Guide To Getting A Business Loan
Here’s a simple guide by IIFL Finance that walks you through the process of evaluating your options in 5 easy steps. Read to know!
Businesses need to keep operations afloat and for that money is essential. Many a time personal resources may not be sufficient to fund business needs. In such situations, a business loan can come in handy. It can be used to expand business or to meet the working capital requirements, buy raw materials, hire more people, or pay utility bills.
Before applying for a business loan, one should define the purpose of the loan. Banks decide whether to sanction a loan or not on the basis of this purpose. Preparing a detailed business plan is the next critical step to secure a business loan. It gives the lender an idea about how the funds will be utilized.
Most small-sized business loans are unsecured, but larger business loan products may require a collateral. The lender will take over the collateral in case the borrower is unable to repay the business loan. As unsecured loans carry additional risks for lenders, banks limit the amount of money that one can lend as business loans. Before shopping for a business loan product, one must do a proper calculation of how much is needed and how to pay it back.
Here is some insight on the lending process of a business loan:
• Choosing The Type Of Loan That Best Suits The Need:There are multiple types of business loans available in the market. One should be careful with the type of loan selected. It should be done keeping in mind the needs of the business, the length of the loan as well as the terms of the loan.
• Do Research On Available Lenders:Conventional loans opted from state-run banks carry low interest rates. But they have stringent eligibility criteria that borrowers must meet to qualify for a loan. Non-bank and fintech lenders typically offer loans through online applications. The approval requirements are not as stringent as traditional lenders but they may have slightly higher rates of interest.
• Assessing The Credit Profile As Required By Lenders:
For lenders the threshold credit limit is 750. A score of 750 and above increases the probability of one's business application getting a quick approval.
Individuals with lower credit scores may also qualify for loans, but they may have to apply with non-banking financial institutions who have less stringent eligibility criteria. Also, a lower CIBIL score may not help fetch the entire loan amount as required and mostly, applicants may have to pay higher interest charges.
• Getting Papers Ready:
Documentation is a perplexing yet important step in availing of a business loan. The papers required vary depending on the lender. In addition to address proof and identification proof, banks and NBFCs need a set of financial documents.
The financial statements and accounting records provided to the lenders must complete and correct. It is advisable to take the help of professionals like certified public accountants (CPA) who have expertise in this field.
• Analyzing The Key Terms Of The Loan:
While applying for a loan, the lenders specify the loan terms. Loan terms refers to repayment period, the interest rate and fees, penalty fees and also, any other special terms and conditions that are applicable on a loan. Before finalizing any borrowing agreement, borrowers should carefully review all the loan terms because it helps to know exactly how much is to be paid back.
While taking a loan business owners must keep in mind that it may be possible to negotiate the terms and conditions with some lenders.
Banks are most concerned about the ability of the borrower to repay the loan and to reduce the risk they may ask for security. Some lenders may be happy to have a personal guarantee of the principal owner. Offering company assets as security can help to get loans on favourable terms. But it is not wise to put any personal assets as collateral.
Business loans come with interest and fees, but they are invaluable solutions that help to retain ownership of business. Business loans help to cover both short-term and long-term expenses without individuals having to exhaust their savings.
While taking a business loan, one must know how much to borrow and how the proceeds from the loan is to be used. One common slipup with borrowers while applying for a loan is committing mistakes in the application form. The application form should be complete and error-free. Any incorrect information in the application form could delay the entire process.
Small business loans are available from different lenders. But it is ideal to choose the lender that offers the best deal. Business loans at IIFL Finance require minimal documentation. Applicants can also use the money as desired as business loans at IIFL have flexible terms and conditions. In addition, IIFL finance also provides a complete digital application process for the ease of its customers.
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