If you have finances available in hand, you can hire personnel, get machines repaired or buy new equipment to help your firm function efficiently without a second thought. However, if you do not have access to money, you can get a business loan to fund your business needs. Although getting a business loan might be a little complicated, it is nothing you cannot achieve with a little help, and you can ask experts like the ones at Kapitus for more information if you don’t know how to apply.
Here are some roadblocks you might face when trying to get a loan as well as tips to overcome them.
Explaining a business loan
A business loan is a loan that is only used for commercial purposes. It involves the creation of debt that, like other loans, will be repaid with interest.
The various types of loans for business are bank loans, mezzanine finance, asset-based financing, invoice financing, microloans, business cash advances, and cash flow loans.
There are two types of business loans: secured and unsecured. A secured loan is one in which the borrower promises an asset (such as a factory, equipment, stock, or a car) as collateral for the loan. If the debt is not paid, the secured asset may be repurposed by the lender. Unsecured loans have no security, but the lender has a general claim on the borrower’s assets if the loan is not repaid.
Unsecured creditors often receive a smaller amount of their claims than secured creditors if the borrower goes bankrupt. As a result, secured loans will often have a lower interest rate. No matter the type of business loan, you can apply for the loan online after the criteria is met.
Hurdles to overcome when applying for a business loan
Failure to fulfil collateral obligations: Because business credit is often secured, most lenders will need you to pledge security against the loan amount. Small and medium-sized enterprises (SMEs) encounter this difficult but typical obstacle because they rarely have any assets to utilise as collateral. In this case, you could opt for a lender that provides collateral-free business loans. You can obtain the funds you require without jeopardising your personal or professional assets in this manner.
An insufficient credit score: Your company’s credit score is one of the most crucial metrics that lenders use to establish your loan repayment capacity. As a result, if you don’t have a Credit Information Bureau (India) Limited (CIBIL) score of 700 or more, the lender may reject your loan application. SMEs and start-ups face this problem because they have little or no credit history.
While you will not be able to improve your credit score overnight, you can do the following:
- Create a well-organised business strategy to persuade the lender that you can fulfill the repayment obligations;
- Try to increase your credit score at the same time.
Inconsistent flow of cash: Lenders prefer to give business loans to companies that have a consistent cash flow because this represents a picture of your business’ health. So, before you apply for a business loan, work on increasing your cash flow. Regularly update and examine your financial records, such as balance sheets and income statements, to keep your financial profile spotless. You can also apply for an unsecured, pre-approved loan from a non-bank financial institution (NBFI), which only requires a high credit score.
Pre-existing debt: If you are currently paying off debt, lenders may reject your application. This is a common occurrence for any company with existing debt because it indicates a high debt-to-income (DTI) ratio. This is a calculation of your total monthly debts (such as credit card bills for your business) and total monthly revenue. While no DTI ratio is ideal, the lower the ratio is the better your chances of obtaining a business loan. This can be accomplished by swiftly repaying your current debt. It will also help you improve your credit score, which will help you become more eligible for loans.
Lack of a comprehensive business plan: Lenders may ask to see your business plan before approving your loan application. A well-written plan lays down all your anticipated costs, such as personnel cost, and inventory and machinery purchases, among other things.
Furthermore, the business plan should include information about the company’s scalability, market size, competition, product development and marketing strategy. A comprehensive business plan will assure the lender that you are serious about your firm and will also assist them in estimating future profit potential.
Unfortunately, some entrepreneurs fail to see the value of a well-defined business plan, resulting in their business loan applications being rejected.
Lengthy procedure: Your company is in desperate need of an upgrade, and you need cash to make it happen. However, even if you have all kinds of documents, company loans in India are infamous for having a lengthy application processing time.
You must first apply for a business loan and then present proof. After that, lenders will double-check your information until they are completely satisfied. They will collect a number of signatures on a variety of documents in order to obtain a repayment guarantee from you. They will also call you many times to validate everything, including the date of the company’s establishment and the amount you earn through your business.
Lack of technology: This is one of the reasons why loans for Indian companies take longer than expected to process. Many online lending sites issue a loan based on credit history and score, both of which are easily accessible via the internet. Online lending platforms are quick to issue a business loan because of technology. So a lack of technology usage could force banks to take much longer to gain access to your credit information.
To check your credit history, Indian banks use the traditional method. They call you to confirm facts, bank officials visit your office to see your business operations, take photographs of your workplace as proof and of course there is lots of documentation involved.
Different criteria for different businesses: Banks in India assess the cost and risk of lending money based on a variety of parameters for various businesses. Companies with a turnover of more than Rs.40 lakhs, for example, are eligible for a loan. Meanwhile, those with a lesser turnover are not. This means banks have varying criteria for different types of businesses, including income, working capital, and so on. They do not have any predetermined procedures for accepting or rejecting a business loan.
If you are looking to bypass these stumbling blocks and acquire a loan for your company’s needs quickly you can opt for a business loan online. For optimal convenience, many business financers offer collateral-free loans, with low interest rates and minimal documentation. In addition, many business lenders give business loans online for better convenience and with minimal documentation. You can also use a business loan EMI calculator to figure out the size of the monthly instalment you will be expected to pay to finish off your loan.