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Top 10 Tips to Get a Business Loan From Banks Successfully


Starting one’s own business has found favour with a rising number of people over the past few years and consequently, the applications for startup business loans have also increased. This increase in applications for loans has lowered the chances of getting a business loan easily. To avail a loan when you want it and when needed, you have to make sure that you have the right documents during the loan process. Loan procedures can be lengthy as it takes some time to verify all your information, and the process can become lengthier if you fail to provide the necessary papers in time. So, it is better to know what exactly your bank is going to need from you to get your loan faster.

Here are the top 10 tips that will help you get your startup business loan successfully.

  1. Determine if you are Eligible to Approach a Bank for Loan
For approaching a bank for a loan to help with starting up a new business, you will need to check a few things off our list. To do that, you must understand the following five C’s of credit.

Capital: 

It is necessary that you have sufficient margin money to start your business before you apply for a loan, instead of entirely depending on the bank for your financial needs.

Character:

You must always display character and integrity as it reflects on the credit history of an individual or firm, which in turn, means that the bank will check your financial reputation and track record when it comes to repaying debts, and it is crucial that you have an agreeable and flawless financial history.

Capacity:

Your capacity to repay a loan is also checked before sanctioning your loan. Loan repayment ability is calculated before sanctioning the loan amount.

Condition:

A condition is where a bank checks how you intend to use that money. This may differ from case to case depending on the business and the requirement.

Collateral:

If your loan application amount is above 25 lacs then the bank requires some kind of additional security in case you fail to repay the startup business loan. This is called 'collateral,' which the bank will return once the loan has been cleared. Your real estate property is an excellent example of collateral, often used while procuring a loan.

All these 5 C’s of credit are necessary to obtain a good credit score, which is also known as CIBIL score. Ensure that you have a good CIBIL score for banks to consider you suitable to approve a bank loan.

Additionally, gather all the documents before you go to your bank. Remember that you must have enough time to set up your company after you've applied for your startup business loan. Since the bank would require some time to process your loan, it is important that you begin the application process in advance. Till then you can start collecting your documents required when applying for a loan.
Also, ensure that you consult with your financial advisor to help you plan your finances.

  1. Write a Detailed Business Plan
You need to make a detailed business plan to apply for a loan to start a new business. A business plan is a blueprint of any business. It is a document that contains everything from how you plan to establish your business, to how you will earn your profit from it. So, it is important for you to understand and study your project completely. Your business plan should contain the
  • name you've chosen for your project along
  • type and the category of your business.
  • cost of your project
  • means of your finances
  • demand and supply of the market that you're working in
  • trends and the overall market analysis,
  • financial projections for the coming years
Make sure to attach your estimated sales and profits in your business plan too. Moreover, you must also enclose your repayment plans to assure the bank that you are capable of repaying your startup business loan, which is known as, 'debt service' in banking terms.
  1. Establish the Loan Amount Needed
It is important that you know exactly how much money you are going to need to help with starting a new business. You need to take into account a working capital, funds for construction or leasing of space etc, capital to purchase machinery or raw material, and also for wages and other miscellaneous expenses. You also need to keep aside a certain amount for emergency funds, untoward incidents, payments, and other expenditures. And most important is to set aside funds for legal documents such as licenses, the expense for which can sometimes not be accounted for in the beginning.

In fact, you can also opt for ‘Term Loans’ that are usually approved on the basis of collateral such as long-term assets like your property. These loans can be repaid over a period of time in regular payments and they usually last from 1 year to 10 years but some loans have even been issued for 30 years in some cases.

Furthermore, assets that can be liquidated within a year, called, 'current assets,' are generally financed through cash credit. Cash credits are short-term loans provided by the bank after you give them certain security such as against your fixed deposits etc. For instance, the loan given in exchange for gold can also be called cash credit.
  1. Ensure Sufficient Cash Flow Before Applying
Cash flow, in banking terms, simply means that there should be a flow of money or some kind of regular transactions in your account. This means that one should always be ready with some amount of liquid cash if any unavoidable expenses arise. It must be kept in mind that your bank is investing in you to help you start your business, so you must show that your existing bank account is active and that you regularly use it and further, you will route your business transactions through the current account and use the funds wisely.

Sufficient cash flow will also indicate that you are financially secure. Lack of cash flow can cause your business to fail.

In fact, a study conducted by the Small Businesses Administration states that inadequate cash reserves are one of the top reasons for the failure of startups. Therefore, in order not to "run out of money", it is important to have enough cash flow before applying for a startup business loan.

  1. Provide Proof that you are Capable of Repaying the Loan
When you apply for a startup business loan, you have to furnish proof that confirms that you are capable of repaying it. The bank checks the credibility of your business proposal and also calculates your repaying capacity. Also, add any expansion ideas that you have as your long-term and short-term goals as it will indicate that you are looking for expansion in future. Also, include business strategies that help you to show your profits and attach bank statements that show your regular monthly payments. This is an important document which can help determine if you can repay the loan. Additionally, you can include your tax returns as well.
  1. Prepare Your Presentation and Project Report
presentation that covers the gist of your project along with your business strategies, future goals, projections etc. You must know that the bank expects you to pay timely instalments and maintain a healthy relationship for the future as well.

You need to show that you have taken precautionary measures to reduce the possibility of a loss, which is also known as reduced risks and include your repayment plans. Subsequently, assure them that you have consulted with your financial advisor.

Similarly, be sure about what you need from the bank as well and accordingly prepare your presentation.
  1. Keep Your Company's Information Hand
When you are gathering all your necessary documents before approaching the bank to apply for a startup business loan, it is important that you carry your company's information and documents as well. This includes the number of employees you currently have or will be hiring in the future.

Furthermore, if you have any partners in your project, include their information as well. For this, an individual information sheet, similar to a biodata, will be required. You can cover this data in a separate information sheet as well.
  1. Provide Details of Your Accounts and Insurance
When you start a business, you will need facilities like electricity, office space, water supply, internet connectivity, etc. Since you'll be paying for these amenities, they will be known as accounts payable. As these are your expenses, you need to mention them while applying for the startup business loan.

Similarly, you will be required to show your accounts receivable, i.e., your income. Ensure that you include any future accounts or revenue predictions that you have at hand.

Your bank will also require all your insurance-related information. So, if you have taken out insurance to help with starting up a new business, make sure that you provide complete information of that to the bank. You must also share information about the insurance policies drawn for your business.

  1. Approach Nationalised Banks First
Make a list of potential banks that you can approach and compare their rate of interests, especially find the ones that offer lower interest rates.

It is recommended that you approach nationalized banks first, instead of international private banks. This is because international have a higher rate of interest and are thus not ideal for startups.

Alternatively, you can also approach NBFCs, but then you may need to compromise on the rate of interest (as it may be comparatively higher) or consider private lenders, but they may not be as reliable as nationalized banks. However, this option of comparison is only relevant if you have accounts in more than one bank or in non-banking financial companies (NBFC).

Ideally, nationalized banks are a better option for those who need help with starting up a new business as they are easily accessible and more convenient for new entrepreneurs.

10.  Establish Good Presence and Overall Character

Finally, to get a startup business loan from a bank, you must make a good first impression. You are also required to show that you have principles and display high morals and ethics related to the business, which you won't compromise on for anything. Include your morals, ethics, and mission statement in your business presentation too. Furthermore, reveal your business’ responsibility toward the society by showcasing that it is an environmentally-conscious project. You have to earn the bank's trust for them to sanction your business loan.

For instance, if you are starting a company that deals with chemicals, make sure that you include in the report your responsibility towards disposing the chemical waste with utmost care instead of letting them flow into the river untreated.

If these tips make you feel intimidated, then fret not. Applying for a startup business loan may seem difficult, but if you gather the right bank loan documents and be honest with the bank, it can be quite a pleasant experience. Remember, the bank needs you as much as you need it. So, don't feel intimidated and apply for your business loan by keeping the tips mentioned above in mind and kick-start your project.

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