How Hard Is It To Get A Business Loan?
Curious about the difficulty of getting a business loan? Our article covers the factors that affect loan approval, tips for improving your chances, and alternative financing options to explore!
Running a business without adequate funds becomes difficult sooner or later. To meet financial commitments, entrepreneurs typically look to banks or non-bank lenders for business funding solutions. The good news is there are dozens of banks and non-banking finance companies that offer business loans to companies of all sizes.
In general, business loans are of two types—those offered on the basis of a collateral and those without any security. The loan approval process differs from lender to lender and depends on a range of factors, including the type of credit. But the big question worrying most business owners here is how easy or difficult it is to get a business loan.
There is an interplay of factors that go hand in hand into a business loan approval. Business owners who are looking forward to getting a business loan approved must be aware of these aspects. Some of the hurdles that can keep one from getting a small business loan sanctioned are:
• Number Of Years In Business:Many large and traditional banks avoid the risk of lending to businesses, especially the smaller ones, that have no proven track record of at least a few years. Banks and NBFCs' decision to lend is to some extent based upon what a company has done in the past. Time in business helps to evaluate the health of a business, thereby giving lenders extra comfort. So, the longer the track record, the better.
• Cash Flow:
Insufficient cash flow in a business may be a warning bell for lenders. During the loan approval process all lenders ask for banking and accounting statements. While some lenders need proof of the average monthly revenues for the last 6-12 months, many others may ask for copies of business tax returns.
All these financial statements help the lenders do a thorough review of the cash flow and predict if the business is generating enough money to repay the loan.
• Poor Credit Score:
Many a time, businesses with poor credit scores face the disappointment of loan rejection because most financial institutions use strict algorithms to get rid of undesirable applications. A major chunk of these includes borrowers with a poor credit score.
A good credit score of 700 and above is what most banks look forward to while sanctioning a loan approval. In the absence of a good score, both personal credit score and business credit score, chances of getting a loan on favourable conditions becomes less.
• Collateral:Collateral makes a loan less risky for lenders. So, sometimes lenders cannot be swayed to grant loans to businesses that fail to provide a proper collateral.
• Lack Of Business Plan:Irrespective of the size of the business, putting the effort into drawing a comprehensive business plan is the first step to succeeding in a business. Lack of a detailed business plan with no information about future projections is enough to portray a poor picture of the applicant.
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• Loan Amount:Banks strictly adhere to the debt service ratio to determine how much an applicant can borrow. It is the ratio of the monthly free cash flow and monthly loan payment. In simple terms, this ratio compares a business's net operating income to its debt-related obligations. This number is used by lenders to ensure if borrowers can honour their debt payments.
Compared to large businesses, a small business or a startup faces a higher level of difficulty in getting a loan. Unlike long-time business owners who have a proven track record in the industry, building a track record for a startup is difficult. And with no track record and income generation, taking out a loan from banks can be a daunting task. But there are other financial solutions available that can help to carry the business forward.
One good alternative for new and young businesses is to approach online lenders or non-banking lending platforms who have easier eligibility requirements. Another good alternative to a business loan is a personal loan. However, since it leaves the borrower personally liable to repay the total loan amount and does not help in boosting the business credit, it is advisable to go for a business line of credit or business credit card.
Securing loans from banks and other non-banking lending institutions to meet financial commitments in business can be a smart decision. But sometimes lending from banks, particularly traditional banks, can be challenging.
However, it is easier to qualify for a business loan from non-banking lenders like IIFL Finance if the business meets the eligibility standards of the lenders. Here, it must be mentioned that it is a wise decision to invest time in exploring options and then choosing the best lending partner for the business.
IIFL Finance is a reputed financial services provider in India. It holds a diverse portfolio ranging from home loans to business loans and personal loans to gold loans, thereby catering to both retail and commercial market needs.
IIFL Finance offers loans through a quick and hassle-free application process that can be completed within a few minutes. The company offers unsecured business loans, without a collateral, of up to Rs 30 lakh for five years or less and secured business loans of up to Rs 10 crore that can be repaid in as many as 10 years.
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