All thanks to Start-up India & Digital India and the economic growth, start-ups are on rise in India. And a majority of these start-ups have been founded/co-founded by youths. This is a new breed of youths in India who is choosing to be an entrepreneur and face the challenges of running a start-up rather than choosing a secure, stable career in a top-notch company. These young entrepreneurs have radical ideas and the energy, passion and dedication to make it work. Yet only a handful of these start-ups have succeeded in making the word, and a majority of them still are struggling to survive. A majority of these young entrepreneurs are from technical backgrounds and excel in their craft but struggle when it comes to managing the business as a whole. The biggest struggle remains to find enough funds for working capital and to keep the company afloat and manage the day-to-day expenses like paying for the infrastructure and the salaries.
Whether a start-up or a top MNC, money is the most crucial factor for any business. It is typical of start-up to have multiple rounds of funding, with each level arranging enough funds to go to the next level. However, only few start-ups get their funding right and most of them remain underfunded. For later the best option that remains is a Small Business Loan. A business loan can be used to have enough capital to keep the business going. With the changing scenario, all the top banks and NBFCs have come up with small business loans for start-ups and new businesses.
However the reasons for choosing a business loan should be justified and should depend on the repayment capability based on the nature and volume of the business. A business loan should never be availed just because of the ease of availability. To avail a business loan, one would need to fulfil certain eligibility criteria, where the lender would need to be assured of the repayment capability of the borrower. Business loans have higher pre-requisites, with multiple levels of checks before approving an application. Hence before you go for a small business loan for new business, you should know the required eligibility criteria in advance.
Who are eligible for a Small Business Loan?
A lender will have multiple checks of different criteria before approving a business loan for start-up.
- Age Limit: In order to be eligible for a business loan the applicant should be minimum 21 years & maximum 65 years.
- Collateral: Most of the banks require a collateral or security in order to approve a business loan. The collateral is usually an immovable property or an asset like land, house etc.
- Business Plan: Most of the banks or lenders need a business plan before approving a business loan. Even a lean business plan is sufficient to get a loan approved from reputed banks. This business plan includes the product, company, team, market and financials.
- Financial Details of the Business: By this what is expected is the document of all bank loan accounts, credit card accounts, investment accounts, and debts incurred, past and current loans. And some of the supporting documents such as complete contact information, tax ID numbers, addresses.
- Account Receivable Complete Detail: This information includes the transaction-by-transaction information of sales and also payment history. If there are no account receivables, the same should be clarified with the bank.
- Complete Details of Account Payable: Just as the case with account receivables even the account payment. This information includes the transaction-by-transaction payables outstanding with creditors. If there are no account payables, the same should be cleared to the bank.
- Audited and Reviewed Financial Statements: For this purpose it is good to report the balance sheet or profit and loss account of the company or yet to start company details. This is the ideal document that will suffice all the financial checks of the company.
- Personal Financial Details: Along with the business details and identity proof of the individual, the applicant should also share personal financial details. This information should be shared to the extent which the requirement of loan is. Bank basically needs to know if the applicant has sufficient income and financial stability to repay the loan completely.
- Insurance: As all about this loan requirement is related to reduce the risk of the individual and also meeting the financial requirements. In case of new businesses most of the banker will ask for insurance of the applicant. This is to safeguard the loan amount in case of the death or illness of the applicant which will lead to non-repayment of the loan.
- Past Returns Copies: Banks will require tax returns documents; this is to check the legitimacy of the company and what is the income furnished by the business in the court of law. It is crucial that every business should file taxes as early as possible without any defaults or delays.
Some banks offer 12 times of your monthly net income as business loan if you meet all the above mentioned eligibility criteria and if you submit all documents to evidence the same.
Different Business Loans for Start-ups and New Businesses
Loans are provided in advance in case of startups for purchasing equipments, for research and development works either along with a collateral or even without collateral or security in some case. Below mentioned are some schemes provided by different Banks for startup businesses.
Line of Credit
Many a time people misunderstand Line of Credit, but actually there is nothing to misunderstand. It is same as a credit card. You can withdraw or use money from a credit card based on your credit card limit in the same way line of credit also works for business loan but it is a bit more complex. How much loan can a business man get depends on his line of credit, and line of credit is dependent on your business. If you have a good plan for your business and you are able to convince the banker too that your plan is going to work which will lead to a successful business than you can get a line of credit. Similarly if your plan is not good enough and you are not able to convince the bank than it is possible that your loan may not approve or you not get a line of credit. To have line of credit for your business you need to have credit, cash flow, collateral in your business.
In this kind of loan for new companies, the hardware or equipment that is purchased in the beginning the business is promised as insurance, along these lines empowering the loan lender to charge a moderately low rate of enthusiasm with marginally higher hazard. The client is required to reimburse the loan used to buy the hardware as incomes are created from their business. Like a line of credit, candidates are relied upon to have a high CIBIL rating (680+), and the required to benefit hardware financing incorporate a merchant cite, a credit report showing your credit history, and an announcement demonstrating the way in which the client plans to use the equipment. The overall advantage of equipment financing is that the deterioration of the equipment purchased can be utilized by the client as a tax cut for a long time.
Why a Business Loan over other Investment options?
Even though more and more VCs and Investment Firms are investing more and more in start-ups, a business loan has benefits of its own, which all entrepreneurs need to know.
- Banks are more approachable than venture capitalists
- Banks don’t require equity dilution
- Banks have structured framework for funding various requests
- Banks don’t need any share of your profits/ loss
What should you consider before applying for a business loan?
Some of the important facts that need to be considered before applying for a small business loan in India:
- Business Clarity
If you are about to start a business or have a newly started business, not only because of the loan purpose but in general also you should have a clear idea that what you are going to do in your business and what will be its turnover, how much you need to invest, how much you need to take loan, who will be your clients. Being clear about all these points is very important, only then you can do your business in a successful way, and most importantly than only any bank can lend you money. Much before the lender, you have to be absolutely confident about your business than only others can have confidence to invest.
- Bank’s Expectations
There are many banks who are ready to lend you money for your business. But before lending they will check for every risk of default. They will only lend when they will find themselves secure enough. This is the reason why banks asks for collateral and security. One of the most important thing they will check for is your repaying capacity.
- Consult an Accountant
Now and again, despite the fact that you are clear about your business, knowing how much business loan to take is always important to know. Banks will tell you what can be the most extreme qualification and eligibility for business loan in view of your eligibility. Yet it is very important to check and be clear that how much loan is really required. Because bank is prepared to offer a tremendous sum, you should not borrow beyond your requirement. It is advisable to take help from an accountant first and then plan everything accordingly for your business.
- CIBIL Score
A good credit score is one of the most important thing which is required to have any type of loan. The same is for business loan. So, if you are planning to start a business and have a business loan for that then the first thing you should do is start making a good credit. A person who is more creditworthy can get a loan more easily and quickly as compared to a person who is less creditworthy.
- Good Relationship with Your Lender
If you successfully get a loan from any lender, it doesn’t end here. There can be future requirements where information, support and instruction can be needed from your lender. So, always try and maintain a good relationship with them. Having a good relationship with your lender can also help you to avail add-on facilities for your loan.
- Bank Statement
Bank statement is required to verify that the applicant, being the owner of the business, is eligible for the business profit and profit is being credited to the applicant’s bank account. Bank statement will also confirm to the lender the applicant’s income and hence it becomes easy for them to decide the loan amount and tenor based on the income.
- Balance Sheet
Business balance sheet helps lender determine the profit earning capacity of the business. As such business balance sheet should always be prepared by a professional to ensure accuracy.
- Profit and Loss Account
The lenders use Profit & Loss Statement (or simply P&L) to determine the worth of the business, which helps them determine the profitability and the repayment capability of the business.
- Personal Credit Score
Credit score i.e. CIBIL is one of the most important thing it denotes your credit history with Financial condition along with repaying capacity. A CIBIL above 750 is considered as good. So if your CIBIL is +700 or 750 you can get the loan easily.
- Business Tax and Personal Tax Returns Paid
You will need to show personal tax, business tax or income tax receipts to the lender when asked during the application process.
- Business Tenure
You should provide proper documents to the bank showing the total tenure period in which your business should get furnished. It is important as based on this the bank will calculate profitability, rent and many more things.
- Need for Loan
Your business loan application will be approved only when you will provide a valid and proper reason to the lender. In business loan application will be approved only when the need is real and the business scheme and plan should look interesting to the lender.
Useful Tips related to Small Business Loans
- Always be timely with repayments.
- Have accurate planning, forecasting and book keeping.
- Keep monitoring business’s financial health in regular intervals.
- Keep everything organized and managed.
- Have long term and short term goals.
- Have cash flow forecast.
- Maintain good relationship with lenders and customers.
- Do not use your resident house and such huge personal assets as collateral for business loan.
- Have a positive attitude.