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Questions to Ask Yourself Before Applying for a Business Loan

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Sep 04, 2021
Questions to Ask Yourself Before Applying for a Business Loan

Introduction


We’ve seen a steady increase in the number of entrepreneurs over the last decade. It is a fantastic indicator of a thriving country. Most of these aspiring or existing company executives will require a loan at some point. It may be necessary to either establish a new business or grow an existing one. It might also be for various reasons, such as making ends meet during difficult times or acquiring a rival. Whatever the cause, a business loan is essential in today’s environment for any entrepreneur.

People who have sufficient capital also tend to apply for business loans, as it never makes sense to invest the entire amount in the business. There could be situations where loans for business are taken to spread the risk over one to five years. It becomes easier to pay an EMI as the business grows. Furthermore, what if there are large orders and the existing capital doesn’t suffice to fulfil them? That is when a business loan comes in handy.

Choosing to apply for a business loan is a significant decision. Before you narrow down a business loan, you should think about it thoroughly.

Things to Ponder While Applying for Small Business Financing


It is an enormous decision to request a business loan in India. Lenders take their time to fund business loans in our country to ensure they are lending to the right set of customers. There are quite a few pointers to keep in mind before going for it. It is impertinent to go through all the options before heading towards a bank or financial services.

Is a loan for small businesses the best option?

Loans are invaluable for most businesses, but they are not necessarily the best financing option to go with. Consider all of them before approaching your preferred lender.

Here are some business-related questions to ask before approaching the lender

  • Will there be a partner who is willing to invest the required capital in the business?
  • Are there available angel investors who would fund the business directly?
  • Have you researched all government grants that are available for small businesses?

Question yourself first before approaching the loan market. It is to ascertain all other options have been thoroughly investigated.

How much loan would I need to start a business?

To avoid under or overestimation, proper financial analysis and evaluation are critical. The ideal way, according to several experts, is to create a monthly cash flow estimate. Consider all the expenses like equipment, rent, electricity, payroll, advertising, and marketing. The gap between taking payments from your consumers to that of the time to pay your vendors must be considered in your calculations as well. SME loans for a new business need to be accounted for after looking into all the above.

Overestimating your needs runs the danger of you paying higher interest for business loans in India with excess unnecessary cash. However, asking for a loan that is lower than what you need risks jeopardising your business. Before you go to the bank, figure out how much you will need.

Fortunately, in today’s competitive market, applying for MSME loans online is as easy as it looks. The lending business is specifically geared towards small businesses. Loans are sanctioned with a minimum turnover of INR 2,00,000. One of the few benefits of the pandemic was how the lending industry streamlined itself to make it easier for new business people to apply for loans.

Need loan to start a business-What types of loans are available?

Loans are divided into two broad categories: personal and business. Personal loans are riskier than MSME or business loans, which safeguard the borrower’s assets while also providing more flexibility in terms of finance. There are multiple types of business loans. For example, you can tap into a line of credit loans or look into options that you see fit. For today’s budding entrepreneurs, the country encourages people to start up their dreams in many ways. Business loans without collateral are also offered for people with stronger credit history and decent turnovers. The government and the banking sector have worked hard to provide all the support people need to start businesses that create jobs.

What does my Credit Bureau look like?

One of the most crucial aspects of considering a loan is your credit score. For a business owner, both your personal credit score and business credit score can dictate whether you find success in finding a loan. One of the setbacks noted is small business owners are unaware of their business credit profile. Most often than not, they are unaware of their business’ creditworthiness. You should learn to build up a strong personal credit score and a business credit score.

Although your personal credit score may not be the most accurate indicator of how well your company fulfils its responsibilities, most lenders will consider it when analysing a business loan application. Some lenders place a greater emphasis on your personal credit score than others. A credit score of less than 680 will make it challenging to apply for a bank loan, while a score of less than 650 will make it tough to qualify for a small business loan.

Some lenders are okay to accept lower scores if other parameters indicate a strong business. However, it is known that most lenders look at your past credit history to forecast the future regarding the choices you will make. Hence, keeping a strong personal credit score and creating a robust business credit profile should be a priority for anyone looking for a small business loan.

Although flawless credit history is no guarantee of financing, it will open more doors than a less-than-ideal history. A recent study confirmed that business owners who had access to their credit scores and regularly monitored their business credit history have a higher chance of their instant business loans getting approved.

What to keep in mind before choosing a lender?

Take a close look at the terms and restrictions, regardless of the financing option you choose. Choose whether you want a fixed or variable interest rate. If you’re going to purchase something, find out what the loan to value ratio is. It varies between 60 and 90%, depending on the lending institution, your company’s creditworthiness, and if you are purchasing new or old equipment. Before signing on the dotted line, double-check the processing costs, payback charges, flexibility, and other terms.

You’re now ready to speak with a lender. You know what you need the money for, how much you need, what your credit score is, and how fast you need it. Furthermore, you will be able to evaluate a possible lender based on whether they’re a good fit for your business if you have a better grasp of what you’re looking for to fulfill your business requirement and the sort of lender you are looking for.

Questions to Ask Your Potential Lender on How to Take Business Loans

Many lenders specialise in certain sectors or have a list of companies with whom they will not operate. Asking this question early can save you time with a lender who will be unable to assist you, regardless of your creditworthiness. It will also be easier to work on a proposal with an interested lender specialising in your industry.

Would a loan term for a small business fit my needs?

It is an essential question as well. Because you’ve determined your loan purpose (your company requirement), you’ll be able to identify whether you need a short-term or long-term loan and determine if a loan type is not suitable.

You can quickly assess if the loan terms are suitable for your scenario, just like most people would not buy a new car with a 30-year auto loan. Some lenders specialise in short-term or long-term loan choices, so if you’re interviewing with one, you’ll notice they don’t have the conditions you’re looking for.

What would be the interest rates for business loans in India?

There are several different pricing and business loan EMI calculators in India. It can help compare financing options and help understand what interest rate works for you as a business person. Therefore, it should be considered along with the total cost of the loan. Moreover, it holds good when trying to compare loans of different terms.

Your loan purpose will help inform this decision, and it is vital to understand before discussing your loan terms with a lender or an officer at the bank, even if you are applying online.

What will my payment schedule be?

The introduction of daily, weekly, and monthly recurring payments shifts away from the more conventional monthly payment method. Nonetheless, many lenders (including internet lenders) have chosen a more frequent-than-monthly payment schedule for various reasons. Not least because, unlike the usual lump sum cash flow drain associated with a single payment per month, it tends to spread out the cash flow load throughout the month.

If your potential lender requires a daily or weekly payment plan, ensure your company has continuous cash flow throughout the month.

How long is the loan process?

It works because of the business loan eligibility and creditworthiness. It also depends on how many documents the lender requires to process these business loans. Therefore, it varies from institution to institution. Some well-established banks take only two days, while others take up to several weeks. Thus, it depends on the requirement and the purpose. Some lenders can be weeded out earlier if their approval process takes much longer than expected.

When you’re searching for a small business loan, you’ll find there are several options accessible to you, some of which will be a better fit than others. Consequently, you may search for a loan that will suit your specific company’s needs.

Conclusion

Our country’s private and public sectors offer a wide range of options for small businesses. However, before going forward with a loan, it is always necessary to understand the necessity of the same. If you are still uncertain about your financing option, it is best to seek advice from mentors or seasoned business people. Chances are, they have taken a loan before. Use their knowledge to ensure you won’t borrow your business to the ground.

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