Do you wish to upgrade your commercial venture to the next stage of growth? When there is a consistent demand for a business’s products or services, investing more funds in improving the premises or purchasing larger stocks of raw materials is a good decision.
The impetus for the ‘Make in India’ campaign has resulted in an easier availability of business loans in India. There are more offers of credit from financial institutions than what was available to the business community about two decades back. In addition to banks and traditional non-banking finance companies (NBFCs), the evolution of FinTech (financial technology) firms has helped to bridge the gap between the demand and supply of loans.
Although the number of options to avail business credit has increased and the funds from these institutions, particularly the FinTechs, are made available in a minimum amount of time, business borrowers need to be methodical while applying for a capital loan. Small mistakes can ruin their chances of getting a much-needed loan. In other cases, even if your application is approved by an institution and you receive the desired amount, you may later realise that better or less costly alternatives were available in the market.
The idea is to do your research well, know all your options and be systematic about your application so that it does get approved at the terms most favourable to you.
Here are six things to understand about the process while applying for a capital loan:
1- You are expected to narrate your story well
Institutional lenders wish to see the creditworthiness of your business. They receive hundreds of loan applications everyday, and they need to have sound reasons to lend to a particular organisation. You should be able to prove that your venture is making reasonable profits and is capable of growing with some financial help.
While preparing your business plan, it is best to provide direct answers to questions such as:
-What does your venture do?
-Which industry does it belong to?
-Who are your direct customers?
-How and when do you get revenue?
-What is your margin of profit?
-What is the track record of your success?
-How will you use the loan being applied for?
2-Certain documents will be required to substantiate the application
Having described your business story through a documented plan, you also need to show its financial health through relevant paperwork. Also, different lenders may require different documents as per their institutional policies.
The requisites for paperwork can also change as per the kind of loan required. For instance, if you need a capital loan in the form of merchant cash advance, you will be asked to show a record of the payments you receive via Point of Sale (PoS) machines that enable payments via debit and credit cards.
Broadly, your business should be prepared with documents pertaining to:
-Latest IT and GST returns
-Bank account statement for the past one year
-Business registration certificate
-PAN and TAN information
Whereas most banks and traditional NBFCs need 2 to 3 years of business history and may, therefore, ask for corresponding records against each of the years of operation, FinTech companies also lend to businesses that are only one year old in their industry but have a good track record.
3-Diverse loan products are available.
A loan for business in India may not always be a term loan. The nature of your business and the strategies you employ will, of course, be different from that of other businesses in your industry. You may have carved out a distinct plan to reform, improve or supplement your project. Probably, you have also decided upon the tenure within which you will make the repayment.
Thanks to the diversified credit product portfolio offered by FinTech companies, you can apply for loans that suit your unique business requirements. These could be in the form of merchant cash finance, supply chain finance or a short-term loan. Customised credit plans are also available for particular professional streams such as e-commerce, schools, petrol pumps and health & wellness centres.
4-Loans are available without collateral
Were you reluctant to proceed with the last loan application because it required you to mortgage a physical asset? Then stop right there. The good news is that you can get a loan without any collateral. While applying for a business loan from a FinTech company, there is no need to pledge any security. Your credit is approved simply on the basis of your business’s creditworthiness. This is verified by the documents that you send with your application.
5-There are other costs apart from the interest paid on the loan
While comparing the best sources of a business loan, it is futile to just consider the interest rates. If you choose a lender only by looking at a lower rate of interest, you might be making a big mistake.
Loans come with other costs – the processing fee, the insurance premium charged by some lending institutions and also a prepayment penalty that is often charged by banks and traditional NBFCs.
While working out the total cost of your business loan, think about all these components as well. FinTech companies usually have a lower processing fee than other lenders and they do not charge prepayment penalties from their borrowers. Therefore, if you intend to repay your loan sooner than the determined schedule, you can avoid the extra cost in the form of prepayment charges by borrowing from a FinTech lender.
6-Too many loan applications can lower your credit score
A ‘credit score’ is a number assigned to your business denoting its creditworthiness. In India, TransUnion CIBIL is a credit score calculating agency that is often referred to for getting such records. In addition to the financial history of an organisation, its recent profits and losses, the number of loan applications sent by a borrower – business or individual – also affects the credit score. Because it is easy to apply for loans online, you should not make the mistake of sending too many applications to different institutions for funds. This will lower your business’s credit rating and may result in a rejection of your request for the business loan.
With the right knowledge of what works and what does not work for your commercial loan application, you can increase the possibilities of getting a higher loan amount on terms that suit your requirements the best.