It is indubitable that in order to flourish as an SME, obtaining a business loan is a saviour for many. A business loan is mostly availed by small and medium-sized enterprises to fund their short term as well as long term requirements. Whether you want to buy new machinery or expand your inventory, a business loan can take care of all your business needs.
With so many SMEs struggling to make way to success in the neck to neck competition market, it becomes challenging to stand out and increase one’s chances of loan approval. So what should a small business owner do, to get a business loan sanctioned in order to turn their dream of expanding their business into reality. Well, the answer is quite simple: step into the lender’s shoe and consider all the important parameters that the lender might look into in order to sanction the business loan.
IMPORTANT FACTORS DETERMINING BUSINESS LOAN ELIGIBILITY
There are a number of factors that a bank/lender considers to scan a borrower’s eligibility, understanding these key factors is really important before approaching your potential creditor for funds. Some of those important parameters are:
- Business Plan
- Credit Score
- Cash Flow
- Estimated Financial Requirements
- Relevant Documents
So the first thing that a person must do in order to avail a business loan is to improve upon each of the eligibility factors.
5 Tips to Get a Business Loan Sanctioned
Tip No. 1: Have a Proper Business Plan
A business plan is basically a formal document in which your business ideas, goals, modus operandi, etc, are written. A well-drafted business plan not only creates a good first impression about your business in the eyes of your lender but also helps a lot in persuading the lender to give you the business loan. This is because the business plan gives the lender a brief estimate of your business’s performance.
A good business plan generally includes the following 7 points:
- Executive Summary: Write a crisp and compelling summary about your company. Include your mission statement, goal, and other important highlights of your business.
- Description of your Company: Give a detailed description of the problem that you solve for your client/customer.
- Detailed Idea of your Products/ Services: Describe your product line/service. Mention about your intellectual property and business assets like copyright, etc.
- Market analysis: Do proper market research, discover the trends in your sector, check on what your competitors are doing, and include all this in your business plan.
- Organization and Management Structure: Pen down the legal hierarchy of your business. Every single member’s responsibility must be planned out.
- Marketing Strategy: This should include the media used for marketing, sales funnel layout, etc.
- Financial Projection: The most important thing in the business plan for a lender is the financial projection of your business. The lender must get convinced that your business is stable and will be profitable. So include balance sheets, income statements, cash flow statements for at least the last 3 years.
Tip No. 2: Improve Credit Score
Having a high credit score gives you an edge over other applicants for business loan. Banks/ Lenders consider your personal and company’s credit history to sanction your loan. A low credit score can give a death blow to your loan application, so you must make sure you have a good credit history.
Here are the ways by which you can improve your credit score:
- Pay your dues and bills on time
- Opt for a long tenure to repay loan
- Try to keep your credit utilization ratio around 25%
- Open multiple credit accounts
Tip No. 3: Manage Your Cash Flow
Cash flow is the inflow and outflow of the net amount of cash and cash equivalents in a business. A lender evaluates the cash flow of your business to ensure timely loan repayment. These figures reflect the liquidity position of your business.
Below are the steps that you can take to improve your cash flow and increase the chances of getting a business loan:
- Avoid unnecessary expenditure
- Give Discounts to get early payment from clients
- Lease equipment instead of buying
- Improve your Inventory
Tip No. 4: Estimate your Financial Requirements
It is very important to access your business’s monetary requirements. One should never borrow more than required. One should be ready with the action plan as to where the borrowed money will be used. This will give clarity to both the business owner and the lender and it will be easier to keep a track of funds later.
Tip No. 5: Keep Relevant Documents Ready
Before applying for a business loan, make sure you keep all the relevant documents ready as it helps to speed up the loan application process. The documents generally required along with the loan application form are:
- Identify proof of the Business Owner
- Address proof
- Bank statement of last 12 months
- Latest ITR along with computation of balance sheet, income, and profit and loss A/C for the last 3 years
- Projections for next couple of years