As a small business owner, applying for your first business loan can be scary. Will the lender grant my request? Will I be able to repay the loan on time? Am I getting the best deal? Who is the right lender for my business? We’re sure you’ve got dozens of similar queries running through your mind.
Getting a business loan is a huge step for any small business. A timely loan can help you expand your business, boost your working capital, help you purchase new machinery, move to a bigger office space, hire the best talent and more.
In this guide, we walk you through all that you need to know (and should do) before applying for your first business loan.
Tip #1: Your Personal Credit Score Matters
One of the most common mistakes that small business owners make while applying for a small business loan is ignoring their personal credit score. Lenders evaluate your personal credit score as well as the business credit score while sanctioning your loan application. This is because:
- Most small businesses do not have sufficient credit history – as a result, lenders evaluate their personal credit score of the business owner to determine loan creditworthiness.
- The business owner is the person who will be repaying the business loan. So, lenders want to check the credit repayment track record of the business owner, before sanctioning a loan application.
If you are applying for a business loan and want to assess your creditworthiness, you can hire the services of credit reporting companies like Command Credit. Command Credit provides credit managers with detailed information on their business credit scores with offerings from Experian, Equifax, D&B, Trans Union, and Credit Reports World.
What’s the minimum personal credit score required for a business loan?
The minimum eligibility varies from lender to lender. While some lenders require a minimum score of 750, other sanction loans to borrowers with credit scores as low as 700. However, note that even if you’re able to get a business loan with a low credit score, the interest rate offered may be steep and you probably won’t be able to secure the loan at your terms.
So, it’s highly recommended that you track and monitor your credit score regularly, even when you’re not considering applying for a business loan immediately. Maintaining a high credit score is a good habit and gives you more leverage in loan negotiations.
Tip #2: Have a Clear Business Plan and Loan Purpose
Lenders prefer borrowers who have a clear idea of how the business loan amount will be used. Even if the lender doesn’t explicitly require a loan proposal form, it’s a great idea to have one. This demonstrates to lenders that you’re serious about the loan and gives them more confidence in your loan repayment abilities.
Ideally, the loan proposal document should include the following details:
- How much money do you need?
- How will you use the money?
- How will the loan money help your business expand/grow?
- How will you repay the loan?
- What backup plans you have if you’re unable to repay the loan on time?
Tip #3: Know Business Loan Types & Choose the Right One
Finding the right business loan starts with understanding the different types of business loans available in the market and picking one that best fits your needs. Business loans in India are of various kinds like:
- Quick Capital Funding
- Term loans
- Working capital loans
- Equipment loans
- Credit line
- Loans against property
- Invoice financing
- Overdraft
- Merchant cash advance
- Business credit cards
- Loans for women entrepreneurs
- Startup loans
Do your research on the different types of business loans and select the right one that best fits your needs. You may also need to know more about the requirements and details of the type of loan you are planning to get. For example, if you plan on getting an equipment loan, you need to know, at the very least, the equipment loan interest rate you are being offered compared to other types of loans from other financial institutions.
Tip #4: Be Aware of the Eligibility Criteria
Different lenders have varying eligibility criteria. Make sure to check if you meet the eligibility criteria of the lender to ensure a seamless loan application. Here are some general eligibility criteria for business loans:
- Minimum Age of the Applicant – Generally, applicants have to be 21 years or older to apply for business loans. The minimum age can go as low as 18 years or high as 25 years, depending on the lender.
- Maximum Age of the Applicant – Generally, most lenders do not sanction loans to applicants older than 65 years at the time of loan sanction.
- The business should be in operation for at least two years.
- The business should be profitable for the last two years.
*Note that these are general criteria. The actual requirements vary from lender to lender.
Tip #5: Have the Required Documents Ready
The loan application process often gets delayed or rejected because the applicant didn’t provide the necessary documents. To avoid this, it’s highly recommended that you have the required documents in hand while submitting the loan application online/offline.
General Document List for Business Loans:
- Identity proof of the business and the business owner
- Pan Card of the company and business owner
- Address proof
- Proof of business – partnership document, sole ownership, etc.
- Bank statements for the last six months (for the business as well as the business owner)
- Tax returns for the last two years
- Profit/loss statements for the previous two years
- Other business-related documents like franchise agreement, commercial lease, rental agreement, etc.
Tip #6: Fill the Loan Application Form Correctly
Today, most lenders offer the loan application form online. Ensure to fill up the form correctly – do not provide any false details or hide information willingly. If you’re unsure how to fill the application or need help, you can always contact the bank’s relationship manager or loan officer. Ensure to double-check all the details provided and ensure that it’s correct to ensure quick and seamless processing of the loan application.
Tip #7: Be Prepared to Answer Tough Questions
The lender may call you in for a discussion before sanctioning the loan application, especially if this is your first time applying for a business loan. Make sure to have all the necessary information about your business in hand. Depending on the loan amount, the lender may ask you questions on how you plan to use the loan amount, your repayment plan, etc. Support your answers by providing the relevant financial documentation.
It’s also a good idea to offer collateral (if available) or bring a guarantor on board to improve your chances of loan sanction.
Tip #8: Apply with the Right Lender
Not all lenders are the right fit for your business. Some lenders do not sanction business loans to startups, while other lenders require compulsory collateral for business loans. So, you must do your homework comparing the different lenders available on the market and then make the right choice.
Here are a few points to keep in mind while comparing lenders:
- Public sector banks have the lowest interest rates, but they have stricter eligibility requirements. On the other hand, NBFCs, private banks and digital lenders have relaxed eligibility criteria but may charge you higher interest rates.
- Ideally, your primary bank (the one you use for all your business transactions) is your best bet for a business loan. This is because the bank knows your business’s financial history and will most likely offer you a loan based on the existing relationship.
- Use a loan aggregator like CreditMantri to quickly compare the interest rates, processing fees, and eligibility criteria of different lenders.
Wrapping Up
Getting a small business loan used to be overwhelming. But, thanks to digital banking and new-age lenders, today, it’s easier than ever before to apply for and get a business loan that best fits your business needs. Use the seven tips listed above to ensure that the business loan process proceeds smoothly. And, always remember to repay the loan EMIs on time to avoid penalties, credit score drops and other negative impacts.
