A small business loan is mostly a secured loan offered for small or medium-sized businesses. The loan amount can transform the companies ideas and make them real by fulfilling their funding requirements. Loans like these have become a crucial aspect that will help modern businesses fulfil their financial need, so many businesses often go for it.
Due to the heated competition in the market, getting a small business loan can be a very challenging process. It is because many businesses are striving to get the funding required for their business prospect. Added to the competition, getting a small business loan requires you to get approval from the financial provider before encashing the loan amount.
But, don’t burden; there are a few ways to ensure that your loan application for a business loan will get approved. For that, you have to be aware of the essential ingredients that will increase the odds of your receiving the loan among the potential competitors. Here are five such ways that will help you increase your chances of getting a small business loan:
Solid Business Plan:
A solid business plan is essential when it comes to getting a business loan. When you have a clear short and long-term goal for your business, it will help you understand the funds you need to fulfil it. With the funds you get as a business loan, you will have to establish and scale your business. You should also include when and how much funds you will use for each of your business improvements.
Your financial provider will give a thorough look into your loan application and business plan to analyze whether you are solid and reliable before approving your loan. You should ensure that your business plan will provide absolute clarity to your financial provider for his better understanding.
To create a clear business plan, you must maintain a birds-eye view of your competitors. You should know about their necessary sales and marketing strategies. Also, analyze their market growth, projects that will increase their future finances, and long-term business goals. When you do this research, you will have an idea of how you can improve your business to get a better revenue than them.
With that idea in mind, you can draft your business plan to ensure that it will become precise and impressive to your financial provider. You should place all measures that will help you deal efficiently with your potential competitors to become successful. Financial providers are likely to place their trust in your business when you explain a specific and well-thought-of business plan.
Adequate Cash Flow:
Financial providers will place their trust in customers who will ensure timely loan repayment. There are different ways with which a financial provider will assess your repayment ability; one such way is through the cash flow figure of your business. With your cash flow figures, they can understand the liquidity status of your business.
Analyze your Debt Service Coverage Ratio (DSCR) that highlights how much cash you have for clearing your debts. With this ratio, the financial provider can assess your repayment discipline. When you have better cash flow figures, the financial provider will fund your business without any worries.
But when you have an insufficient cash flow, you can improve it by eliminating any unnecessary business expenses that impact your cash flow. Additionally, ensure that any invoice you pay towards your business must be under your business name. It will act a proof for your loan repayment. Also, ensure that you reduce the overhead expenses of your business as much as possible.
Solid Credit Score:
Another crucial factor that the financial provider will look for while assessing your repayment ability is your credit history. Your credit history will be determined using your CIBIL or Credit Score. A credit score ranges from 300 to 900, in which 300 is the least and 900 is the highest. When you have repaid all your loans on time without any defaults, then you will have a good credit score.
Whereas when you have a low credit rating, the financial provider will feel unreliable and not approve your loan. So ensure that you always repay the loan promptly without any defaults. Your credit utilization ratio should be steady when you want to impress your financial provider. If you need, you can open multiple credit accounts to oversee non-business related debt through different accounts.
Many businesses require a loan, so keeping all the relevant documents ready will help you speed up your loan approval process. It also gives your financial provider the impression that you are organized and well prepared for your upcoming meetings. Ensure you do thorough research on the documentation required for the loan before you apply for one.
Each financial provider will have different documentation requirements, and you should analyze the one you want correctly. Ensure that some lenders will require both online and offline documents for their loan approval process. Here is the list of documents commonly asked for:
- ID proof
- Address proof
- Latest bank statement
- Proof of continuation
- Income proof for the past two years
- Latest ITR with computation of profit and loss reports, balance sheet and many more
Loan Repayment Plan:
When you are transparent and detailed with your business loan application process, it will bring you a step closer to getting a business loan. For building confidence and trust in your financial provider, you should make proper communication and plan your end-game with respect to your loan repayment.
Your loan repayment plan can be drafted online using an EMI calculator, which will guide you when you enter the required fields. It is wise when you imagine the worst-case scenario. A failed business will lead to a considerable loss, take away your profit, and make your business insufficient with cash flow. Communicating your strategy with a clear backup plan will show your financial provider that you are carefully assessing your finances and are prepared for the worst.
When you follow the five steps above, you can clearly understand the tips for improving the odds of getting a small business loan. So think carefully and act cautiously before deciding upon your loan for a better approval rate and stable finances.