Expanding a business involves purchasing raw materials, increasing productivity, improving cash flow, inventory development, hiring workforces etc. To achieve all these things requires a significant amount of funds. Under such circumstances, you can apply for a business loan to fulfil these requirements.
5 Essential Questions to Ask Before Taking a Business Loan
Following are the five important questions that you need to ask while applying for a business loan:
- Why do you need a business loan?
Before planning to take a business loan, the foremost thing your lender will ask is your reason for taking that loan. However, if you fail to answer that question, it might cause a negative effect on your loan application.
To find your reasons for taking a loan, you can do some assessment of your business. After making the analysis, note them down correctly. The analysis result will include your business’s mission and vision, income and turnover alongside your decisions to meet its future goals. Also, you can take a business loan EMI to pay off earlier debts in a timely manner for avoiding unnecessary hassle.
- What are the different categories of business loans available, and what are the main factors influencing their interest rates?
Business loans are available in two different forms for the applicants. They are secured business loans and unsecured business loans. Term loans, working capital loans, lines of credit, equipment loans, start-up loans, and other business loans are available in the market.
In addition, the factors on which the interest rate relies include your organisation’s age, yearly turnover, credit history, and collateral. Moreover, your lenders will approve your loan request if your business is active for a minimum of three years.
- Is credit history important while applying for a business loan?
Credit history plays a vital role in business loans. In most cases, a business loan is considered unsecured, requiring no collateral from the applicant. Under such cases, the lender is always at high risk before offering the credit. This is why the lenders focus on the applicant’s credit score and credit history. It comprises business details, client details, tax registration details, and tax return details.
If your organisation has failed to pay any due in the past, it will show up in the credit history, and your credit score will reduce. With the decrease of this score, the chances of your loan’s approval will diminish too. Hence, while you apply for a business loan, focus on improving your credit score and retaining an ideal credit history.
- What are the eligibility criteria for a business loan?
Nowadays, the business loan has become an ideal helping hand for businesses. It helps business owners enhance their production and growth. However, there are some eligibility criteria that you have to fulfil while you apply for a business loan. By these criteria, your lender will determine whether you are eligible for the loan or not.
The following criteria are as follows:
- The applicant should be an Indian citizen
- The borrower must be self-employed for a minimum of 3 years of experience in the business field
- Age limit of the individual must be between 25 years and 65 years
- Applicant has to provide the proof of business turnover
- Must provide Income Tax Returns of the past 3 years.
- The balance sheet of business must show profitability.
- Must possess a CIBIL score of 685 or more
- What are the lists of documents required while you apply for a business loan?
Private sector enterprises, sole-proprietorship organisations, partnership businesses, and self-employed individuals can opt for a business loan anytime. However, it requires a list of documents to be submitted alongside the loan application form.
Following is the list of the essential documents you require while applying for a business loan.
- Identity proof
- Address proof
- Business address proof
- Bank statement of last six months
- Business PAN Card
- Business proof documents
- Proof of continuation
- Profit and Loss statement and balance sheet for the last two years
- Income Tax Returns for last two years
What Are the Types of Business Loans?
Let’s enlighten the types of business loan available in the market:
- Term loan
Term loans are the most used business loans. They are available in short-term loans and long-term loans. The repayment tenure of a short-term loan ranges between 1 and 5 years. While for a long-term loan, the tenure ranges between 10 and 20 years.
- Working capital loan
In general, these loans have a repayment tenure of 1 year. It enables a business to fulfil its regular needs, like buying raw materials, developing inventory, increasing productivity, etc.
- Letter of credit
A letter of credit is the credit limit offered to businesses by the lender during international trade. Business entrepreneurs use the Letter of Credit during the export and import of goods.
- Start-up loan
These loans are offered to recently formed businesses that do not have a healthy credit score. Lenders provide this loan based on the present turnover of the organisation.
When you apply for a business loan, asking precise questions makes the entire process easier, right from the application up to the repayment. As soon as you go through these questions, you will better understand a business loan and its significance.