plan is professional, well written, and inspires the lender to believe in your business. This means being able to show where your business is heading, a clear marketing strategy, and tangible, realistic financial forecasts.
It is also important to acknowledge the commercial risks you face in your business plan. All businesses, small and large, are exposed to risks as well as opportunities. By identifying both as part of your plan, you will inspire confidence in the lender that you are a trustworthy and informed business owner with a robust business plan.
Know Your Numbers
This may seem obvious, but lender expect you to know exactly how much money you need to borrow, where it will be invested, and how you are going to pay it back. Some entrepreneurs approach lenders without having a clear idea of the amount to ask for. This can result in one of two ways – either you get a business loan that is too small to make any real difference to your business, or you get nothing at all. A lack of financial knowledge can really discourage lenders from loaning you money.
When approaching a traditional lender, you should be able to clearly demonstrate that you have considered all factors that could affect your cash flow, and that you have factored repaying this business loan (plus interest) into that. To do this, use sales projections to determine how much you will earn over the course of the loan repayment plan. By subtracting expenses and overheads from this amount, you will be able to come up with a budget for your monthly repayment.
Here’s a simple way to calculate this:
Sales Projections for Loan Duration – (Expenses + Overhead) / Loan Duration in Months = Monthly Repayment Capacity
Register Your Business
Trading and registration are two separate things when it comes to getting a business loan. Lenders are naturally risk-averse. They want to know that if they make a loan, and the borrower is unable to repay the loan on time, they can take legal action against the entity they have lent to. That is why they generally only lend to businesses that are formally registered, and most lenders prefer not to lend to businesses that are under two years old.
Registering your business lets them know that you are operating within the legal framework that is appropriate for your type of business, and this reduces the risk associated with lending to you.
Get Your Business Documents in Order and Make Sure They are Consistent
In addition to your business plan, lenders will ask you for other supporting documents to prove that your business is a legitimate one and is currently trading. These will normally include your business registration documents such as:
- Gumasta Dhara
- Goods and Services Tax (GST)/ Value-Added Tax (VAT) Certificate
- Importer-Exporter Code (IEC) Certificate
- Food Safety and Standards Authority of India (FSSAI) License
- Certificate of incorporation (COI) (in case of Private Ltd. firm)
- Partnership Deed/ Limited Liability Partnership Deed (in case of a Partnership firm)
- Shop and Establishment Act Certificate
- Memorandum of Association (MOA) and Articles of Association (AOA) (in case of Private Ltd. firm)
- Shareholding pattern (in case of Private Ltd. firm)
- Company’s PAN Card (in case of Partnership/ Private Ltd./ LLP)
- 2-3 photos of your establishment to verify the business activities.
The business document requirements vary depending on the type of business you have. In addition to the documents mentioned above, lenders also require your bank statements, GST filings, Tax Return documents, and your financial statements for the last two years audited by a certified CA if you’re applying for a loan of more than 20 Lakhs.
Your financial history is important when a lender assess your creditworthiness. So, whether you are a young business or have been operational for a while, it is crucial that all your accounts be well maintained and consistent across the board. Make sure you have been consistent with your filing, creating formal accounts, and that your Income Tax is up to date and matches the figures on your management accounts. Discrepancies or inconsistencies liked this can create a lack of trust, which could give the lender a reason to reject your business loan request.
Before applying for an SME business loan, you should ensure all your business documents are valid, consistent, organised and where possible, collated into a report. That way you can become familiar with your business finances and answer any questions from the lender quickly and confidently.
Don’t Ask for A Business Loan You Can’t Afford
As a rule, lenders follow is they will not loan you more than 25% of your annual turnover. So, if your turnover is less than 12 Lakhs, they will not be willing to lend you a 1-5 Lakh business loan.
Lenders do this because they don’t want to put your business under strain once you have taken out your loan. That’s why they check both your declared turnover and your bank balances to verify that they are not crossing this 25% threshold rule when they lend to you.
Maintain An Appropriate Minimum Balance in Your Business Current Bank Account
Lenders want to know that you have enough cash month-to-month to be able to repay the business loan you take from them. They verify this by checking that you have a minimum balance in your account every month that will allow you to cover both, your regular monthly business expenses and the EMI payments associated with your loan. Therefore, if you’re applying for a 1-5 Lakh business loan, you should have at least an average bank balance of 10,000 to pass the minimum loan eligibility.
Use your Current Account Not your Savings Account for Business Transactions
Lenders want to know that you have adequate revenue and cash flow to pay back your business loan. They will review your business’s current account to see the level of sales you do every month and that you have enough excess cash each month after paying your expenses to pay back your loan. Here a simple way to think about it:
Monthly Revenue > (Monthly Expenses + Monthly Loan Repayment)
When assessing you for a business loan, lenders do not take into account your personal income because it’s more important to them that your business is strong enough to generate the revenue required to pay back the loan.
As a rule, lenders do not lend to businesses that only use a savings account. However, in some rare cases, if you are a Sole Proprietorship using your personal savings bank account, some lenders may extend a business loan up to 10 Lakhs to you. As this is not common practice, we strongly discourage you from only using a Personal or Business Savings Account for your business finances.
Repay Your Existing Debt on Time
When you’re looking for a new business loan, lenders want to see that your repayment behaviour on any previous debt you had or currently have is good. If you are currently in arrears on your debt repayment, you won’t be able to get a new loan until you get your repayments back on track. This means demonstrating consistent and timely repayments over a period of a least 36 months.
It’s important that you stay on top of your debt repayments and if you anticipate any issues, let your lender know in advance. Remember, communication is key here! Talking to them about it helps you both come up with a solution together, including a repayment schedule you can manage, and it increases the lenders’ trust in you. This also helps reduces the negative impact missing a loan repayment has on your credit score.
Improve Your Credit Score
Having a poor credit score, both professionally and personally, affects your chances of securing business financing. One of the simplest ways to ensure your credit score remains attractive is to your pay bills and make sure any existing loans or credit card debt you have is paid on time. Paying your bills on or before they are due is not only good business practice, but it will keep your credit score high and maintain good relationships with your creditors and suppliers. This proves to lenders you are not only a responsible borrower but that you also have the funds available to pay off your debts.
A good credit score varies from one Credit Bureau to another. However, as a general practice, having a score above 700 means lenders will consider given you a business loan if you fulfil all of their other requirements.
You should regularly check your credit score, so that you can track any changes, and report mistakes on your profile to the credit authority for correction. Something as simple as a wrong address can have a dramatic effect on your credit score, so make sure all the information is correct and up to date.
If you do have a bad credit score, it is probably best to hold off on applying for a business loan until you have taken corrective action to improve it, as every rejection from a lender can reduce your credit score even more.
Reduce Your Financial Risks
Our final suggest is to reduce your financial risk to be more attractive to lenders. One way to do this is by creating a cash reserve. A cash reserve is savings that can be used in emergencies when funds are unexpectedly low, but you have expenses that need to be honoured. For lenders, this gives them the security that even if you have short terms working capital issues, you will be able to keep up with your regular repayments using this cash reserve.
Keeping your overheads low will also make you more appealing to lenders, as this reduces your risk and increases your profit margins – which is always a good thing from the perspective of a lender. Simple changes to your business such as going paperless, reviewing your utility suppliers, and rethinking your employee benefits system can all have a huge effect on your expenses.
CreditEnable’s goal is to help you find the perfect business loan for your needs at the best terms possible. If you are not qualified to get a business loan from one of our lender partners right now, don’t be discouraged. Making the small adjustments recommended above will help gradually increase your attractiveness to lenders. So, when your business is ready and you are more confident about your business plan and finances, apply again! We’ll be here waiting for you!
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