Even if you have the most brilliant and unique idea which can take your business to greater heights, it won’t matter if you do not have funds to finance the implementation of the new idea. Earlier financial institutions gave out business loans easily to small businesses to help them materialize their expansion plans, but now due to the precarious position of the banking sector and financial markets globally, they are becoming very selective in disbursing business loans for MSME. Most of the financial institutions are now following very strict guidelines while deciding on approval of a loan application for collateral-free loans for MSME. This is because these lenders are looking to minimize their risk exposure on unsecured loans and prefer secured loans for the safety of their funds.

For what purpose do financial institutions offer business loans?

This is a crucial question in the wake of the recent market trends. Small businesses form the backbone of the economy and offer employment to a large number of individuals. But as they have only limited access to capital, they must depend on borrowed funds to meet their financial obligations. If you are also thinking of applying for a loan, first you must understand various purposes for which the funding is available. If your requirement does not fall in any of the below-mentioned categories, chances of your loan application getting approved are slim: –

  • Purchase of Capital Assets: – Financial institutions offer term loans for purchase of capital assets. These are fixed assets that add value to the business and are necessary for upgradation of the facilities or expansion of the facilities. Various assets that can be purchased through these loans can be Land, Plant, and Machinery, Equipment, Car. The assets purchased from these loans must be mortgaged with the lender.
  • Paying Daily Expenses: – Financial institutions offer loans to help you manage your daily expenses while you are pursuing your growth ambitions. As your business grows in size, you need funds to fuel that growth. These loans are offered in the form of working capital limits to manage the day to day expenses conveniently. These loans are useful when you must sell your goods and services on a credit basis.
  • Upgradation of Infrastructure: – Financial institutions also offer loans for upgradation of your infrastructure that would contribute directly to the business growth. This could include construction of new offices, construction of the building, improvement of machinery, etc. The assets upgraded using these loans shall be mortgaged with the lender.
  • Making timely payments: – Financial institutions offer a facility like overdraft limit or general-purpose business loans to help you make timely payments to suppliers and labour. This ensures that if there are some fluctuations in your cash flow cycles, they do not affect day to day functioning of your business.

This list is not exhaustive but will give you a general idea of the purposes for which financial institutions offer funding when you apply for a business loan online as well as offline.

Things to note when applying for a business loan

Here is a list of various factors that you must consider and keep in mind while you are in the process of applying for a business loan online

  • Availability of a Collateral

Although many financial institutions offer collateral-free loans for MSME’s but to be able to avail that facility your business profile needs to very strong. But if your business is relatively new, that might not be the case as you are in business for a short duration only and the lender might not want to risk its money. In such cases, you must have collateral which can be kept as security while applying for the loan. If you have acceptable collateral your application for a business loan for MSME’s will be approved without much hassle.

  • Credit Score

Almost all lenders will review the credit score for your business along with your personal credit score. So, you should keep a close watch on your credit score and before applying for a loan perform a check on your credit score. If your credit score is below the acceptable threshold, your application will most likely be rejected. So rather than taking a chance, it is advisable that you delay the process by a few months and in the meanwhile take professional help to improve your credit score.

  • Audited Financial Reports

You must have your financial reports audited by a competent Auditor. Unaudited financials are not considered by the lenders. So even if your business turnover falls below the specified threshold for a mandatory audit, you must go for a voluntary audit as it will lend credibility to your financials. If you have not yet gotten your financials audited, do so now because your lender is going to ask for them. You should make sure that financials for your last three years have been audited and ready with you.

  • Insurance Documents

Most financial institutions want safety and security of their money, and for that they want you to have a comprehensive insurance policy. If you do not have any insurance policy as of now, you must get one immediately otherwise your loan application would be delayed until you get the necessary insurance coverage. Also, having an insurance policy portrays you as a responsible businessman and holds you in good stead.

  • Comprehensive Business Plan

If you need money from a financial institution, you must have a purpose for it. So, you need to have a well-defined business plan ready with you covering all facets of your funding requirements. You will need to submit this business plan with the loan proposal, so if you do not have one as of now, get it ready immediately. You can take the help of a professional to make sure that there are no loose ends in your business plan.

  • Financial Stability

Financial institutions will judge your application by your financial stability. So, you need to assess the financial stability of your business as well as your financial stability. For this, you can enlist the help of a professional such as a Chartered Accountant. Once you identify the areas where you are lacking it is advisable that you work towards strengthening them to enhance chances of success of your business loan application. For this, you need to analyze your financials such as debt-equity ratio, account receivables, account payables, debtor aging etc.

  • Provisional Financials

Business loans are sanctioned not only by your past performance but also your future projections. You should enlist the help of a chartered accountant and prepare your future projections based on your past performance and future aspirations. Make sure that you keep these projections realistic and do not fudge them to get a higher loan amount. It will come back to hurt you.

  • Interest rates and charges

When you avail a business loan you must remember that till you repay that loan, interest payments would form a significant part of your monthly expenditures. So, you must take note of the interest rate and various charged being levied by the lender. Negotiate hard with them to save as much as possible as even a slight reduction in interest rates can translate into considerable savings in the long run.

You must remember that when you are taking a loan, it is a big decision which could impact the future of your business significantly. So, you need to consider all these aspects carefully before proceeding ahead.

Author Bio:

Rahul Setia works at Ziploan.in, RBI registered NBFC as AVP Digital Marketing. Rahul enjoys creating innovative marketing strategies and is an expert at website data analysis. He is passionate about blogging and frequently shares his extensive knowledge through guest posts on different portals. Rahul has done his bachelors in Information Technology from Gurgaon.