Tips to Improve Odds of Getting Small Business Loan

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A small business loan is often secured by small-sized to medium-sized business enterprises (SMEs) to transform their venture ideas into realities. Such loans have become a crucial aspect of modern business and are heavily sought after. Due to industry competition, procuring a loan can be a challenging process as a vast pool of SMEs are striving to fund their business propositions. In addition to the competition, getting a business loan also requires your application to be approved by the lender.

Luckily, there are a few ways to ensure that your application for getting a business loan is approved. Knowing these essential ingredients will increase your odds of receiving funds from potential creditors. Here are five ways using which you can increase your chances of getting a small business loan.

Clear Business Plan

A well-thought business plan is essential when it comes to getting a business loan. With clear short and long term goals in mind, you can better understand the amount of funding necessary to establish and scale your business.

You can also cite in better detail where and how you will be using the funding secured from your creditor. Your lenders are likely to view your application as honest and reliable when you describe your project with absolute clarity.

Having a clear business plan requires that you maintain a birds-eye view of your competitors, have necessary sales and marketing strategies in place, project your future finances, analyze the market, and indulge in detailed communication with any investors about your business’ long term goals. Challenge your business propositions with everything that could go wrong, and place measures to deal with potential roadblocks. Lenders are likely to place their trust in your business when you can explain a specific and well-thought plan to them.

Adequate Cash Flow

Lenders place their trust in customers that ensure timely loan repayment. There are many ways a lender assesses your ability to pay them back. One such means is your cash flow figures. These numbers showcase the liquidity status of your business.

Analyze your debt service coverage ratio (DSCR) which essentially highlights how much cash you have available to clear any debts. This ratio gives a lender an assessment of your payment discipline.

The better your cash flow figures, the more likely it is that a lender will fund your business. To improve your cash flow figures get rid of any unnecessary business expenditures that are impacting your liquidity. Additionally, ensure that any invoice paid towards your business should clearly name your business — not a person — as proof of debt repayment for your specific business. Finally, try to reduce overhead expenses as much as possible.

Healthy Credit Score

Another crucial manner in which a lender assesses your repayment ability is your credit history. Your credit history can be summarised through a ‘CIBIL’ or ‘credit score’ that is ascribed to every individual with a credit card.

Lenders respect a healthy credit score as it reflects one’s ability to manage their finances. Presumably, a good credit score indicates that a person is conscientious and pays back their debt in a timely manner.

Your Credit Score is determined by your current outstanding debt, payment history, credit utilization, length of credit history, and business size. There are many tactics to improve your credit score. Firstly, repay all outstanding bills and expenses as promptly as possible. Make sure you keep your credit utilization ratio steady at around 25%. If need be, open multiple credit accounts to oversee non-business related debt through a separate account.

Documentation

Since there are so many businesses vying for loans, keeping all relevant documents readily available speeds up your loan approval process. It also gives your lender the impression that you are organized and well prepared for your upcoming venture.

Do your research on which documents are required during the loan application process to avoid roadblocks on the way to getting a small business loan. Keep in mind that certain lenders ask for additional documents like your ‘Sole Proprietorship Declaration’ and your company’s ‘Articles of Association’. However, ensure you are prepared with hard and soft copies of each of the following essential proofs.

Identify proof and address proof
Latest bank statement
Latest ITR with computation of balance sheet, profit and loss A/C, and income for the last 2 years
Proof of continuation

Loan Repayment Plan

Being transparent and detailed in your loan application process brings you closer to getting a business loan. To build confidence and trust in your creditor, communicate your end-game plan with respect to the repayment of your loan.

Your repayment plan can be drafted using online EMI calculators. It is wise to imagine the worst-case scenario — a failed venture leading to huge losses and tanking profits — and come up with adequate safety measures to repay your business loans. Communicating your strategy with a necessary backup plan shows your lender that you are careful with your finances and prepared for the worst.

If you are duly prepared to secure a business loan for your SME, you might be on the lookout for the right avenue to approach. Apply for Business Loans on Bajaj Markets to avail funding of upto ₹75 Lakhs in 2 minutes. For your convenience, the entire loan application process is available online for you to complete your application at your own pace. With repayment tenures ranging from 12–60 months, secure your next venture with Bajaj Finserv Business Loans, available on Bajaj Markets.

Also read about how to get business loan without an ITR.