Does obtaining a business loan sound like an insurmountable hurdle? Well it is not that difficult provided you play your cards right and take some strategic steps on your part. Here is a simple 7 step guide towards obtaining your business loan without hassles –
- You should start the process before you actually need the loan. Try and build relationships with your lender before the time comes when your business actually requires the loan urgently. Let key personnel know more about your company prior to seeking any funding. Always remember that any lender will do business with an organization/individual that is known, liked and trusted.
- Have a clear picture as to why you need the money. There could be positive reasons like purchasing equipment/other necessary items, financing long term growth, growth oriented acquisitions, purchasing real estate or other software development activities and so on. Negative reasons could include taking care of monthly losses, taking care of urgent working capital requirements during times of non performance, acquisitions of non essential business assets and so on.
- Be decided on how much money your company actually requires. Many businesses make the mistake of not applying for a sufficient amount which plagues them later on. Underestimating the amount you need can lead to a severe working capital crunch earlier than you initially planned. Also, overestimating the amount you require may lead to lenders questioning your own credibility and other credentials. Always have a well researched and discussed budget that is backed by your profit & loss statements and cash flow statements. The budget should be reasonable and should show the lender that you have done the minimum research required.
- Always know your credit score. Most lenders will still look at the business owner’s credit score in order to judge your own reliability. This is intrinsically perceived as essential towards establishing trust in the repayment ability of the company. Here are some key things to keep in mind in this regard –
- A credit score above 750 will always be acceptable but this does not guarantee that you will get a loan. Most lenders look for credit scores between 700-800 at least.
- The percentage of your personal debt payments should not cross more than 33% of your gross monthly income.
- Lenders are more inclined towards offering working capital and term loans to organizations which are more than 2 years old and have reliable track records when it comes to incoming accounts receivables.
- Try and find out how your industry is rated in terms of industry risk reports. Industry risk is based on Government SIC codes which are ranked.
- The higher your operating cash margin, the higher the chances for your business to survive when markets are slow and unfavorable. Most lenders provide funding based on the cash flow of a company since it measures the ability of the organization to repay the loan successfully.
- Finding the right lender is very important and you should do some research on this. You can choose from public/private sector banks and non banking finance companies (NBFCs) in tandem with micro and alternative lenders and commercial banks.
- The loan application should be carefully prepared. This includes the business owner’s profile, documents, business documents, the business plan, the company’s financial results and other projections including balance sheets, profit & loss statement and cash flow statements and personal financial information of the owner including tax returns for three years. Remember that the owner’s profile will be carefully scrutinized by the lender prior to approving a business loan.
- Patience is a virtue which you should exercise. You can expect to get an answer from a lender within 2-4 weeks. Check every week for an update on your application. The lender may also require additional documents from time to time. Be ready to provide the same minus any delays.
Following these 7 steps will help you get your business loan approved without major hassles!