Applying for a business loan involves detailed preparation of various documents, and understanding what's required is crucial for a successful loan application. Our blog overview of the documentation necessary for different types of business loans.
Business Loan is one of the most valuable aspects that any business needs to perform successfully. Many of us have fantastic ideas that, if realised, can lead to the establishment of new business enterprises. The only thing standing in the way of the concepts becoming a reality is a shortage of finance. Important Documents Required for Business Loan
A business loan can help you develop your operations, cover day-to-day expenses, and purchase equipment or inventory. If you’ve never sought a business loan before, you might be confused about where to start or what paperwork you’ll need. Various businesses have different demands, so the financing requirements may vary. The rationale also implies that you will be able to measure the quantity of money required and the various products on the market.
In six simple steps, this article will lead you through the process of reviewing your alternatives and organising your business loan application.
Read before applying for a business loan
Filing for a business loan differs from applying for a personal loan. The standards are stricter, and the paperwork is more extensive. As a result, it is critical to comprehend the procedure and the process required.
Knowing all about a business loan somehow doesn’t make you competent to apply. Instead, you may utilise this process to understand better what it takes to receive a loan. Filing for a micro-business loan can be a daunting task. You are enthusiastic about the potential of securing a loan to help your business develop, but you are also concerned about making a misstep that could harm your finances.
Irrespective of your scenario, there are several things you should know about seeking a bank loan for your business before you begin.
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Get a clear strategy
To secure a loan, numerous banks require you to get a comprehensive financial plan explaining what your business consists of. It serves as an introduction to who you are and what your company is all about. Strategic planning should be able to articulate the company’s aims, mission, and how it would be conducted to meet all of the specified objectives. Understand that an effective business model signals to the lender that the business is expected to prosper.
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Determine how you intend to use your funds
Banks typically consider how well the potential borrower intends to spend the borrowed funds. For example, you must seek equipment financing if you wish to purchase equipment. If, on the other hand, you need funds to keep your business functioning until your creditors pay you, you should ask for a loan for a short period. Thus, mentioning whatever your loan could be used for allows the bank to easily decide whether the amount requested will cover all of your needs.
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Specify the funds needed
When asking for a loan, it is important to conduct thorough research to not under or exaggerate the sum of money you require. This is because neglecting can result in financial problems down the road. On the other hand, Overestimation causes the bank to doubt whether an extensive study was conducted before preparing the business plan. To eliminate these uncertainties, make a proper budget with accurate financial estimates.
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Fix your credit score
There may be inaccuracies in your credit history from time to time, which can negatively impact your credit score if you are not vigilant. Therefore, it is often a good idea to keep track of your personal and professional credit files frequently. If you detect any problems, call a credit agency right once to correct and boost the score by deleting the anomalies; otherwise, no bank will approve a loan if your credit score is poor.
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Explore the entirety of your lending opportunities
After reviewing your credit history and verifying that it is in good standing, it is important to conduct research and compile a list of banks willing to issue the type of loan you require. Choose the bank with the lowest interest rates and perhaps the most adaptable clearance criteria.
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Maintain accurate accounting records
It is easier to obtain a business loan from a bank when you have correct financial statements. Lenders would always ask to review your capital structure, cash flow records, and income statements to see whether you will be able to repay the loan. This implies that if you haven’t been maintaining these documents, it’s time to start because they could come in handy whenever seeking funding in the future.
What if you don’t have proper documentation while applying for a business loan?
Most Indian banks, non-banking financial firms, and other financial organisations offer business loans to entrepreneurs to assist them in running, growing, or expanding their enterprises. These loans have attractive interest rates and flexible repayment terms. However, to obtain a bank loan, you must present certain documentation defined by the lender. These documents are needed to check the information you supplied throughout the loan application process and verify your business’s validity. Lenders will calculate the loan amount, period, and rate of interest of your business loan depending on the validation of these documents.
Lack of proper documentation can lead to rejection of the application, and if not rejected, perhaps you would face difficulties while getting it done. All these hurdles might take a lot of time to be crossed.
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Documents Required for a Business Loan
Standard Documentation Required for Every Business Loan:
- Application Form: Complete and sign the application form with accurate details.
- Passport Size Photo: Attach a passport-size photo to the application form.
- Valid Identity Proof of the Applicant: Choose one from PAN card, Passport, Voters ID card, or Driving License.
- Valid Proof of Residence: Acceptable options include an electricity or telephone bill, lease agreement, passport copy, Aadhar card, trade license, or sales tax certificate.
- Proof of Age: Provide a PAN Card, Passport Copy, or Voters Identity Card.
- Financial Documents: Include Income Tax Return copies for the past 2 years, current bank statements for the last 6 months, and audited Balance Sheet and Profit and Loss Account statements for the previous 2 years, verified by a Chartered Accountant.
Additional Documentation Depending on Business Type:
For Self-Employed – Private Limited Co. & Partnership Firms:
- Identity Proof of a Private Limited Company: Submit copies of Sales Tax, VAT filing, Service Tax, Excise Registration (where applicable), and the company’s Income Tax Return.
- Proof of Address: Provide utility bills (water, electricity, or telephone), registration certificate under the Shops and Establishment Act, Pan ID, municipal tax bill (in the company’s name), Memorandum of Association (MOA), Articles of Association (AOA), and a certified copy of the Partnership Deed.
- List of Partners/Directors: Include a list of partners or directors.
For Self-Employed Individuals – Professionals (Sole Proprietorship):
- Identity Proof of Sole Proprietorship: Offer proof of identity for the sole proprietorship firm, which could be a PAN card, Income Tax return, Bank Statement, or Utility Bill.
- Sole Proprietor Identity Proof: Provide a copy of the Passport, Driving License, voter’s ID card, or PAN card.
- Sole Proprietor Address Proof: Choose from a Utility Bill, Passport Copy, Voters ID card, or Driving License.
For Self-Employed Individuals – Non-Professionals:
- Identity Proof: Submit identity proof.
- Address Proof: Provide proof of address.
- Income and Tax Documents: Include the last 3 years’ Income Tax Returns and Sales Tax Returns.
- Bank Statements: Supply the last 6 months’ bank statements, authorised by the banker or branch manager.
- Detailed Financial Statements: Furnish Profit and Loss and Balance Sheet statements for the last 3 years.
FAQs on Important Documents for Business Loans:
Who is eligible for a business loan?
Eligibility for a business loan varies among lenders but generally includes factors like your business's financial health, creditworthiness, and ability to repay the loan.
What is the rule of business loan?
There is no one-size-fits-all rule for business loans. The terms and conditions can vary significantly based on the lender, loan type, and your business's specific circumstances.
What is the interest rate on a business loan?
Interest rates on business loans vary based on factors like the lender, loan type, your creditworthiness, and the prevailing market conditions.
How to start a business?
Starting a business involves various steps, including creating a business plan, securing financing, registering your business, and launching your products or services. It's a complex process that requires careful planning and execution.
How to apply for a loan to start a small business?
To apply for a small business loan, you typically need to identify a lender, gather the required documents, complete the loan application, and await approval.
What are the 6 steps to getting a business loan?
The six steps to getting a business loan typically include business planning, document preparation, choosing a lender, completing the application, undergoing underwriting, and receiving the loan decision.
Which bank is best for startup business loans?
The best bank for startup business loans depends on various factors, including your location, the type of loan you need, and your specific business circumstances. Researching and comparing different lenders is advisable to find the one that suits your needs best.
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