Availing a business loan is one of the significant hurdles faced by most small businesses. The reason is the tight lending criteria by banks. But Funds are necessary to cover day-to-day expenses and meet overall inventory and payroll requirements.
Competition is high and to keep pace with your rivals you need to quality products, services, expert team and of course funding.
However, the government is trying to help people but as most people can’t get benefited because of strict loan rules. It seems unfair for the first time but if we think about their prospective they are right. Let me tell you why?
People often avail business loans form the government schemes and don’t the complete EMIs that causes tax increments. To get rid of defaulters governments as well as private banks and NBFCs have made loan processing difficult.
As said earlier, getting funds is difficult, but NBFCs and online lenders have come up as an excellent option to meet the financial needs of a growing business. They ask for minimal documents and disburse loan in very short span of time, sometimes it only takes 2-3 days to get your loan approved.
So, let’s take a look at the five steps to get a business loan:
Understand the need for a Business Loan
Why you need money is one of the questions that most lenders ask. You need to tell the lender a valid reason for the same. The answer may fall between the following:
- Start a business
- Manage expenses
- Grow the business
- Create a safety cushion
However, sometimes people want to avail a business loan for personal works because business loan interest rate is cheaper compared to personal loan. I would strongly recommend don’t try to follow this practice it will damage your credit.
In fact, a study found that people are not paying EMIs of government business loan scheme (Mudra Loan Yojana) for SMEs. It is triggering to others to take a strong action against defaulters.
Determine the Best Type of Loan Lender
You can avail the credit facility from several places, such as banks, NBFCs, and online lenders. The financial products offered by them are different and vary based on their features and terms and conditions. You can approach the lenders that offer the product as per your requirements.
Before visiting lenders whether it is private banks or NBFCs do some research online as well as offline. Here are what you should look for before approaching the lenders.
- The reputation of the lenders
- Who they have funded before
- What is the loan interest rate
- What is the cycle for repayment
- How much they take to disburse the loan
- How many papers they are asking
- If they are asking for mortgage
- If they are providing loans even if you are average or bad credit score
Use banks when:
- You have collateral to offer
- Have a good credit score
- There’s no urgency of funds
- You need big amounts
Use micro-lenders when:
- Your company is a start-up
- You don’t need much funding
Use NBFCs when:
- You don’t have collateral to offer
- Need urgent funds
- Want hassle-free loan
Besides, there are several government loan products as well, such as MUDRA loan, you can apply for them as well. Once you decide on the lender, the next step is to choose the right financing product.
Decide the Right Loan Product
Deciding the right type of MSME loan is imperative. If it’s a new business, you need to avail a start-up loan. However, it is difficult to get a loan for business in the initial two years. The lenders require cash flow, profit and loss statement, and balance sheet to support your capability to repay the loan. So, start-ups are majorly declined for a small business loan.
Notably, there are several types of loan products that you can choose, such as machinery loan, capital loan, working capital loan, and Flexi loan. But first, you need to choose between a secured and an unsecured business loan. Here, if you have collateral to pledge, you can avail a collateral or secured loan. However, if you don’t wish to pledge collateral, you can avail a collateral-free or unsecured loan.
Next, you can compare the loan products on various factors, such as eligibility criteria, documentation requirement, interest rate, etc. Depending on the same, you can zero in on a type of loan product. Significantly, don’t forget to calculate the EMIs through business loan EMI calculator to determine the right loan EMI that you can afford.
Find if you qualify
To avail the credit service, it is essential that you qualify for it by meeting all the eligibility criteria laid by the lender. For this, you can take credit report once a year and search for the entries which are bringing your score down. Most NBFCs and banks want the minimum credit score of 550 to approve the business loan application. However, if your credit score is above 750, you can avail loans at competitive interest rates.
Business vintage is also crucial to get the application approved. Your business should be at least two years old. Also, you should have documents, such as bank statement and ITR, to prove your income. These documents will help you show the lender that you are capable of repaying the loan.
If you have found the right business loan product and are qualified for it (as per the lender’s criteria), next, you need to apply for it with the required documents. Many lenders require minimal documentation for a business loan. So, if you too have applied for the loan with the same lender, you will have to gather fewer documents.
The documents would vary from lender to lender. However, you’ll need the following documents with your loan application:
- Business address and home address proof
- Bank statement
The five easy steps mentioned above will help you apply for a business loan with ease!