How to Get A Business Loan? Step-By-Step Guide For Budding Entrepreneurs

How to Get a Business Loan

Escaping the 9-5, becoming your own boss, and building your business, that’s the dream for so many of us! 

All this sounds interesting until you realize there’s significant capital required to start a business, let alone sustain it. But, don’t give up on the entrepreneurship dreams just yet. Business loans are a great way to secure financing for your ventures. They help you hire a great team, get the latest machinery, and fund day-to-day operations.  Established businesses use business loans to fund their growth and expansion strategies. Moreover, business loans offer tax benefits that reduce tax liability, increasing your overall ROI.  However, finding and securing the perfect business loan is confusing for first-time entrepreneurs due to the available options and varying requirements.   

Here, we simplify how to apply for and get a business loan, especially for entrepreneurs. 

personal loan

What Is A Business Loan?

Business loans are designed for your company’s use. Some lenders allow the borrower to use the loan for personal use, but it comes with higher interest rates.  Business loans are better than other types of loans such as personal loans as they have:

  • Longer payment terms, with some banks offering tenure of up to 20 years
  • Higher loan amount, with the range starting from a few thousand and extending up to multiple crores

On the other hand, business loans have stricter eligibility criteria. 

For example, it is a challenge to get a loan with no credit history or business credit score. In such cases, loan providers ask for a personal guarantee that transfers the liability to the borrower if your company fails to repay the installments. But, here’s the secret – we have the cheat sheet that bank officials use to evaluate your business for a loan. 

How Is Your Business Evaluated For Business Loan Eligibility?

Here’s a list of everything loan officers will ask for to check your business’ eligibility. 

1. Business Plan 

A detailed business plan should include how the company will: 

  • Use the loan amount
  • Generate revenue
  • Meet the outlined goals 
  • Repay the loan

Essentially, you provide a business roadmap to gain the bank’s confidence. 

2. Debt History

Debt history shows any ongoing loans the business may have and reflects on your ability to repay the loan amount on time. 

3. Cash Flow

Simply put, a cash flow statement shows the net cash inflow and outflow of your business. 

The cash flow statement is divided into three sections: 

  • Operating cash flow – contains income and expenditure from the main business
  • Investing cash flow – contains income, expenditure, and profit/loss on buying/selling assets
  • Financing cash flow – contains income and expenditure for debts and issuance of shares

4. Annual Revenue

Annual revenue, or gross business income, helps bank officials decide the loan amount. Some banks have minimum annual revenue eligibility criteria for a business loan.

5. Collateral 

While some banks offer unsecured loans, most banks need collateral to issue a secured business loan. A collateral is an asset that bank officials might seize and sell to recover an outstanding loan amount.  However, you don’t have to worry about this as long as you are paying the dues on time. 

6. Credit Score

Yes, businesses do have a credit score that is separate from your own. However, in the case of a new business, the bank might consider your credit score before approving the loan. 

Also, Read: How to Get a Business Loan on Low Credit Score?

Steps to Get A Business Loan

Getting a business loan is much like preparing for a marathon – it is exciting, requires detailed planning, is slightly nerve-wracking, and has a huge payoff. 

Note: We recommend working with a finance professional before you opt for a business loan. 

1. Finalize A strategy To Apply For The Business Loan 

Here are a few things to consider when applying for a business loan. 

  • Choosing the bank
  • Choose a bank with which you have a long-term relationship to make the process easier as they already trust your repayment capabilities. 
  • If you’re opting for a new bank, refer to the above-mentioned cheat sheet to learn how banks assess businesses.
  • Outlining loan purpose 
  • Most lenders ask for the loan purpose to understand where the money will be spent, and business generates profit. After all, they just want to ensure they are getting timely payments. 

Some reasons why you seek a business loan are: 

  • Business expansion
  • Real-estate purchase
  • Acquisition costs
  • Purchase of tools and machinery

A few other reasons have slightly negative connotations to them. Yet, they are perfectly permissible for legitimate loan purposes and include:

  • Working capital requirement during business slowdowns
  • Extra cash to offset temporary losses

Furthermore, mention your venture’s future vision, values, mission statements, and historical activities. Mention your management team and their business goals to add credibility and give more clarity regarding your business. 

2. Decide Loan Type

There are a few different loan types, depending on your business model and loan amount. Let’s look at some types of business loans. 

  • Traditional loans

Traditional loans from banks are expensive and often come with shorter repayment tenure. However, you can negotiate for lower interest rates and longer repayment terms if you have a long-term, working relationship with the bank. 

  • Term loans

Most organizations opt for term loans as they have longer repayment periods. For one, a secured term loan has a repayment period of 20 years. And, unsecured term loans have a repayment period between 1-5 years. 

  • Startup loans

Startup loans are great for new businesses without any credit history. Consequently, the eligibility criteria are based on the borrower’s credit profile. 

  • Working capital loan

Small businesses use working capital loans to run daily operations during the off-season, or to fund the increased activities during the peak season. Naturally, this is a short-term loan with a high interest rate. Working capital loans are best for businesses in retail, manufacturing, export/import trading, wholesale, and service industry.

  • Government loans

Most governments offer loan schemes to micro, small, and medium-sized businesses. These schemes have flexible repayment terms, lower interest rates, and a shorter tenure. However, the loan amount is also smaller. 

There are a few government schemes, like MUDRA loans and the Stand-Up India Scheme, that offer up to ₹1 crore. Credit Guarantee Fund Scheme for Micro and Small Enterprises (CGFMSE) offers working capital loans up to ₹2 crores.

  • Business loans For Women

Lenders, as well as the Indian government offer special loans with low interest rate to women entrepreneurs. The simple loan process encourages women from rural areas to acquire funds for their venture and participate in the economy. 

3. Check Eligibility Criteria

Different loan types and lenders have different criteria, so it’s better to check with the officials before proceeding with a loan. The criteria include minimum turnover, borrower’s age, business age, business experience, profitability, and ITR. 

Here’s a list of generic eligibility criteria that most lenders look for. 

  • At least 21 years old and not more than 65 years old. 
  • Minimum business operations of 1 year
  • Minimum business experience of 1 year.
  • Credit score above 700.
  • Indian citizen, without any previous loan defaults.

Again, we can’t stress this enough, check the eligibility criteria with your lenders before moving forward with a loan. 

4. Decide The Loan Amount 

Determine The exact Loan Amount That Your Business Needs. 

  • A lower loan amount creates operational bottlenecks, while a higher amount increases repayment amount.  Refer to your company’s annual budget and cash flow while determining the loan amount. Get the stakeholder’s buy-in also when deciding on a loan amount. 

Prepare The Documents 

  • Remember, always carry the originals and their attested photocopies of your essential documents. This tip will save you a lot of unnecessary round trips to the nearest photocopy store. 

Here’s a list of must-have documents when applying for a business loan. 

Identify proof
  • Aadhaar card 
  • Passport 
  • Voter’s ID card 
  • PAN card 
  • Driver’s license
Address proof
  • Aadhaar card 
  • Driver’s license 
  • Passport 
  • Voter’s ID card 
  • Electricity bill
Income proof
  • Bank statements for the last six months. 
Business income proof
  • CA-certified balance sheet 
  • P&L statements 
  • Cash flow statements 
  • ITR with the income computation 
Continuation proof
  • ITR 
  • Trade license 
  • Establishment certificate 
  • Trade certificate 
  • Sales tax certificate
Signature proof
  • Bank verified signature
  • PAN card
  • Passport
Other documents 
  • Sole proprietorship declaration
  • Certified copy of partnership deed
  • Certified true copy of MOA & AOA

5. Loan Disbursal 

Unlike personal loans that are disbursed within a few hours, business loans take two to four weeks to receive approval. Consequently, exercise patience and continuously take status updates from the lenders.  If the process is still getting delayed, ask if they require additional paperwork and promptly provide them with the same to ensure timely loan disbursal.

Also, Read: Pros and Cons of Business Loan

Conclusion 

Even with everything outlined, getting an approved business loan can be time-consuming. Credmudra is a loan matchmaking platform that does the heavy lifting for you. 

The benefits of using Credmudra for getting business loans are:

  • Find the best match for your business needs
  • Easy application process with minimal documentation requirements 
  • Flexible loan tenure for easier repayment
  • Get loans for any business expenditure without any restriction from the lenders

Credmudra also offers a low turnaround time, with a promise to disburse the loan amount on the same day. So, if you ever face a cash crunch in your business, you know who to approach. 

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FAQs

1. Does the Income of the borrower affect the Business Loan Eligibility?

Yes, the borrower’s income matters for new businesses with a non-existent credit history. In such cases, banks base their assumptions on the borrower’s repaying history. 

2. What is the Minimum Annual turnover required for a Business Loan?

The minimum annual turnover for a business loan varies from bank to bank. 

3. What is the Best Credit Score to get a Business Loan?

Ideally, a 750 credit score is the best way to get a business loan. However, some banks offers loans to borrowers with a 650 credit score. 

4. Does the Bank conduct background Verification before Disbursing a Loan?

Yes, the bank verifies the authenticity of all the submitted documents before approving the loan. 

5. What is a Penal interest in a Business Loan?

Penal interest is an extra charge levied on borrowers who fail to pay the installments on time.

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