Budding businesses require loans from financial institutions to invest in equipment, employees, and operational space while functioning ones, for the management of resources, maintenance of implements, and security of inventory. Loans assist owners in their businesses from initiation to the establishment. Incidentally, almost 60% of MSME’s in India rely on informal channels when it comes to borrowing funds. However, there are several advantages of borrowing from formal channels such as credible financial institutions.
Since business loan are crucial for the smooth running of a business it is advisable to be aware of common mistakes that people make when applying for a business loan to avoid rejection. Once these roadblocks are overcome, getting a loan becomes easier.
Here are the 5 things that one must remember while applying for a business loan from formal financial institutions:
Things Must Remember While Getting Business Loan:
- Maintain a high credit score- A clean, decent record of credit is an important factor in deciding the borrower’s credibility. Lenders consider credit history as a verification of the creditworthiness of the borrower. The loan application may get rejected if, in past reports, the business is found to have shown a lack of interest for repayment of the debt.
Your credit score is another determining factor of the approval of your loan application by the bank. Maintaining a healthy score is critical for a business to be eligible for further loans.
- Have a solid
business plan- When you are
a part of the finance world, you are expected to have a detailed,
well-structured plan for your business. Lenders often look for sincere
business owners who have long-term plans of action about stabilizing trade
and increasing profits. Applying for a loan without a strong business plan
may not bode well. It is vital to present a plan including the details of
your company, management team, industry analysis, operations plan, and
promotion strategy, to the lenders.
- Organize
your documents- One of the
problems that a loan applicant might face is not having the proper
documentation required by the lender.
Business loan documents include:
~ Valid identification proof and address proof, like Aadhar card, driving license, or passport
~ PAN card
~ Bank statement of the past six months
~ CA certification
~ Personal and business ITR statements
~ Proof of continuation, like the Sales Tax Certification, Trade license, or Establishment file
~ Sole Proprietorship Declaration
~ Accredited copy of the Memorandum and Articles of Association
~ Board Resolution
Unprofessional
business practices such as pending updates of files and not filing income tax
returns can put up a bad impression of your business, thus leading to the
rejection of your application.
- Seek expert advice- Before approaching a lender, a business owner might also want to seek some expert advice. This can be sought from a senior chartered accountant or other business owners who have gone through the journey of borrowing funds and deploying them. They would be able to offer invaluable insights about how to apply for a loan from a credible financial institution. These experienced advisors would also be able to recommend financial institutions from where one can avail of a loan. Approaching a financial institution through such references also helps.
- Compare market rates- The task of having to dedicate a large amount of time and energy into surveying about loan lenders in the market seems exhausting. Many businesses, to save up on this time, make erroneous choices of lenders in haste, without exploring the various options at hand. To avoid this, and to provide a platform for easy comparison of lenders, many web pages simultaneously show you real-time offers and business loan interest rate of different financial institutions. It is recommended to make as many careful comparisons as possible before settling with the offerings of a lender.
