Whether you are facing an emergency or you need to expand operations, as a small business owner you will eventually need loans. Microfinance in India is one of the best to meet small business needs without having any financial burdens. If you need cash to buy new types of machinery or make a big purchase like commercial real estate, perhaps it is time to apply for SME financing.
With so many lenders and options in the market, you can get overwhelmed. You are also prone to making mistakes which can lead to your loan application rejection. The process of SME financing application begins way before you fill out your application. We have prepared a list of things you should know before applying for a small business loan.
Have business clarity
You must have clarity of your business and its turnaround before applying for a loan. We have prepared a few questions for you to answer before applying for a business loan or even start a business. Answering these questions should help you be precise on what you need, and what you do not need to take your business to the next level.
A business loan is approved when the lender is confident in your capacity, and if the lender finds that you are not sure about your business, they will likely not offer a loan.
- What is your line of business, or what does your business do?
- What’s your industry?
- Who are your major clients?
- How and when do you get paid?
- How have you managed your previous credits?
- What are the margins?
- Do you have a track record of success?
Build your credit score
Lenders prefer borrowers who are low-risk borrowers and can pay their loans as scheduled. CIBIL credit score plays a crucial role in determining your creditworthiness, and it is the most important factor lenders consider during your loan application.
Having a low credit score implies that you are a high-risk borrower. Lenders may outright deny your small business loan application if your CIBIL score is too low. So, before applying for SME financing, know where you stand in terms of your score. If you don’t have a healthy credit score, start building your score gradually and then apply for a loan.
Establish your need
It is easy to apply for a small business loan and avail of a high loan amount. However, it would be wise to understand how much you need and determine whether your reasons for taking a small business are genuine.
Before applying for a preferred loan amount, consider your return on investment to ensure that you can afford the monthly instalments along with the interest. If applying for SME financing is helping your business and outweigh the costs, proceed with the process or else, you should reconsider your decision of taking a loan.
Prepare your documents
Submitting proper documents can never be avoided in a small business loan application. The required documents depend on the lender, the loan amount you need, and the type of loan you are applying for. Nevertheless, there are a few basic documents you have to prepare in advance to submit with your application.
You may need to furnish the following documents:
- Most recent income tax returns (Minimum 2 years’ worth of returns)
- Bank statements for at least six months
- Profit and loss statements and balance sheets
- Proof of ownership: business license, certification, etc
Find the right lender
After determining your reasons to opt for a loan, the preferred loan amount, and the mandatory documents required by the lenders, you are just one step closer to applying for SME financing. The loan market is filled with competition and there are so many lenders to choose from, but how do you find your lender?
Your lender depends on factors like the amount of loan you need, the type of loan, your creditworthiness, and your time in business. It would be wise to conduct the right amount of research and find a lender that offers a better MSME loan interest rate, rigid and flexible EMI options, easy eligibility criteria, and have a hassle-free documentation process.
Conclusion
Microfinance in India has the primary purpose of uplifting small businesses, making them financially independent through SME financing. If it is your first time applying for a small business, you have to understand that each business undertaking is different and has different requirements. Likewise, you need to ensure your business needs and be well-informed before applying for a business loan.