Being a crucial first step for anyone looking to grow business, choosing the right business loan needs time. You cannot rush this process, seeing as how your decision depends prominently on research, much like what you’re reading now. Here are a couple of basic points for you to keep in mind:
- Online calculators will help you find out what precisely you need to pay monthly by way of EMIs using your principal amount, the term of the loan, and interest rate
- You will face rejections along the way; nearly everyone does. Do not let it dishearten you. Keep applying at multiple sources until you land one that is right for you
What do lenders or investors look for?
The following is the best-updated information you need to know before searching for the right business loan. The following criteria will help you finetune your strategy.
- Operation Time
How long your business has been ‘open’ is a key factor used by lenders to determine your eligibility for a loan. However, if you happen to be a new business owner, you most certainly won’t have a ‘company history.’ In these cases, your personal job history will be taken into consideration.
- Business Revenue
If you have a business going, lenders will demand to see revenue statistics. New businesses need capital to grow and branch out before they can see distinct income margins. Financial reports on your part will be crucial for helping lenders understand how you can go about paying back the loan. Also, you have to be prepared to show specific metrics relevant to your business’s industry. For example, If your business is a SaaS or subscription business, you need to understand terms such as Monthly Recurring Revenue, Run Rate, Annual Recurring Revenue, Annual Revenue per Account, and Churn. Lenders will want to understand not only the profitability but also the risks associated with your business model.
- Business Size
This is a no-brainer. Lenders will most definitely need to know if yours is a small or big business venture. Business loan standards vary among lending institutions, so check to see how your business qualifies. Based on its classification (using total revenue, or other factors), you can shortlist your loan sources. Example: some lenders exclusively cater to small business loans, and not large ones
- Credit Score
This can be business or personal. If your business has already been open for a while, lenders will ask for your business credit score. If you are a new entrepreneur, a personal credit score will suffice. The latter is feasible because yours is a new business that needs time to build up a credit score.
- Asking Price
Psychologically speaking, a smaller loan is usually a welcome request. If you can figure out precisely how much you need to start, you can better pitch that sum to lenders. Often, small businesses need less than they might have assumed at the get-go. Payback will also prove simpler, to say nothing of risk mitigation on the part of the lenders.
- Business Plan
This is a must-have! A quality professional business plan is crucial to winning the respect and trust of lenders. From themes and concepts to resources, organization, and aims, you need to state your business plan crisply, and with adequate detail. In the loan world, your business (more so if it is small or new) will be competing for a business loan with much bigger corporations. A professional presentation will ensure good financing options. This is especially the case in venture capitalism and angel investing.
How to Start Searching
Small and medium businesses usually turn to banks to avail of a business loan. It is not unreasonable to turn to non-banking financial companies due to the following reasons:
- Convenient loan renewals
- Brief turnaround periods
- Low processing fees
Another important factor to keep in mind while searching is Processing Time. Your approved loan relies on ‘turnaround time.’ With banks, drafts, and excessive periods are the norms before you see the funds credited into your account. Good lending partners perform e-transfers once all the paperwork has been filled out to satisfaction.
Speaking of paperwork, below are some of them that you need to keep ready (if you are in India):
- Business and/or personal history
- Bank statements
- KYC credentials
- Supporting documents
- Legal documents, if any, for your business
- Financial statements: cash flow, balance sheet, P&L account. In the case of a new business, it may not be required
- Professional business plan
Asking the Right Questions
Making informed decisions is required where business loans are concerned. Here are some such queries, which you can modify as you see fit:
- Will there be any restrictions on the use of the provided funds?
- What are the overall fees, their structure, any hidden fees?
- What will happen in case of default?
- What are the final EMI and repayment terms? How are they calculated by your good selves?
- Take me through the approval process, in detail.
To respect the other side of the coin, here are some queries that the lender should or will ask you:
- Are you looking for short- or long-term finance?
- What do you plan to do with the funds given to you?
- Are your business financials in a good place?
- Do you have any liabilities or loans already?
- What are your specific fund requirements?
- Tell us more about your business experience.
- If the collateral is required, what do you have in mind?
- What is your estimated periodfor loan repayment?
- Share the health of your credit score with us.
Technically, your business loan lender becomes your business partner. They look forward to the success of your entrepreneurial idea or business venture. If you win, though, you both profit from the success. However, upon defaulting, charges are added as a penalty to your capital. This is one of several reasons why you need to keep both your feet in the realm of reality before choosing a loan fund.
It is certainly going to be challenging for you to invest the loan into various sectors of your business, to say nothing of how much effort it is going to take to keep the business going until it sees a profit margin worth appreciating. Until then, you need to ‘do business within your means.’
Take your time to plan and strategize how you are going to go about your business. Only after you have a sound business plan should you even think about approaching lenders.