Must Ask Questions Before You Apply For A Business Loan

When you apply for a business loan, you must choose the type of loan you want to take out depending on your requirement. Read to know the questions you must ask before applying for loan!

3 Jan,2023 10:15 IST 1853 Views
Must Ask Questions Before You Apply For A Business Loan

A business loan is simply a line of credit granted by a bank or non-banking finance company (NBFC) to a firm for any reason, such as working capital, equipment purchases, or long-term expansion, with interest and over a set duration. Small-ticket loans are occasionally issued in exchange for collateral, although they are also available without any guarantee. Larger, longer-term business loans require a collateral more often than not.

The lender decides whether to approve the business loan based on the borrower's credit history, the company's prospects, its cash flow, and its business strategy. The principal and interest are repaid in monthly installments, and defaults often result in penalty interest. But before prospective borrowers decide to take out a business loan, they must have absolute clarity on some issues, such as the purpose of the loan and how they plan to repay it.

What Is The Advantage Of Business Loan?

An entrepreneur or business owner may experience a number of situations when they require fast cash for their operation but lack the necessary funds. Their initial inclination in such a circumstance will be to obtain a business loan because doing so is simple and hassle-free. 

Additionally, if they have good credit, they may be able to borrow money at low interest rates. Furthermore, since the operation of the firm may be dependent on having enough financial resources to meet both short-term and long-term requirements, business loans may become essential.

Are You Eligible For A Business Loan?

Before applying for any loan, especially a business loan, one must be aware of the requirements to be met for the loan. The list of requirements varies from lender to lender. The eligibility criteria may also be relaxed by the lender based on the customer’s relationship with the lender and credit history.

Broadly for a business loan, the requirements are:
• It should be an established business operating for more than six months at the time of application.
• The business must have a minimum turnover of Rs 90,000 in the last three months from the time of application.
• The company is not included on any lists or categories of prohibited or restricted businesses.
• The establishment address is not included in the list of undesirable locations. 
• A business loan is not available to trusts, NGOs, or charitable organisations.

How To Apply For A Business Loan?

When considering and approving a business loan application, most lenders follow a similar procedure. However, some exact terms and conditions may change based on a number of variables, including the loan size, period, and purpose, the borrower's ability to repay the loan, and whether or not collateral is being used as security for the loan.

Application:

The process starts with the borrower selecting a lender after doing research and filling out the application form and submitting documents. 

Evaluation:

The completed application is evaluated by the lender on the basis of a number of criteria.

Documentation:

The lender verifies each document that the borrower submits in order to obtain a loan.

Approval:

The loan is granted after the lender confirms the borrower's eligibility and repayment capacity.

Do You Have All The Documentation Needed For A Business Loan?

The basic list of documents required is listed below but the actual list may vary from lender to lender.

• PAN Card:

This is issued by the tax department and is essential for tax purposes.

• Identity Proof:

A copy of any of the following documents—Aadhaar Card, Passport, Voter’s ID Card, PAN or Driving License.

• Address Proof:

A copy of any of the following documents—Aadhaar Card, Passport, Voter’s ID Card, or Driving License.

• Bank Statements:

Typically, lenders ask for statements for the previous six months.

• Income Tax Documents:

Latest tax returns along with balance sheet, and profit and loss accounts.

• Proof Of Continuation:

Income tax returns, trade license, or GST certificate.

• Other Documents:

Company incorporation documents or a copy of the partnership deed, a copy of company memorandum, articles of association, and the board resolution.

Do You Need A Good Credit Score?

To qualify for a business loan with an attractive interest rate and convenient repayment terms, it is important for the borrower to have a good credit score. A potential borrower must avoid loan defaults and pay back the loan and interest on schedule and in full to maintain a good credit score.

The credit score and the procedure for approving a new loan can both be impacted by any unfavourable comments from clients, prior lenders, merchants, or suppliers. The credit score ranges from 300 to 900. Lenders prefer borrowers with a score above 750, which reflects a strong credit history and minimal chances of default. Borrowers with a lower score may also get a loan, albeit at higher interest rates.

Conclusion

Reputable lenders like IIFL Finance take great care to ensure that the businesses and individuals to whom they are providing money adhere to good financial principles.

Borrowers with outstanding credit histories and a proven track record in the company should only choose these renowned lenders since they not only have the finest rates to offer but also because they make the application procedure for business loans simple and hassle-free.

IIFL Finance also provides an entirely online application process. The loan is swiftly and smoothly transferred into the business account once the documentation has been cleared. IIFL Finance offers unsecured business loans up to Rs 30 lakh and secured business loans for a maximum of Rs 10 crore that can help entrepreneurs sustain and grow their ventures.

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