Applying for a Business Loan: Understanding the Process is Important

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By Rishi Mehra

Applying for a business loan is not the same as applying for an individual loan. The requirements are stricter and the paperwork more important. Therefore, it is important to understand the process and the steps involved.

The reason for the loan

The first thing is to understand why you need the money and the loan. Business needs may be different which means the loan requirement would be different. The reason will also mean that you will be able to quantify the amount of money you need and the different products available in the market. For example, if the loan is needed to purchase machinery, there are a number of banks and NBFCs that offer equipment and machinery loans and equipment financing. Therefore, knowing the need for the loan is sometimes vital.

Account books

One of the most essential elements behind any bank loan is to have your finances in order. This is especially true today, when banks have tightened their lending criteria and are very picky about who they give a loan to. It is very important to keep proper accounting books and before applying for a loan it is essential that you go through them to rule out any discrepancies or errors. Banks usually ask for the company’s balance sheet, profit and loss accounts, cash flow statement, tax audit reports, and statutory audit report. These should be for the last 3 years in the audited / interim financial statements. You will also need a one-year tax return from your business.

Prepare your answers

Beyond the financial statements, you would also need to get other documents and answers to any questions the bank might ask you. The current year performance and expected revenue on the entity’s letterhead would be required and it is important to get it right. If, for example, the loan is for the execution of a specific project, you will need to provide a detailed project report containing the details of the project, the costs involved, the means of financing it and the projections. In some cases, you may need to provide government approvals for electricity, pollution, fire and safety, construction plans, and documentary evidence. If you are purchasing machinery or any other property, you will need to submit, and if it is to purchase land, it may be the copy of the award letter / deed in case ground. The answers and supporting documents you would need would vary depending on the need for the loan and it would be prudent to sort this part out.

Credit rating

It’s surprising that businesses often don’t understand the value of getting a credit score for their business. A good credit score can make a substantial difference in the interest rate you are charged by a bank and can in fact be a deciding factor in your loan approval. A credit score is extensive in nature and goes beyond the financial aspects of a business. Most ratings perform a comprehensive risk analysis that examines financial strength, industry dynamics, entity’s competitive position, operational efficiency, management capacity, organizational systems, client profile, history with lenders and other stakeholders. Banks feel much more comfortable if your business has a credit score, and therefore, before you take out a bank loan, you may want to have your business analyzed and valued.

Homework – It is very important to do some homework before starting the process. Different banks have different requirements and products. See what works best for you and what can work for you. Preselect a few banks or NBFCs that you might want to approach, and as a bank does their due diligence, you need to keep a close eye on what’s on offer in terms of lending. While we often only look at interest rates, there are many other things to consider before deciding which offer to accept.

The author is, CEO, Wishfin.com

(The one stop destination for MSME, AND RISE provides news, perspectives and analysis on GST, Exports, Financing, Small Business Policy and Management.)

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