9 Factors to be Considered Before Applying for a First Time Business Loan

Any new Business which has just started, won’t have the lender’s confidence hence their loans often get rejected. This, unfortunately, is one of the reasons why 50% of small businesses fail in their first 5 years of business from lack of funds or financial support.

Consider these factors before first-time applying for a business loan-

     1. Have a clear coherence of your business –

You should have good clarity and coherence of your business and not just for only getting a loan. Before deciding on starting a business and applying for a business loan, make a comprehensive analysis about the business, its needs and requirements, its immediate and future clients, the marketing strategy to be followed, means to acquire credits, the expectations the lenders would have from you or your business, the margins and profit scale, purpose of loan, etc.

      2. Collateral as security–

Though banks and financial institutions lend you the loan amount, they are very cautious with first-time business ventures as they have a higher chance of defaulting. This is one reason for the banks to ask for collateral and additional documentation prior to approval of a loan. The borrowers who are able to offer collateral for the purpose of loan prove as a worthy candidate to repay the business loan.

      3. Taking a professional help–

Even if you have clarity about your business, understanding the amount of business loan to be undertaken should always be inferred from a professional. Banks can appraise the maximum eligibility for your business loan on the basis of your credentials, but it is vital to understand how much loan is really required so that you avoid taking a large amount and end up in huge debts. An accountant will help you in this process to determine your requirements.

      4. Assemble credit prior to setting up the business–

At least 2 years ahead, you should start accumulating up credits and contacts if you have decided on setting up a business. A high creditworthy applicant will get a loan quickly with minimum documentation and at low-interest rates. Maintain a good credit score by paying your bills on time, keeping away from the defaulter’s list for a credit card payment and avoid applying for other instant loans. Your lender will run though your credit history before approving the business loan. A Personal credit score over 600 is considered good from the bank’s perspective. When applying for a business loan, there would thus be a lesser chance of being rejected due to low-credit.

      5. Maintain a healthy relationship with your lender–

Just obtaining a loan from the lender is not the end of the interaction. In the future, you will be required to contact them for information, instruction and support for any further needs. Hence, it is essential to maintain a good and healthy relationship with the lender during all stages of the business loan. It will also help you to get any additional offers and facilities or even any unexpected or immediate requirement for cash, credit-card acceptance or payment solutions, and equipment financing or consumer solutions which can crop up during running a business

     6.Bank statement–

Bank statements help prove that being the owner of the business, the profits from the business will be credited to your bank account from time-to-time. Maintaining a regular and consistent income is a major plus point while applying for a business loan. Banks can then asses your repayment capacity based on this income and sanction the loan amount.

     7. Balance sheet and Profit and Loss statements–

The business balance sheet gives a birds-eye view of your business. Based on these analyses, banks can get a clearer idea of the profit earning capacity of the business. An accountant can help manage your business balance sheet and Profit and Loss statements with precision and authenticity, for the bank to review.

     8. Business Tax and Personal Tax Returns Paid–

It is an added advantage if you have filed your taxes consistently on time. The lender might demand the Tax filed receipts during business loan approval.

     9. Validity for Loan requirement–

The lender might ask for a valid reason for applying for an instant loan. The purpose of the loan would have to be furnished. The bank then decides if the grounds provided are justifying and reasonable, only then the loan will be approved. There might even be an inspection of the financial records of the business to decide the amount of funding assistance which would be required for the ongoing business.

Additional Reading-Everything You Wanted To Know About Business Loans (BL)