Tips to Improve Your Chances of Getting a Business Loan

Rajath Kumar

Lack of adequate funds is one of the main reasons why enterprising individuals with innovative business ideas often struggle in materialising their projects. Even after a venture takes off and begins to grow, it will need extra funds at some point in its growth journey to enhance its operations and pay its suppliers. A business loan in India has been typically procured from banks, but over the past decade, though the number of small and medium enterprises (SMEs) has risen sharply, most of the SMEs who had applied for business loans remain unfinanced at large.

The gap between this demand and supply for loans is gradually being closed by new age FinTech lenders. By providing quick loans without collateral, FinTech companies are helping entrepreneurs in harnessing the full potential of their business ideas. However, the competition in this field continues to be huge, and applications for business finance are still approved based on creditworthiness.

If you are grooming your entrepreneurial venture for more success and plan to apply for business loans online, here are some tips to improve your chances of approval:

1) Create a neat business plan – You must have chalked out a business plan before foraying into a field of your interest, but if there are no formal documents in its support, it is important to prepare them. A formal business plan must include the objective of the project, the way it plans to earn revenue, the development strategy and the marketing methodology. It should also have copies of financial statements and the data on cash flow projections.

If you do not have an official business plan, you may be asked to demonstrate a solid record of revenue generation with at least one year in business. To get the application for an unsecured loan approved, it is important to prove that you are capable of repaying the loan amount without default.

2) Include a documented plan on the intended use of the loan – When you need a loan for business, you must also be able to tell the lender about its exact purpose. Be it a bank or a FinTech company, the lending institution will determine the credibility of your application on the basis of the reason for which you need the loan. While all organisations have their own unique requirements, the most common grounds for loans are business expansion, raw material or inventory purchase, administrative expenses and capital investments. You can also borrow from a digital lender to refinance or pay off old debts.

3) Know what kind of loan will suit your needs – Even after you describe the purpose of your loan, you may be faced with multiple loan categories that you can apply for. It is good to know the details of each – in terms of interest, tenure, payback plans and documents necessary to procure them. Banks and digital lenders often categorise their loan products for the ease of disbursement and management. While some credit products help in quick invoice financing, others may be more beneficial to buy inventory. Consult the lender to borrow profitably.

4) Double-check your cash flow projections – When a business does not have a high credit rating or a strong history of generating revenue, it typically gets saddled with a high interest rate on unsecured loan. It is therefore important to assess your cash flow projections. You must have a good knowledge of your ability to pay back and ensure that you will soon have adequate funds to clear off your debt.

5) Be aware of the risks that lenders assess – Lending institutions in both public and private sector evaluate loan applicants on a scale of risk. If a business is considered a ‘risky borrower’, there is a high chance that its loan may not be approved. The traits that make a business look risky are as follows:

– Very small owner’s equity
– Poor credit history or defaults in payment of previous loans
– Poor revenue earnings
– Very short period in the industry
– Weak accounting system
– Questionable management

6) Leverage your personal creditworthiness – Usually a business is a different entity from its owners. Even a sole proprietorship is a separate legal entity for accounting purposes. However, when it comes to getting a business loan without collateral, even a clean personal credit history can help you in obtaining the amount you seek. The strategy is to make payments on any outstanding personal debt and credit card bills as much as you can afford. This will give your lender more faith in your business and assure them that you are not burdening yourself with unpaid debts. You can personally guarantee for your business loans by proving your ability to repay them.

7) Research extensively for lenders – If you were denied a loan for business by a bank or a traditional lending agency, do not consider it the end of your search for funds. A FinTech company offering unsecured business loans evaluates your creditworthiness using parameters different from those used by banks. If you can successfully prove your expertise in business, FinTech lenders will provide adequate financing for your immediate working capital needs. So, think beyond the conventional platforms and apply for finance online using those documents that demonstrate your ability to pay back in time. Digital lenders also grant short-term loans, the amount being disbursed in a few minutes post the approval of the loan application.

The online lending industry has shown that getting a business loan need not be a frustrating process for SMEs anymore. FinTech companies are willing to grant loans and the application process can be effortless. All you need to do is start preparing early (in lieu of the competition from other similar applicants) and collate the minimum essential documents in support of your application.

At Capital Float, the basic premise is that all applications for getting a business loan will be evaluated with speed, efficiency and favour. The products for business loan in India are custom-fit for SMEs and include Term Finance, Online Seller Finance, Pay Later Finance, Merchant Cash Finance, Supply Chain Finance and Taxi Finance.