Starting your own business is an exciting journey full of revelations. But, it is not without its own set of challenges. Finance is one of the most important aspects one has to worry about while venturing to establish a business. Although it sounds simple in theory, finance raises a deep concern among entrepreneurs, especially when 4 out of 5 banks or credit unions refuse the appeal for a business loan. Getting a loan is all the more challenging for small and new businesses.
This article discusses various aspects of business loan eligibility, how to get a business loan, and the documents required for a business loan.
Reasons why business loans are difficult to get:
Inadequate Collateral: There can be various reasons why a bank or a credit union refuses an appeal for a business loan. One of the most popularly heard reasons is the lack of collateral needed to secure a business loan. Collateral can be any business or personal property ranging from equipment to real estate. It serves as a guarantee to the bank. If the customer defaults to repay the loan amount, their collateral gets seized by the bank. Since entrepreneurs who are just venturing into the business world do not have any business infrastructure, they often use their personal property as collateral. It makes the transaction risky because if the customers falter in repaying the loan, their personal property gets seized.
Insufficient or poor credit score: An insufficient or poor credit score is also one of the many reasons why banks or lenders refuse an appeal for a business loan. Personal and business credit reports and past payment history are thoroughly verified and checked before the bank decides to approve a business loan. For owners of small businesses with inadequate experience in the industry, their creditworthiness is relied upon. If the applicant's creditworthiness is poor, it is difficult for them to get approved for the business loan.
Income and debt: Along with credit score, the banks or financial institutions may also consider the borrower's income and their capability to serve their debt. Fledgling businesses that get overburdened by expenses and have not yet secured a steady profit or income have a harder time proving that they can repay their loan. If the borrower is already in debt and falters in paying any previous loans, the banks usually will not approve of the appeal of a business loan for that borrower.
Capital Investment and income: If a business already has a successful amount of capital investment in their initial venture and can still finance their debt, they have a better opportunity to be approved for a business loan. A business with inadequate funding and resources is seen in a negative light because it lacks stability, and lenders doubt the capability of such businesses to repay their loans within the stipulated time.
Since big firms already have credibility and stability in their income, banks and credit unions are more willing to approve of their business loans as opposed to small businesses. Small businesses usually do not have capital investment to support themselves and are unable to finance their debts. But there are a few ways to improve the situation and make a positive impression on the bank or the financial establishment sanctioning the loan.
Documents Required for a Business Loan:
- Identity Proof: PAN Card, Aadhar Card, Voter ID, Driving License, or Passport
- Valid Address Proof: Electricity Bill, Passport, Gas Book/ Bill, or Driving License
- 2-3 copy recent passport photo (color)
- Document of Incomer Proof
- Profit/ Trading A/c Details
- Balance Sheet (Last 3 Years)
- Bank Statement (Last 6 Months)
Ways to Solve the difficulties in getting a Business Loan:
A sound business plan: One of the first steps to leaving a lasting mark upon the bank sanctioning the business loan is to include a business plan along with the business loan application. A business plan is a document that outlines the company's products, resources, staffing, target market, and projected financial statements. It also includes the balance sheet, cash flow statement, and profit-and-loss statement. Lenders will usually scrutinize the business plans and analyze the rate of success of the business. If a business is backed up by a sound business plan with good management, lenders are more willing to loan money.
Acquire sufficient personal or business collateral: Another influential method to ensure the approval of a business loan is to secure the borrower's collateral. While seeking a secure loan, if a borrower does not have adequate personal or business assets, the bank or credit union refuses to sanction their loan. If the borrower has adequate property they are willing to use as collateral, they should take an inventory of the said property. They should also determine what they are willing to put up as collateral in light of the risk of losing it in the event of a loan default. Accordingly, they must prepare a collateral document that details the specific personal or business property that they will use to secure the loan, along with its estimated value. This gives the lender clarity and usually helps in getting the business loan sanctioned.
Maintain a good credit score: A bad credit score leaves a negative impression on the lender, and it is often the reason why most business loans do not receive approval. Borrowers should attempt to improve their credit score, pay their settlements in time, and settle any pending or late payments. Suppose the borrower already has a functioning business. In that case, the lender will usually assess the business credit, so the firm has to make sure that their business credit reports do not reflect negativity. You must also check MSME loan eligibility. Suppose the borrower is unable to arrange for personal or business assets as collateral. In that case, they could also opt for an unsecured business loan eligibility that does not require any collateral to secure the loan. Beyond clearing up negative items, businesses should bolster their credit by opening credit cards or other forms of credit, keeping balances low, and making timely payments.
Submit the correct documentation: The documents required to be submitted to the bank or credit union are precise and clearly mentioned in their respective websites or forms. Follow the proper business loan procedure and check the various options available thoroughly.
Explore alternative options and unsecured business loan eligibility: Businesses must attempt to maximize income and profit and minimize debt. To reduce the debt-to-income ratio, increase the gross monthly income by increasing sales volume or prices, increase the amount paid in debt each month, and delay large and non-essential purchases. Entrepreneurs should attempt to make moderate investments in their business because lenders assess the debt-to-equity ratio to understand the number of funds required by the business. If acquiring a secure loan is met with little success, one always has the option of Community Investment Funds, Term loans, and even a Line of Credit.
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