Things to Keep in Mind Before Applying for a Business Loan in 2021

Now that 2020 is past us and the balance scales are gradually tipping towards normalcy, it’s no surprise that businesses are running a race in terms of building what they’ve lost. The global pandemic was merciless indeed, but now that we’re coming to terms with it, companies need to regain their respective positions.

Whether you’re about to start a new business venture or need financial support to make up for the losses, a business loan would currently be your biggest asset. However, it is more serious than it sounds and entails various regulations and conditions to meet.  Let’s take a look at it from two perspectives – the lender’s and yours.

What Lenders study before granting loans?

 When it comes to providing a business loan, any financial institution or lender will broadly focus on these three categories: –

Your capacity

First, lenders will study your capacity to repay the loan and hence, run your credit history. In doing so, they’ll evaluate your repayment history with other institutions and your current debt, if any. Then they’ll also assess your debt service coverage ratio and review your income which will ultimately determine your capacity to repay the business loan EMI timely. 

Your company’s capital 

While evaluating your financials, lenders will also review your organisation’s capital, and if it’s not sufficiently-capitalised, they may consider it too risky to approve a loan for you. 

Your collateral 

Since unpredictable circumstances are part and parcel of business, a lender will generally require collateral to stay on the safe side. These will depend on your business’s available assets, like real estate, accounts, vehicles, etc.

Things to consider when you apply

Keeping the above-mentioned factors in mind, these are some critical points you must remember before availing business finance: –

Go through your credit history 

Since credit scores are paramount for business loan eligibility, you must evaluate your credit history before applying. Check if it’s sufficient to prove your financial responsibility, and meet the required scores. If not, you must wait and build a compelling CIBIL score, especially if you’re a new business without a strong enough credit history.

 Keep your documents sorted 

For successful approval, you must furnish essential financial documents, apart from completing KYC. Lenders usually look for: –

• Bank account statements of six months before applying.
• Filed ITRs.
• CIBIL score.
• Proof of ownership.
• Previous two years’ balance sheet.
• Profit and loss statements signed and audited by your CA.

Know your collateral capacity 

Since collaterals aren’t uncommon for business financing, you must be sure of possessing any tangible asset that will help you secure the loan. Thus, before applying, evaluate your collaterals and ensure that you don’t reach the point of defaulting and losing assets.

Carefully assess all lending avenues 

Finally, you must choose the right lender otherwise you’ll be down the rabbit hole before you know it. After checking your credit scores, collaterals, financial records, etc., you must research and select an institution or lender with the right conditions. These may include flexible approval terms, affordable business loan interest rates, and other criteria. Choose wise, and it’ll serve you well.

And, it’s a wrap

Use our tips mentioned above as your starter toolkit for setting up your business finances. And, before you know it, you will be laying the first brick of your future enterprise.