When taking out a business loan, you must make sure to be well prepared with all the essentials so that the loan application gets approved by the bank. Apart from comparing the loan deals by financial institutions, you must take care of the documentation required, meet the eligibility criteria, and have a strong business loan plan. There are a few more aspects to focus on when looking for a loan for company needs, and we have discussed those below in detail.
Things to Consider When Applying for Business Loan
Below-mentioned are some of the important things to keep in mind when applying for a business loan:
Have a Clean Repayment Record
If you have plans to establish a business in the future, start preparing for it early. Most importantly, begin to build a good credit score. A person of good creditworthiness can obtain funds quicker with low interest rates and documentation, and vice-versa. A high score on your credit report proves yourself as worthy to borrow money, as regular payments convince lenders that you will repay the new loan on time as well.
So, make timely payments on credit cards and bills. Also, expand your contact circle and stay in touch with industry bigwigs, so that you can approach them in time of need, especially for recommendation, investment, or as stand by you as a loan guarantor.
Clarity on Business Idea
Before you apply for the funds, have a good clarity of the business, its revenue possibility, turnaround, and other financials. Have the answers to questions such as – what’s the industry and what the business does? Who are the clients? How and when does your company get paid? What are the profit margins? What are the future plans on your business?
What makes the company different from others and competitors? Has the firm previously managed credit? What are you going to use the loan for and how do you plan to repay the amount? If you are able to answer the questions raised by the bank, precisely, then the institution will trust you better with funds.
Take Help of an Accountant
Even if you have a clear idea about the business, you must know how much you have to borrow. Banks will tell you about the maximum amount you can borrow based on the business credentials, financials, and other details, but you must borrow only an amount that your firm requires, so as to limit the total cost of the loan as much as possible.
You must not accumulate debts over an amount that is required. So, to understand the extent of quantum of finance, take the help of a qualified accountant who will judge how much you must borrow and how the funds can be used for the end purpose.
How long has the company been in operation? When did it commence the operation and what was the date of incorporation? These questions can be answered by submitting the incorporation certificate of the company and bank statements on business account to the financial institution. Banks prefer providing loans to companies that have been in consistent in operation at least for the last three years.
Personal and Company Credit Score
If you take any type of loan, your personal credit score is checked for, but when it comes to a business loans, the company credit score also matters. Both these prove your creditworthiness and a deciding factors for banks in approving the loan application, or not. Personal credit score of over 700 is considered decent from the perspective of lenders. A high company credit score is also appreciated in sanctioning the highest loan amount possible.
Meet Expectations of the Bank
Financial institutions are prepared to offer a loan to customers who meet their eligibility criteria. If your company lacks a good credit score and financials, then additional documents and collateral will be required to provide funds. This is done with the intention to override risks related to default. Thus, make sure you prove yourself and the company to be as creditworthy as possible before applying for the loan. Make sure to limit the number of applications to banks and NBFCs so as to not seem as credit hungry. Also, meet the criteria regarding annual turnover, profit generation, business vintage, etc.
Income Tax Returns
If you come under an income slab wherein paying tax or filing income tax return is mandatory, then the lender would need a proof of the income tax return, both on personal income and business income. This is why; you must pay the taxes on time and keep the receipts of the returns. Tax filing receipts should be submitted to the lender, with the loan application.
Audited Balance Sheets
Balance sheet analysis will help bank understand the company’s profit earning capacity. Thus, you must be able to present audited balance sheet of your company, of the last few years. It is always a good idea to get a professional involved in managing the company balance sheet so that reliability and accuracy is maintained in the reports.
Latest Bank Statements
To prove your eligibility for the loan, provide the latest bank statements of both your business and personal accounts. Specifically the account that gets credited with clients’ payments and the account from which payments outflow, statements of these are important. The bank will judge your repayment capacity based on these reports and statements, which will help them in determining a loan amount.
Profit and Loss Statements
Apart from the balance sheet, the bank will analyze the Profit and Loss Statement. This document will allow the lender to determine the financial worth of the company. Submit the audited copy of this document, which is also known as the P&L statement, to the lender along with the signed loan application form.
Maintain a Good Relationship with the Bank
Taking loans from financial institutions is not the end of the journey. There will be several future scenarios where you will have to contact the lender for instruction, support, and information. Thus, maintain a good relationship with the fund-provider, at all stages, so that the bank can trust you with new credit in the future.
If you share a good rapport with the existing bank, then it may offer you best rates, pre-approved deals, and flexibility in repayments, other terms, and conditions. Loyal customers and those with excellent repayment records on previously borrowed amounts at the existing bank, have better chances of securing the loan faster and at better offers.
Go through the above-mentioned factors and make sure you are thorough with understanding these. Keep all the documents and financial reports in place to submit with the loan application. Maintain a good credit score for the company and at personal level to prove your creditworthiness to the bank in order to get the ideal business loan offer.