Important things that lenders check before approving a business loan.
Getting a loan from a lender or a bank can be a very hectic process. It involves a lot of paperwork and some technicalities. Even if one of your paperwork is not correct or some process did not go right, they will not sanction you the loan. That’s why it is important to ask the lenders properly what all documents and proofs they need, or you need to prepare before even going to the bank so that your loan process can be fast and quick. Now different loans may have different demands e.g. an education loan may require some different papers, a business loan may acquire different papers, and so on. In this article, we are going to cover the business loan.
But before moving ahead you need to know whether you can apply for a business loan or not. The following entities can apply for business loans-
- People dealing in services
- Self-employed individuals
- Partnership firms
- Private companies
The age factor depends upon various organizations, lenders, and banks. Some have a minimum age of 18 while others have 21. You need to keep in mind that till the time your loan is mature you should not hit the age of 65. Many lenders will see that your business should be in existence for a minimum of 2 years only after that you can apply and also whether your business was profitable or successful for minimum 2 years or not.
Here is a list of things that you need to prepare for or that your lender will check before approving the business loan –
Although most lenders provide unsecured business loans, a larger loan would almost certainly necessitate the use of assets as security. Banks require security to ensure that the credit risk is minimized. You must be able to demonstrate your repayment capacity and credit eligibility if you want a no-collateral business loan. While established profitable firms may not require any collateral, new enterprises pose a risk to the loan lender, necessitating the provision of security. You can put up assets like your house, land, business property, gold, and so on. Depending on the lender’s internal regulations, the form of collateral may differ.
- Credit score
When you set up a company organization, you’ll have a separate account that’s not the same as your account. However, with a small firm, particularly a start-up, the founder becomes the company’s face. As a result, lenders evaluate your credit score to determine your reliability. A personal credit score reveals how financially responsible you are. Also, when a lender does not have adequate information about the firm, your credit score becomes the evaluating element for business loan eligibility.
When numerous partners are participating in a firm, the lenders may want to know about each one’s credit history. When your business has a solid relationship with the bank, such as when it conducts many transactions through business accounts and so on, the lender may just examine your business credit score. The company credit score, on the other hand, will be in the name of the firm owner.
- Strategy and plan for your business
Lenders want to see how enthusiastic you are about your firm and its success. A genuine business plan should be written by aspiring entrepreneurs, and it should include financial objectives, future sales, cash flow, profits, income, marketing strategy, target market, number of workers, location, and so on. The lender may want to know the only aim of the business loan when you offer your company plan. You should have a good idea of how you’ll use the loan ahead of time. If you lack a clear vision and operational efficiency, the lender may be hesitant to grant the loan if you do not have a calculation about the final use of the company loan.
- Financial information
It is a regulation that the borrower must demonstrate proof of a minimum annual turnover for established firms. Depending on the bank’s policies, it might range from Rs. 20 lakhs to Rs. 1 crore. As a result, you must assemble all of the financial information about your current firm into a report and submit it with your loan application. To receive speedier clearance, the comprehensive financial accounts should be audited and verified by a certified accountant.
This criterion is negated if you are starting a new business for the first time. In this case, the lender may need a third-party guarantee or collateral before granting the loan.
- Your success matters
Lenders want to know that your current firm is generating money consistently and that there is no credit risk. As a result, they want you to demonstrate how well the company has done in the past. A successful firm is more likely to impress the lender, which can lead to a speedier business loan approval.
- Insurance information
Because the lenders want to be confident that they will be paid, they search for measures to lower the risk. Banks will request the owners of the company’s insurance information so that they may recover the loan amount in the case of an unexpected occurrence such as death or incapacity. Furthermore, having insurance plans boosts your chances of getting a loan.
- Business license and other permissions
To function lawfully, any firm, no matter how small or large, will require business licenses or permits. The banks want to know if you’re running a legitimate firm with government approval. Fire, health, environmental, and zoning licenses may be required to be submitted together with your company financing application.
- Any other Ownerships
You should be prepared to reveal any ownership or ties you have with other firms. This will prevent any potential problems or conflicts when it comes to approving the loan amount.
These were certain criteria that you need to check on your list while accessing a business loan so that you don’t face any problems or obstacles in the process of availing of the business loan.