5 Questions to Ask Yourself Before Applying for a Business Loan￼
A business loan comes in handy in case of boosting working capital, hiring skilled staff, expanding business inventory, renovating business infrastructure etc. There are different types of loans available from different financial institutions; however, you need to choose the one that suits your business requirement the most. However, before opting for a loan, you need to question yourself and your lender to choose the best type of business loan.
5 Questions that You Need to Ask Yourself Before Opting for Business Loan
Before opting for a business loan, there are specific questions that you should ask yourself as it is an enormous decision to take a business loan in India. Lenders take some time to provide the loan because they have to verify your background and ensure whether you have the capacity to repay the loan.
It is better for you to check all your options before choosing the best bank or financial institution. Let us take a look at a few points that you can keep in mind:
Question 1: Do You Even Need the Loan?
Before opting for a business loan you should understand whether you require it or not. Loan is a valuable funding option; you can utilize it to finance your business. It is better if you can learn about all the options in terms of types of business loans available. You should even look for non-traditional options in case traditional banks reject your offer.
Other types of funding options are also available like an angel investor willing to fund directly. Your business partner might also fund you or your business might even qualify for special grants. In such cases, you might not require a business loan in the first place.
Question 2: How Much Amount Do You Want?
According to popular culture, opting for a lot of money will solve all your problems. However, as there are multiple costs associated with a loan that you need to bear along with repayment of principal amount, you should consider it well ahead of opting for the loan to plan your repayment accordingly.
If you can consider the returns that your business can generate you will be able to arrive at the exact figure that you will need for your business. In case your project’s return is less than interest you will need to pay, timely repayment might be a problem. Therefore, you might have to reconsider your strategy. It is best to borrow exactly the amount that fulfils your business requirements.
Question 3: Are You Eligible for Getting the Loan?
This is one of the crucial questions that you should ask your lender before applying for your business loan.
Check whether you fulfil all the qualifying terms set by your lender. This will safeguard you from loan application rejection. In order to qualify for a loan, you should convince your lender that you are capable of repaying the loan. Other than that, being in business for a long period and having an impressive monthly turnover helps too.
Eligibility criteria for business loans vary from one lender to another. However, here are some standard criteria which are applicable in general to business loan applicants:
- Have to be within a specific age limit which starts from a minimum of 21 years to 60-65 years.
- You need to be a citizen of India.
- Minimum experience of handling a business for 3 years.
- A specific annual turnover of your business which is approximately around ₹20,00,000 a year.
Apart from meeting the eligibility criteria, you also need to submit relevant documents for the lender to verify your eligibility and repayment capacity. Here is the list of these documents:
- Aadhaar Card
- Individual PAN Card
- Company PAN Card
- IT returns receipts for last 2 years
- Balance sheet for last 2 years
- Bank statement for last 6 months
- Rent agreement
- Business address proof like electricity or gas bill
- Passport size photograph
You can get a better idea of the documents required by contacting the lenders.
Question 4: How Does Your Credit History Look?
This is another essential question before opting for a business loan. It is better to make sure that your credit score and personal credit history are good in general.
A credit score is a 3-digit score that indicates your creditworthiness or your ability to repay your loan on time. In general, Indian lenders expect a minimum credit score of 650 to 700. In case you find that your credit score is low, you should take steps to ensure that your credit history is clean and accurate.
You can start by paying your bills on time, not closing accounts of your previous debt history and clearing your pending loans. Your lender will conduct a credit bureau enquiry to check your credit score and repayment track record. If you have lot of enquiries in credit bureau with no loan sanction, it might impact negatively on your credit score and loan approval chances.
Therefore, it is better to opt for the loan when your credit score looks good. In this way, you will get the loan amount, interest rate and tenure that you actually want.
Question 5: Can you Repay the Loan Amount?
Before lending you money, certain financial institutions will check certain figures such as your monthly revenue and other financial commitments. You should be confident that you have enough cash flow to afford repayment of your loan amount along with the interest charged.
For this, analyse your EMI expenditure and compare it with your monthly cash flow. Do not forget to check the loan tenure and interest rate while checking your repayment capacity as these two factors will determine your EMI.
You need to understand the larger your loan amount and shorter your tenure, the higher will be your EMI. Ask yourself how your loan repayment will affect your profitability.
Apart from repaying your loan amount, other charges like late payment fees, and prepayment penalties should also be considered before availing this loan so that you do not end up getting any nasty surprises later during repaying your loan.
If you own a business, taking a business loan is an essential aspect of getting funding. Opting for a loan becomes easier when you are aware of what questions to ask yourself and the financial institution you are taking your loan from. It is essential to give ample time on conducting proper research before availing your loan to get best deals as per your needs.
Getting a business loan is not complicated; however, you should approach it with caution. The questions mentioned above will help you navigate your entire loan procedure right from application to repayment.
Frequently Asked Questions
Do banks lend to startups?
Yes, banks do offer funding to startups which can show that they are capable of repaying their loan. If they are successful in providing collateral / present strong monthly finances, chances of getting their loan sanctioned improve.
What is the application procedure for a small business loan?
To apply for a small business loan online, you need to visit the official website of your lender. Add your details to complete OTP verification. After filling up your details, you will need to upload your bank statement for the last 6 months. Once you complete this procedure, one of the representatives from the financial institution will connect with you to discuss further loan proceedings. You can also apply offline through branches or agents.
What are some of the most important questions you can ask your potential lender?
Before availing a loan, some of the essential questions your can ask your potential lender are whether they have previously lent money to businesses falling under your sector, what will be your interest rate, repayment tenure, etc.
Additionally, you can also ask whether there will be any additional charges applicable, how long will it take for loan approval, whether it is possible to speak to some of the current loan customers, etc.