Whether you have a small, micro or medium-sized business, at some point in time, you are certainly going to need a business loan. Just as you generate more money from growth, growth itself requires more finance. SME business loans are by far the most difficult to get. But rest assured, with the right kind of preparation, you can get your required loan approved in three simple steps, as described below.

Secure a Business Loan in 3 Simple Steps
Secure a Business Loan in 3 Simple Steps

First and foremost, there are preparatory measures.

 Determining the reason for taking up a loan:

Any lender that decides on granting you a loan will do so after a thorough background check of the reasons why you need that significant amount of money and how you are going to spend it. This concern is quite valid as the reason for borrowing determines the ability for repayment.

What follows are a few of the reasons that make up for the stringent financial requirements that are generally approved of by the lenders.

  • managing the daily expenses
  • expansion of business
  • purchasing the equipment,
  • contingency cash buffer
  • providing for business startup

Also, make sure to make a proper estimation of the necessary loan amount. Do not unnecessarily borrow so that you need to pay back too much, along with the extra interest. Also, do not borrow so little that you are not able to cover for the required expenses.

Living up to the lender’s assessment of your credibility:

Banks, NBCCs and other kinds of lenders generally consider the five following factors for determining the payment capability for the borrowing business. Since SMEs are usually newer operations, they are not expected to excel in all five. But being active in a minimum of three factors will help the lenders process your application more smoothly.

  • Credit History and Score:

Whether you have repaid your past loans or have not been able to be dug up by the prospective lenders through their credit review systems.

  • Collaterals:

Some lenders want securities that help in covering up for the unpaid loan amount in case of a default, which includes buildings, real estate, inventory, accounts receivable, equipment, vehicles, etc.

  • Cash flow:

The more revenue the business currently generates, there are lesser risks for the lenders involved. Making profits is not enough, it is essential also to manage it properly. If the outflux and influx of money are too fast, it is, not a good sign for the business.

  •  Length of business operation:

If you have been in business for quite a few years, it enhances your credibility. While startups, as well as new businesses, don’t have time to speak for them, if they have solid executable plans for reaching future goals, tend to even the odds for the lenders.

  • Industry:

Competition, market scenario and business forecast for your niche industry, etc. factor into your lender’s willingness to give you a business loan. Some other relevant factors are technological, regulatory, environmental, and geographical predictions.

 Now for the three crucial steps to getting your small business loan:

  1. Determine the necessary type of loan:

If you need loans for a startup or small business and have no collateral or revenue to offer, you might apply for personal loans or business credit cards. However, the loan interest rates for these are much higher. Personal loans also do not factor in the building of a business credit history.

In the situation, your business has been around for some time, you, have the following options available:

  • Bank loans:

Bank term loans are pretty much straightforward and familiar. After qualifying for the same, the business owners receive a lump-sum amount from the bank, upon which they make repayments with interest, over a particular tenure. These are good for established businesses with a solid credit score which requires quick dispensing of expansion cash.

  • Medium-term loans:

Their tenures are smaller, ranging from one to five years. They offer comparatively lower sums of money with fixed interest rates to businesses. These loans also require significant collateral or excellent credit score.

  • Microfinancing:

These companies offer microloans or short-term loans of smaller amounts and can help small business owners with their cash flow as well as help in building their credit score.  Microloans, after successful application, may be approved in as little time as a fortnight, as opposed to months required by other loans.

  • SME loans by the government:

The Central Government of India provides SME business loans to owners under stricter borrower guidelines. This kind of backing by the government, along with low-interest rates gives confidence to SME business owners. The downside is that the approval process takes quite a long time.

  • A business line of credit:

These are more fluid than bank loans. Any business line of credit will give you access to the necessary capital as allowed by the credit limit, yet interest is paid based on only the cash drawn. These are good towards the covering of short-term expenses or the annual downtime for the small businesses that are seasonally operational.

  • Commercial real estate loans:

These loans, just as their name implies, are generally used for purchase, construction, and development of business establishments like hotels, storefronts, offices, etc. which are then leased or rented to the other businesses. Tenures for such loans may range between five to twenty years.

  • Financing and Invoice factoring:

With invoice factoring, the unpaid invoices of your business are sold to a factoring company, which later becomes responsible for collection from customers. Invoice financing, on the other hand, uses these invoices as collaterals for a loan. Both can generate cash pretty fast.

  •  Equipment financing:

While taking loans to buy equipment related to business, the equipment becomes the collateral. In such cases, the loan terms are determined based on the value and the expected lifespan of the equipment.

  • Cash Advances for Merchants:

If the business makes a consistent amount of considerable credit card sales, merchant cash advances can mean a quick capital source. After an accumulation of the lump-sum loan, it is then paid back through daily withholding of the debit and credit card sales or through weekly bank account withdrawals.

  1. Deciding upon a lender:

The next step will make you decide upon a viable lender and possible alternatives in case the first scenario does not work out. All lending organisations, banks, NBCCs, lending networks, etc. do not function in the same manner. Knowing their methodologies of being operational will help you curate the ones most suited to your purpose.

  • Direct lenders:

Direct lenders are usually either asset-management firms or wealthy investors or credit unions and traditional lenders like banks, tend to deal with the borrowers on a one-to-one basis.

  • Peer-to-peer lenders:

P2P is a kind of direct lending that is almost exclusively online. Here the investors browse through the borrower profiles and then choose the businesses that they in which they would like to invest. A total amount of P2P loan may come from either one or multiple investors.

  •  Lending marketplaces:

Lending marketplaces are online exchanges that aggregate multiple loan options from the networks of business funders, which even include traditional banks. Online lenders generally have fast turnarounds but need a decent credit score.

  • Brokers:

These connected and market-knowledgeable individuals come in extra handy when you need to arrange loans for setting up a business in a new and unfamiliar geographical location. Brokers have inside knowledge of how things work in a particular area, and that expertise becomes helpful. Brokers usually help to mediate between the borrowers and loan officers from direct lending institutions for some commission.

  1. Arrange The Necessary Documentation And Apply:

No matter what lender you are deciding to choose or what kind of loan you are applying for as well as how little the paperwork is, documentation is a full-proof way of showcasing your credibility so be extra careful not to leave any out when you are compiling and organizing the following papers, wherever applicable:

Document Type Documents Needed
  • Identity Proof
  •         Driving License
  •         Passport
  •         Aadhaar Card
  •         PAN Card
  •         Voter ID Card
  • Address Proof
  •         Ration Card
  •         Electricity Bill
  •         Trade license
  •         Sales Tax certificate
  •         Passport
  •         Lease agreement
  •         Telephone Bill
  • Income Proof
  • Bank Statement of Past Two Years
  • Financial Documents

 

  •   Past Two Years’ Income Tax Returns
  •   Balance Sheet from the past two years
  •   Income and Profit and Loss a/c           records from the past two years.

 

 

  • Proof of Business Ownership
  •     Declaration of Sole Proprietorship
  •     A certified true copy of Memorandum
  •     A certified true copy of Articles of Association
  •      Proof of Business Continuation
  •      Last 3 years audited financial documents

 

 

  • Other Documents
  •       Business and personal credit report
  •       Business plan
  •       Business forecast

 

  • Legal documentation
  •          State registrations and licenses
  •          articles of incorporation
  •          commercial leases
  •          franchise agreements
  • Post-Application Things-to-do:

While applying for a substantial business loan amount, processing will take some time so it will give your existing business plan a lot of lead time. The loan application processing might take months depending upon the types of loans and lenders. Some avenues, such as lending marketplaces, may speed up both application and approval.

Apart from the business loan amount that you applied for, additional charges are often applicable, so pay attention to the same. Take note of the loan guarantee fees, loan application fees, early and late repayment fees, consultation fees, processing, and handling charges, etc., which tend to affect the annual percentage rate or APR. Do the maths and take necessary measures to be able to complete repayment on time, according to the schedule.