Either you are aiming to grow or managing to keep your business afloat, business loan is one of the best tools in your toolbox. Getting a loan sanctioned for your business could be a daunting task for any business owner, as there could be a lot at stake in the form of collateral or security. However, there are several types of unsecured credit products with lesser loan amounts that do not require any collateral, such as micro loans for startups and self-employed professionals, Micro Small and Medium Enterprise (MSME) loans, overdraft, loans offered under Govt. schemes (MUDRA loan under PMMY, PMEGP, and CGTMSE), Merchant Cash Advance, etc.
To avail any of these loan types, you should first check credit score so that you are well aware of the possibility of getting the loan sanctioned. You can always make an effort in improving your credit score to enhance the chances of loan approval.
Besides checking your credit score, you may also check your company’s credit rank from the leading Credit Information Companies (CICs). In case you want to get a loan on the basis of your creditworthiness, you can check your credit score from credit bureaus, named as TransUnion CIBIL, Experian, Equifax and CRIF High Mark, before applying for a loan. However, it is recommended to get a business loan if the amount is high and the loan is to be used solely for business purposes only. To get more hands on it, let us discuss some measures to consider before applying for a business loan.
8 factors to consider before getting a business loan sanctioned
Know your Credit Score
Like discussed before, checking your personal credit score and company credit report helps in determining your, as well as your business’ creditworthiness and repayment capacity. Maintaining a high credit score and creditworthiness improves the chances of loan approval at your desired terms.
Purpose of Loan
Primarily, this is an elementary and fundamental thing to be considered. The purpose of the loan should be clear, whether the loan is being applied for business expansion purposes, to buy land/property, meet working capital requirements, purchase equipment or fleet finance, buy goods and stock inventory, etc.
Determining the required funding
You should prioritize the budget beforehand, such as how much to avail in the form of a loan and how much to spend in the form of expenditure. Without proper planning, there could be over-borrowing which may eventually result in overspending of some unwanted or miscellaneous products.
Look out for alternatives of loan products
You should thoroughly research the various business loan options available in the financial market, whether the requirement is of term loan, small business loan, overdraft, working capital loan or any other loan type. By doing this, you end up opting for the best-suited loan product that shall further help in your existing or new business.
Need to check Collateral/Security – If required
Check whether the loan product shall require collateral/security or not. If it is a secured business loan, then the lenders might require collateral from you to be submitted with them. However, these types of loans are offered at low interest rates, as compared to unsecured business loans because of the high risk of default.
Read the Terms and Conditions thoroughly
Check out all the terms and conditions along with hidden fees and charges mentioned in the loan documents painstakingly to avoid any confusion. Additionally, you should also look out for repayment and part-payment terms, foreclosure charges, loan cancellation fees, documentation charges, balance loan transfer fees, cheque bounce/swap charges, etc.
Effective lender’s selection
Always select a well-renowned and reputable lending institution with a good track record and market reputation. These financial institutions shall include private and public sector banks, NBFCs, Micro Finance Institutions (MFIs), Small Finance Banks (SFBs), cooperative banks, etc. One should choose the best option from these lenders as per the business requirements to avail a startup or business loan at ease.
Demonstrating realistic Financial Projections
Highlighting realistic financial projections further helps in representing the capability to repay the loans within the specified timeline, as well as enduring all the defined loan’s terms and conditions. It depicts the proposed growth and income generation prospects of the borrower. Eventually, it helps in getting your loan approved within a lesser timeframe and with various additional benefits.
Your credit score which is also generally termed as CIBIL score (as CIBIL is one of the most preferred credit bureaus) is considered as one of the most vital components in the loan approval process. However, for availing any type of business loan, your company’s credit rank is equally important. Higher credit score has its own benefits, such as chances of relatively lower interest rates, higher loan amount, instant loan approval, power in negotiations, option to shop around credit products and much more. Therefore, follow all these measures to avail business loans at competitive interest rates.