The MSME sector, which contributes a massive one third to India’s GDP and 45% of the manufacturing capacity, is, unfortunately, seeing a considerable credit gap.
A recent report of 2020 states that out of approximately 75 million MSMEs in the country, only 16% that apply for business loans receive formal credits from financial institutions. A business loan without collateral is crucial to fund a company’s daily activities and invest in better infrastructure, upgrade to the latest machinery, and maintain inventory. Hence, business owners should keep the following factors in mind while approaching a financial institution to apply for these credits.
Factors to consider before applying for a business loan
- Calculate the required corpus
One of the first things that business owners need to consider is the purpose of availing of a business loan. Often, financial institutions will ask you the precise expenditure channels where the availed corpus will be utilised. For example, these funds can be used to meet working capital requirements, purchasing the latest equipment, hiring new staff, leasing a new property, or even marketing.
Calculating the possible expenditure will help estimate the required corpus, preventing the chances of borrowing more than required.
- Compare eligibility criteria, interest, and other charges
Next, calculate the exact cost of availing a business loan. Compare terms and conditions of various financial institutions, including interest rate charged, EMI outgo, and other expenses. Selecting a lender offering favourable terms will help you maximise your savings in the long run.
Estimate your monthly outgo, including the new loan EMI, using the interest rates and origination fees. Include this in the financial statements that you provide to your preferred lender and enquire about any additional terms and conditions to decide which one will be the best fit for you.
- Know your CIBIL score
Credit score is one of the most critical factors that financial institutions consider when sanctioning a credit line. Before you apply for business loan, request a copy of your CIBIL report and notify any discrepancies at once.
A low CIBIL score is an indication of risky investment, and financial institutions may reject a loan application if the credit score does not meet the set requirement. Approach the credit bureau at once if you find any error and get it resolved immediately.
Additionally, here are some steps you can take if your business’s credit score is low.
- Consider repayment capacity and flexibility
Never avail of a business loan without collateral that you cannot repay comfortably. The borrower’s fixed income to obligations ratio (FOIR) is what the financial institutions will check to determine business loan eligibility and repayment capacity. Avail a loan that you can quickly repay without stressing the monthly budget or working capital. Applicants can use a business loan EMI calculator to check the monthly outgo and plan finances accordingly.
Several lenders also extend flexible repayment facilities, where borrowers can withdraw only the required amount from a predetermined limit. Interest is only charged on the borrowed corpus, which significantly helps lower monthly instalments. Check with your preferred lender for such offers before submitting an application.
- Check the required financial statements
Include all financial statements – both past and present – that you can provide along with your loan application to maximise the chances of approval. These include a copy of the income tax returns, bank account statements, and CA-audited balance sheets for at least the last 2 years.
Further, financial institutions like Bajaj Finserv provide several pre-approved offers to expedite the loan application procedure. These offers can be availed with minimal documentation and are applicable on products like business loans, personal loans, credit cards, etc. You can check your pre-approved offer by providing a few necessary details like name and contact number.
Considerable research is crucial before you apply for business loan with any premier financial institution in the country. Adjust your plans after considering the factors mentioned above, and you will have a better chance of loan approval.