Running a small or large business is not easy due to the market dynamics and changing customer needs. Especially for startups and small firms, financing their business operations from office rent to employee salaries needs continuous cash flow to sustain and generate revenue. Hence, business loans become almost inevitable regardless of the business scale to get funds for running business operations and staying competitive in the market.
Getting a business loan application approved on the first go can be challenging, especially for startups & medium-sized businesses. The lenders will always look to minimize their risks and offer loans to only those firms that meet all the criteria with respect to business loan eligibility. Hence you have to proceed cautiously and use a systematic approach to get a green signal from the lender to get the required funding to make your business flourish. Here are 5 simple tips to boost your business loan eligibility and qualify for a business loan.
5 simple tips to boost your business loan eligibility
1. Clear Business Plan
A full-proof business plan is crucial when it comes to improving your business loan eligibility. With clear short and long-term financial goals in mind, you can have a better understanding of how much funding will help you reach them. You must create a detailed plan with respect to how and where you will be using the funding received from your lenders. Furthermore, the lenders will like to see a business loan application that is both honest, reliable, and consists of a business plan developed with absolute clarity.
Devising a clear business plan requires you to maintain a close watch on your competitors, have the best sales & marketing strategies in place, forecast your future finances and market analysis, and keep your investors informed about your long-term business goals. Assess all the things that could go wrong while running your business operations, and develop suitable strategies to deal with potential obstacles. Lenders are likely to trust businesses and approve loans that can explain their financial plan and use of funds in a specific and clear manner.
2. Healthy Credit Score
Another crucial factor which a lender looks to assess your business loan eligibility is the repayment ability revealed through your credit history. The credit history can be summarized via a ‘CIBIL’ or ‘credit score’ that is attached to every business owner or group. Lenders appreciate seeing a healthy credit score on your business loan application as it shows prompt repayment of previous loans and other EMI. In addition, a good credit score indicates that a business owner is conscientious and doesn’t keep any outstanding debts.
The Credit Score is calculated based on your current outstanding debt, credit utilization, payment history, credit history length, and size of the business. There are some tactics to boost your credit score. Firstly, pay back all outstanding bills and expenses in a prompt manner. Ensure the credit utilization ratio is kept consistent at around 25%. Open multiple credit accounts to manage non-business-related debt via separate accounts if necessary.
3. Adequate Cash Flow
Lenders place their trust in borrowers that make sure loan repayment is made in a timely manner. There are numerous ways a lender checks your repayment capability. One such method is to assess your cash flow figures. These showcase the liquidity state of your business. They will analyze your debt service coverage ratio (DSCR), highlighting how much cash reserve you have to clear any outstanding debts. This ratio provides an assessment of your payment discipline to the prospective lender.
The better your cash flow data, the more chances will be that a lender will approve your business loan application. To enhance your cash flow figures, you must avoid any unnecessary business expenditures that negatively affect your liquidity. Also, make sure that any invoice paid for your business should clearly have the name of the company and not an individual. This will serve as proof of debt repayment for your specific business. Finally, try to minimize overhead costs as much as possible.
As there are hundreds of business loan applications to process, having all the necessary documents readily available can help you get prioritized, thereby increasing your chances of approval. It also provides an excellent first impression to the lender as he will get a positive feeling that you are organized and well prepared for your upcoming business venture. Do thorough research on which documents are necessary to prove your business loan eligibility and avoid any obstacles that can delay your loan application process due to missing documents. Remember that most lenders request additional business-related documents such as the ‘Sole Proprietorship Declaration’ and ‘Articles of Association.’ However, make sure you are ready with both hard and soft copies of the following essential documents.
- Identify proof & address proof like pan card, Aadhar card, DL, passport, etc.
- Latest 6 months bank statement
- Latest ITR (Income tax return) with profit and loss A/C, computation of balance sheet & income generated in the last 2 years
- Proof of continuation
5. Loan Repayment Plan
Being detailed and transparent in your business loan application process brings you one step closer to getting a business loan approval. To develop confidence and trust in your lender, reveal your end-game plan with regard to the loan repayment. The repayment plan can be prepared using various online EMI calculators. It is a smart move to assume the worst-case scenario like failed business leading to massive losses and sinking profits and then come up with a contingency measure to pay back your business loans. Communicating your strategy with an alternate plan shows your lender that you are diligent and cautious with your finances and prepared to repay the loan even in the worst financial situation.
Business loans can become vital in managing your day-to-day operations and expanding your business to bigger heights. A business loan application that is prepared using the above tips can definitely help you in getting the required approval in a quick time so that you can start using the funds to accomplish your financial goals. Once the lender is convinced about your business loan eligibility, he will try to offer you the best possible loan amount and tenure that can give you sufficient breathing space to run your business smoothly and repay the loan amount within the agreed terms.