With the government leveraging reforms on setting up a new business, more and more people are inclined towards entrepreneurship. Each year, more than 100 million start-ups enter the market with high prospects and attractive plans. The ease of setting up a new business or start-up has been helped by financial institutions like banks, NBFCs and other major lenders who supported the idea.
Previously, due to strict reforms and policies, entering the markets with a new business idea was only for major players who either already existed in the market or had a strong backup. But with the increasing support of the government and eased out policies, newer opportunities have cropped up for entrants trying to tap the markets. The banks play a vital role in such establishments as the situation is a win-win for both parties. However, the process of borrowing money from financial institutions requires some details to be furnished.
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Although, there are several lenders who provide a collateral-free business loan or unsecured business loans to the borrowers, a loan of a higher amount does require some security. Depending on your market value, collateral is demanded. If you are already established in the market, then it would be easier for you to get an unsecured loan.
If you are a new entrant and are expecting a huge quantum of loan, you will be asked to produce collateral. The starts-ups are well supported by the small business administration (SBA) programs that offer an initial cost to the start-ups making it easy for them to procure a loan. This also reduces the risk for banks.
Business financials refer to the ledger of your business regarding all past and present loans, debts, business bank accounts, credit cards, investment or Demat accounts and other relevant information like contact numbers, tax ID and complete address.
Most of the banks require your business plan and business idea to be sure of the success of their investments. The banks require a company summary and details on the operational team like a product, finances, and so on.
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The credit score in case of availing a loan from a bank is mapped at two levels - business credit score and individual credit score. Although all businesses have a separate bank account, in case of a start-up, the business owner generally starts the finances with a personal account. If not more, the bank sanctions the loan depending on the credibility of the owner and the credit score.
Hence, before applying for a loan, it is better to check your credit score and make necessary improvements if needed. If the business and the business idea are new to the market and the owner does not have anything credible to produce in front of the bank, a good credit score is really handy.
A business plan is a broader idea for which you need funding. The loan you are availing at present may be for a particular segment of your business. While you apply for a business loan, make sure you know what the purpose of borrowing is. It is crucial for the lender to know and be sure of where the money is going to be used.
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Depending on various factors like a business plan, credibility of the borrower, purpose of the loan and so on, the loan quantum is decided. Maybe you applied for a loan of say Rs 10 Lakhs; but the lender is comfortable sanctioning just Rs 5 Lakhs, this number is not just decided by choice; but on conducting a detailed analysis of the quoted amount on a shared business plan. As per suitability, the loan amount is then decided.
The track record of the business also plays a vital role in the sanctioning of the loan. It is always easier for a successful company to get a loan as compared to humbler starts and survivals.
Insurance is an excellent way to reduce risk. Banks prefer borrowers who have an insured business. An insurance-secured business is also more likely to get a business loan.
All companies require permits and licenses to conduct the business. Be it a start-up or an established organization, a business permit is essential. A banker will ask you for all these licenses and permits before giving the money. They include fire, environmental, health and zonal permissions from the respective authorities.
Last but not the least, the capacity to repay is really important. A borrower must reflect on how well he can repay the loan. A debt-to-income ratio is a good way of showing this.
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