Thinking about applying for a business loan, but you haven’t registered your company? You’re not alone! There are millions of entrepreneurs just like you who choose to not register their businesses, or don’t know that they need to register their business.
Let’s learn what the benefits of registering your business are.
What does it mean to register my company?
When someone talks about registering a company, it means they are making their business a legal entity and obtaining the necessary permits and licenses needed to operate within a state.
You have worked so hard to develop your business idea, create a well-researched and in-depth business plan, develop a product/service, and get together the funding needed to start your business. Registering your company is the final step in protecting your business and yourself.
Registering a business was once a long and tedious process, but with the help of technology and firms like Vakilsearch, it is now simple and quick for entrepreneurs to register their businesses.
What are the benefits of registering my business?
1. It is easier to open a business bank account for a registered business
When your business is registered, it is easier and faster for you to open a current bank account for it. When you open a savings account, you only need your ADHAAR and PAN information. However, to open a current account (which is the type of account you should be using for your business transactions), your lender will need business registration documents in addition to other documents.
While getting the right documents in place may seem cumbersome, it is something you only need to do once, and lenders are more likely to approve your business loans if you conduct your business transactions using a current account instead of a savings account. So, this also increases your chances of accessing formal business funding in the future.
2. Creates a credit history for your business
Registering your business creates a credit history for it, separate from your individual credit history. This means any time you apply for a business loan, lenders are less likely to check your individual credit report or may put less emphasis on it as your business has its own credit history, complete with a history of borrowing and repaying loans.
3. Helps you get a business loan faster
Registering your business improves your credibility with lenders. It indicates to them that you run your business responsibly and follow legal regulations.
It also acts as proof of business vintage, meaning how old your business is. If your business has been registered and operational for at least two years, it indicates to lenders that:
- You have a well thought out business plan
- Your business is or has the potential to be a profitable entity
- You are aware of the challenges that arise when running a business and know how to overcome them.
This increases your attractiveness to lenders and conveys to them that you can repay the business loan they may lend to you.
Having all your registration paperwork complete and in order, before you apply for a business loan greatly speeds up the process of loan sanction and disbursal as your application package is not missing those key documents the lender needs to verify your business information.
Your business is registered, and you need a business loan? Apply for a business loan with CreditEnable.
4. Your business becomes its own legal entity separate from you, creating limited liability protection for you
When you register your business, you are creating a new legal entity, independent from yourself, that can take legal action in its name against a person or another organization. This is helpful if a client sues your business or if you need to start legal proceedings against a client for overdue payments, for example.
Depending on the type of registration you get, it also limits your personal liability in case your business goes bankrupt, is sued, or makes losses.
5. Helps in brand recognition
Finally, registering your business creates a brand identity and recognition and helps create business longevity, which positively impact customer loyalty and sales.
You can pass down a registered business to an inheritor, which means the business will carry on even if the original owners are no longer involved in it. This is great for your business vintage and contributes to creating long-term customers.
Let’s take the example of two CreditEnable customers who applied for business loans last month.
Our first customer, Mr. Kumar, owns a local grocery store in Maharashtra. He has been running his shop for over 15 years and has a healthy annual business turnover and the required minimum balance in his bank account. Now he wants to open another store in an adjacent neighbourhood.
Our second customer, Ms. Kaur, is a wholesale trader of garments and owns a boutique in Punjab. She’s been doing business for only 3 years and meets the lender requirements for annual business turnover and required minimum bank account balance in her Current account.
Both businesses are doing well and should qualify for a business loan from a lender, right? So why did the lender approve Ms. Kaur’s business loan application but reject Mr. Kumar’s request even though he’s been running his business longer and is a more experienced business owner? This is because Ms. Kaur registered her business the day she started operations, while Mr. Kumar never did!
So, even though he’s been running his business for much longer, the lender has no way to verify his claims and business ownership information, while they can do this easily for Ms. Kaur because all this information is linked to her business registration.
Now if Mr. Kumar wants to get a formal business loan, he will have to first register his business, then wait for at least 24 months before he can get his desired loan amount at favourable loan terms and ROI.
Moral of the story – We recommend you register your business as soon as you start operations so that you can get the funding you need to grow your business more easily!
What are the different types of business registrations I can get?
- Private Limited Company
- Public Limited Company
- Limited Liability Partnership
- One Person Company
- Sole Proprietorship
- Section 8 Company
If you start your business and don’t register it, it is automatically considered a Sole Proprietorship.
When you’re applying for a business loan and have registered your business as a Partnership business, Limited Liability Partnership, or Sole Proprietorship, you will also need a supporting license or registration as your proof of business vintage. In this case, you can submit one of the following supporting documents*:
- Udyam registration
- Shop Act license
- GST registration (if your annual business turnover is more than 40L)
- Labour license
- FSSAI registration
- Import-Export license
*This is not an exhaustive list.
The goal is to have a document that reflects when your business was established so that the lender can verify your business information easily.
Registering your business reduces your liability as a business owner in case something goes wrong. It also allows you to open the right type of bank account, making it easier to get formal funding to grow the business. A registered business can also purchase property, and it is easier for you to transfer ownership of a registered company to your family members or a buyer in the future. There are a few different types of business registrations for you to choose from, so we recommend taking the time to understand them and your business needs properly before registering. You can always make use of an account to complete the process smoothly.