Best practices to apply a Business Loan

There are many small businesses who like to operate debt-free. They are debt-averse and find the act of applying a business loan intimidating. However, a simple fact of a successful business is that ‘You Need Money to Make Money’ and taking a business loan can give a timely boost to expand and grow your venture. Once you start a business there are many occasions to take a business loan. A business loan can help in increasing working capital, purchase of equipment and inventory, expanding products, services or workforce, buy insurance, advertise or to take advantage of a new business opportunity.

As a business owner, there are a few things you need to understand and practice, before starting the application.

1. Preparing your finances and understanding your options
   The process of applying a business loan is easy. It is all about organizing your finances, understanding your requirement and knowing your options. You should have a broad idea of your loan requirement, know what type of business loans are available (secured or unsecured), the terms and conditions associated with it, and the process of applying. It will help you make the best decision going forward.

2. Maintain all documents
   Once you know the purpose of your loan, the next step is to organise and maintain all documents required to apply the loan. PAN, Aadhar card, Passport, Voter’s ID and Driving licence are the basic documents required followed by ITR and bank statements. You should also maintain PAN for the company and provide income statement, balance sheet and P&L account for the last 1-2 years. All financials should be certified or audited by a chartered account to add legitimacy to the documents. Trade Licence, GST credentials, as well as Sole Proprietorship declaration or certified copy of Partnership Deed if relevant may also be required.

3. Think like a lender
   Revisit your loan purpose and desired amount. Your loan purpose should be legitimate and desired amount should be realistic or else it could affect the loan process. Personal credit score plays an important role to make a credit decision so it’s advisable to check your credit score before starting the application process. Build a business history as lenders want to know if your business is making enough for you to pay back the loan. Your business should ideally be profitable for last 1-2 years. Higher annual revenue, average bank balance and profitability of your business will give comfort to the lender.

4. Keep your collateral ready for secured loan
   While unsecured loans are popular for smaller amounts, for loans more than Rs 50 lakh a security is necessary. Few lenders accept stocks, bonds, real estate, jewellery, machinery, equipment and vehicles as collateral. It is important to have clear titles ownership of such assets ready in advance as the amount of the loan offered depends on the value of the collateral.

5. Follow best practices
   Review your business loan application to avoid any mistakes that can delay the process. Be truthful and accurate with every bit of information you provide and don’t delay in providing any follow-up information required. Always remember, more information is always better. Once you have followed all steps and made the application, the last thing is to wait and hear back from the lender.

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