Most small-business owners need a bank loan at one time or another, and applying for one involves much more than filling out paperwork. Among other things, you need to consider the state of your personal and business finances, how you will repay the loan, and how much money you need.
Here are some of the critical questions you should ask and seek answers to before applying for a loan:
1. Is it likely I will qualify for the loan?
You’ll only hurt your credit if you apply for a loan you won’t get. So I think you better do some homework. We suggest you ask at least one lending institution about their specific requirements before applying. Many will let you know the minimum credit score required, the cash flow you need to show, and other qualifying factors.
Credit Score by CIBIL and other Credit Information Companies plays an important role.
Now, in India, the banks’ reference to CIBIL and other Credit Information Companies has become commonplace.Most people know their credit score, but very few know their business score; as with personal credit, you can find your business credit score through bureaus like CIBIL, Experian, HighMark or Equifax. If the score isn’t as high as you think it should be, it might be because there are outstanding unpaid loans against your business.
| How to protect CIBIL score: every time Bank asks for the CIBIL report, the score will come down by 5-10 points. It is desirable to take the own report directly from CIBIL and enclose it to Bank with a request to take the CIBIL report only after they have agreed to finance. |
2. How much do I need?
Before you reach the Bank, please make sure you have assessed how much loan you need. The best way to determine this is to create a monthly cash-flow projection. For example, do you know if your customer pays you in 60 days but has to pay your vendors in 15 days? If so, you might need extra money to tide you over. It will reflect poorly on you if you go to the Bank asking for an amount, and while working out the specifics, it may go up by a considerable margin.
If the loan is for buying assets /create a new manufacturing facility, better to be prepared for requirements before going to the Bank. Prepare a detailed project report by taking the help of consultants, which includes a detailed financial plan. In the program, a break-even analysis estimates the revenue the business must generate to cover expenses before making a profit. The study can help you determine the funding you need to survive until you reach—and exceed—the breakeven point.
3. What type of loan facility should I ask for?
The type of facility must be linked to the nature of use (working capital, asset creation, new project, export, etc.). Borrowing should be purpose specific and aligned to the cash flow cycle. Short-term funds should not be used to create long-term capital assets. It is essential to avoid the temptation to (mis)use short-term finds for any long-term use.
4. How much collateral do they ask? can I borrow based on the asset?
It is a common perception among small business owners that banks will give loans only based on collateral. But, of course, collateral is crucial in opening the relationship. How much you can borrow depends upon how is the cash flow. Therefore, it would help if you avoided any temptation to borrow without a clear-cut revenue model before you.
Secondly, some loan products wherein the Bank finances solely against assets intended to purchase (for example, truck finance). Under the CGTSME scheme of Govt of India, Bank will extend loans without collateral security up to Rs 2 crore. A new project is in the offing for startups.
5. Should you lose heart if you don’t get a loan from any Bank?
No, absolutely no
There are many other opportunities to raise the required loan. For example, many NBFCs lend without collateral, provided the customer has good profiles (Ex Equitas, Vistara, etc.). Also, there are few venture funding sources for those which envisage new product development (Ex SIDBI). Also, you may explore the venture capital /Private Equity/Crowdfunding route.
For small business people, it is always desirable to be a member of any local cooperative bank as it will help them to borrow in emergencies,
| A good profile mainly consists of having a good CIBIL score, filing IT returns on time with proper disclosure of profit, ensuring no cheque returns etc. REMEMBER– In the future, it is his individual or his company’s credentials that hold the key to getting desired funding support. |
6. Do I have the adequate cash flow to repay the loan?
Your banker will probably ask you to provide financial projections for the business. Could you make sure to include your debt repayment plan in those projections? Bankers are interested in companies that have minimum headroom to service the debt.
7. Will the money help my business grow or complete the project?
It is commonplace in India wherein the borrowers agree to a lower loan amount under pressure from the Bank. However, he knows that the agreed-upon loan is insufficient to complete the project or meet the working capital expenses. In the end, it leads to distress.
It is strongly recommended not to start any project or growth plan without tying up the total funds required. Remember, Banks’ will not show any mercy in distress and will initiate recovery proceedings.
Equally, it is essential to avoid excess borrowing for any reason as It will be an inducement to disaster.
8. Are my finances in order?
Bankers may want to look at the total picture of your finances, including personal information like outstanding home loans, Car loans, personal credit card debt and mortgage payments. Until your business reaches a substantial size, the Bank will rely heavily on your financial statement and personal credit score to determine the creditworthiness of your business. Therefore, you may have to look at alternatives if you have a lot of personal debt and very little collateral considered credit-negative.
9. Do I have all the documentation I need to apply for the loan?
It is observed that more than 75% of loan applications are not fructifying, not because of the business you are in but of poor paperwork. Therefore, we suggest preparing tax returns for the last three years of business, personal financial statements, and financial projections for the next 24 months.
10.If I die, how will the loan be repaid?
It’s something most people don’t like to think about, but in the event of your death, an unpaid business loan can affect your family. Most business owners give their houses as collateral; if the business fails, they could lose their homes. Also, the bank may come if you leave a significant life insurance policy. So be mindful of risk and have a contingent plan.
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