5 Key Things Entrepreneur Should Know Before Applying For A Small Business Loan!
In a report
published by Economic Times, “the Indian economy is expected to be a $5
trillion economy by 2025 and the MSME sector is expected to play a very crucial
role in this growth story.” The MSME sector in our country has been the
backbone of the economy. It contributes around 30 percent to the GDP and
employment generation.
With the
government`s ‘Make in India’ initiative, this sector is set to play an
important role in supporting domestic companies and foreign multinationals to
set up manufacturing units in India. Till now, 83 startups have entered the
elite Unicorn club which has made India the third largest startup ecosystem in
the world after the US and China.
But not every
startup joins the Unicorn club. Some struggle to sustain themselves due to the
lack of funds. And for an entrepreneur, the constant lookout for sources of
working capital is like a nightmare, especially for those who run a small and
medium-sized enterprise (MSMEs) with limited assets or collateral, finding
different ways for fundraising.
So, if you are
an entrepreneur and want to take a loan from a bank or a non-banking financial
company, here are 5 things to improve your chances of getting a business loan
from a bank or a non-banking financial company:
1.
Maintain a Healthy Credit Score
A credit score symbolizes
the creditworthiness of a person or business. It is assessed based on the payment
history of the individual or business. So, the personal credit score of a
person or a business is collected from the multiple institutions that maintain
the records of the payments. These records can significantly affect the
business's eligibility for a loan.
If you pay your
EMIs regularly and on time then you will have a healthy credit score which
indicates that you are financially disciplined and are unlikely to default on
repayment. Although the credit score that is required to take a loan varies and
depends on the lender, a credit score above 700 will enhance your credibility.
2.
Maintain Adequate Cash Flow in the Business
When you apply
for a small business loan, the financial lender will investigate your business
cash flow (past and future projections). An adequate cash flow will determine
if the size of the loan that you are seeking is appropriate. Your previous loan
history and existing debts will also be analyzed to determine whether you will
be able to pay the loan`s monthly installments without defaulting. To ensure
your loan approval, maintain the adequate cash flow in the business.
3.
Keep all the Documents Required for Loan Application
One of the most
important steps is you keep all the necessary documents ready when applying for
a business loan. Keeping all the documents ready and in place will streamline
the process and will make things smooth for you as well as the lender.
The following is
the list of documents for verification:
·
Identity proof
·
PAN card
·
Address proof
·
Proof of business
·
Business and personal bank
statements (last six months)
·
Business and personal tax
return records
·
Business’s financial statements
·
Business’s legal documents such
as commercial lease, and franchise agreement.
4.
Be Insured
Being an
entrepreneur involves a lot of risks. Hence, personal or business insurance is
a must so that the loan can be paid off in case of any unfortunate event. Your
probability of getting your loan approved is directly related to the risks
associated with you and your business. The less risky your business is, the
higher the chances of your loan getting approved.
5.
Know the Best Time to Apply for a Loan
Many
entrepreneurs often waste their time contemplating the ideal time to apply for
a loan. However, there is no best time to apply for a loan, as the time of
applying has minimal effect on the chances of your loan getting approved. Many
business owners believe that the best time to apply for a loan is when your
company is in the need of finances.
Many startups
have to close their operations due to a lack of funds. But with a business
loan, you can ensure that your business sustains in the market. There are many
government schemes as well that offer business loans at nominal interest
charges. So keep the above-mentioned points into consideration when applying
for a small business loan.
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