If you are unsure or confused about how to get a business loans, follow this extensive step-by-step ‘beginners guide for business loan’, that will help you to get your business loan.
Fundraising plays a decisive role in determining the success and expansion of an aspiring business. When you want to expand your business and take it to another level, getting a business loan can be beneficial. Since personal resources are not enough to meet the high financial requirements of the business, financing the business is the only way out. Get more details for Business Loans: A Beginners Guide To Get Your Business On The Roll
If you are uncertain about availing of a business loan, this ‘beginners guide for business loan’ will give you detailed step-by-step instructions on how to do it. So, let’s get started without any further effort.
What Does a Business Loan Mean?
Just like we need loans for our personal requirements like purchasing a car, getting an education, or paying a mortgage; similarly, businesses need loans to meet their business requirements like expanding their business, opening new outlets, increasing their inventory, etc. These loans, which are required to expand the business are called business loans.
Who Can Get a Business Loan?
All businesses can get a business loan, provided they meet the requirements of their respective lenders or banks. Whether you are a public or a private limited company, a partnership, or a sole proprietorship firm, you can avail a loan if you meet your lender’s requirements. Apart from that, the age limit for the applicant to get a business loan is between 21 to 65 years.
What is the Maximum Amount of Loan You Can Get?
Beginners Guide to Business Loan (Step-By-Step Procedure)
Now that you know what is the eligibility of a business loan and what is the maximum limit of loan you can get, let us discuss the step-by-step procedure to get a business loan.
Step 1: Clearly Define Why You Need a Loan
First, and most crucial step is to clearly define the purpose of why you need a business loan. The reason why it is important to propose the need is that, based on that need, the bank or the lender would decide whether you require a loan or not. Defining the need will also make sure that you are not overestimating the need for the loan, and that you actually require it.
Step 2: Make a Clear Business Plan
The second critical step of availing a Business loan after defining the need is making a business plan. A business plan gives an idea to the lender about how you would use and allocate the funds that you receive. It will also give an idea about what is your plan to expand your business.
The moneylender would definitely want to know it to make sure that you have the potential to make the repayments on time since if you fail to repay, the lender will be at a loss. Make sure that you keep your plan short but precise.
Here are a few things you can mention in your business plan:
- Purpose of your business
- Management, their experience in the field of your business, to gain trust
- Past performance of your business
- Future aspirations of the business
Step 3: Get the Papers Ready
After you are ready with your business plan the next step is to get ready with the papers. Documentation is one of the most overwhelming steps of availing of a business loan because it involves many complexities of permits, taxes, financial transactions, and a lot more.
Another reason is that, since the amount of money is more, the procedure also takes time to complete, and that’s why more documentation is required.
The papers you would require will vary depending on who is the lender. However, a general list of required documents is given below:
- PAN Cards
- Statutory Filings reports which include GST Returns, Income Tax Returns, etc.
- Partnership Deeds or the Incorporation Certificate
- Your business account’s bank statement
- Financial statements of 3 preceding years which include Audit Reports, Audited Balance Sheets, Profit & Loss Accounts, etc.
- Projected financials for upcoming terms
It is advisable to take the help of an expert like a Company Secretary or a Chartered Accountant since they have expertise in this field and can provide authentic information in case of paperwork. You can also save your precious time by asking for the help of experts.
Step 4: Approach the Lender
The last step of getting a business loan is to approach the lenders/ banks. However, before starting to approach, it is advisable to weigh the costs and benefits of reaching out to different lenders so that you get the best deal. For instance, bank loans generally have lesser interest rates, but at the same time, they take more time to repay. On the other hand, small cooperative banks need less paperwork and documentation, but their interest rates are higher.
Another important thing to inquire about is what collaterals are required by the lenders. Lastly, you should also check what are other charges and the processing fee the lenders require if you need a business loan from them.
To make a sound decision, it is advisable to ponder over these pointers before approaching the banks to avoid any issues in the future.
Now let’s discuss general rates of interest and collaterals required by the lenders in the case of business loans.
Who Is Eligible for a Business Loan?
In India, eligibility criteria for a business loan may vary from bank to bank. However, here are some common factors that lenders consider when determining your eligibility for a business loan:
- Credit Score: A good credit score is essential to demonstrate your creditworthiness. Most banks prefer a credit score of 650 or above.
- Business Vintage: Lenders often look for a minimum business vintage of 3 years. Startups or businesses with a shorter operating history may face more challenges in obtaining a loan.
- Annual Revenue: Your business’s annual turnover or revenue is a crucial factor in determining loan eligibility. Lenders generally prefer businesses with stable and sufficient revenue.
- Profitability: Banks assess the profitability of your business by evaluating the net profit margin and operating profit margin. A healthy and consistent profit margin improves your loan eligibility.
- Debt-to-Income Ratio: Lenders analyze your debt-to-income ratio to ensure you have sufficient income to repay the loan. They typically prefer a lower ratio, indicating lower debt obligations.
- Industry and Business Type: Some banks may have specific preferences for lending to certain industries or business types. Understanding the lender’s focus areas can help you find the right fit.
- Collateral or Security: Depending on the loan amount and type, lenders may require collateral or security to mitigate their risk. Assets such as property, inventory, or machinery may be considered.It’s important to note that meeting these eligibility criteria does not guarantee loan approval, as banks consider multiple factors during the evaluation process. It is advisable to directly approach banks or financial institutions to discuss your specific business loan requirements and eligibility.
What Are the Rates of Interest on a Business Loan?
Business loans are different from personal loans. Businesses involve more risks; hence, the interest rates charged by the lender are also higher than that in the case of personal loans. Depending upon the industry and niche of the business, as well as who the lender is, the interest rates of business loans vary from 11% to 26%. Apart from that, you also need to pay a processing fee of 2-3% of the total amount that is approved.
What Collateral Do You Require?
Business loans are risky and high-amount loans for lenders or banks and require some form of collateral. It can take the form of liquid assets such as residential or commercial real estate or bank deposits. The bank will take over the collateral in case you are unable to pay a business loan. The collateral provided must be appropriate for the loan that it is applied for. Nevertheless, today, there are many money lenders who lend business loans even without collateral
FAQ
How do I know which loan to choose?
Choosing the right loan for your business depends on various factors such as your specific financial needs, repayment capacity, interest rates, loan tenure, and any collateral you can provide. Consider consulting with a financial advisor or loan specialist who can assess your business requirements and guide you in selecting the most suitable loan option.
Which loan should I take first?
The choice of the loan depends on your business needs. If you require funds for working capital, you may consider a short-term loan or a line of credit. For larger investments or expansion plans, a long-term loan or equipment financing may be more appropriate. Assess your business requirements and prioritize accordingly.
Which loan is more costly?
The cost of a loan depends on various factors such as the interest rate, loan tenure, fees, and charges. Generally, unsecured loans or loans without collateral tend to have higher interest rates compared to secured loans. It is essential to compare loan offers from different banks or financial institutions and carefully review the terms and conditions to determine the overall cost of the loan.
What are the 7 tips to get instant business loans?
Maintain a good credit score Prepare a comprehensive business plan Keep your financial documents organized and up-to-date Build a positive relationship with the bank Offer collateral or security, if possible Demonstrate steady business revenue and profitability Compare loan offers and choose the most suitable option.
Conclusion
In a nutshell, raising funds plays a decisive role in the expansion and progress of a rising business. So, if you follow this ‘beginners guide for business loan’ you shall definitely get a loan in some time. Make sure that you weigh the pros and cons of approaching all the available money lenders to know what is best for you according to your priorities.
If you have any queries related to availing of a business loan, it is recommended to contact the experienced experts of Vakilsearch.
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