Making your business loan-ready. Why and How to do it

Availability of credit facility and loans from financial institutions are the key drivers for the long-term growth of any business. Examples of businesses which have failed to grow successfully due to infusion of funds from banks and financial institutions are many. Taking care of the various aspects to increase the creditworthiness of your business is therefore important from the perspective of availing loan at the right time.

In your attempt to raise finance for your business, the first question that you have to ask is- Why do you need a loan in the first place?

Expansion of business, access to working capital, purchase of assets, inventory, equipment, business space is some of the reasons that come to mind. This very aspect should support your reason to avail the loan facility. 

 “Educate yourself of the various lending options” available in the market say experts. This is half the battle won as it can help you focus on what you exactly need. 

  1. Conventional lenders such as Public sector banks, Private Sector Banks, NBFC’s are the conventional ‘to go’ institutions whenever you need a loan. 
  2. Personal loan, loan against property, loan against collaterals, loan against rent receivables, Overdraft facility by the banks are some of the options. 
  3. For business owners and micro SMEs e-lending platforms are in the new options available

There are various factors that you must bear in mind before applying for a loan and must begin prepping up for this process WELL IN ADVANCE.  Here are the EIGHT Essential factors that you need to ensure to make your business Loan Ready-Filing of I-T Returns-

  1. Income Tax Returns for the previous 3 years of operation is an important document to be attached along with Form 16.
  2. Balance Sheet- Get your Balance Sheet done through a Chartered Accountant with a Profit & Loss Statement. Entrepreneurs should know these two documents like the back of their hands and should have them documented for the previous 3 years.
  3. Ensure that you have a good payment history for the loan availed by you in the past either on your personal capacity or in the name of your company. This could be either your personal loan, home loan or any loan that can impact your creditworthiness.
  4. Have a good credit score: This is an essential aspect for availing a business loan. Having a good credit score will ensure that you have access to easy credit and loan facility and will help you understand the creditworthiness of your business. The RBI guidelines stipulate a business credit score in the range of 300-900 points, of which having a score of 700+ points indicate a good repayment history for any credit availed by you or by your business. Business credit score Report tracks your payment history for the past 36 months and covers, bank loans availed by you or your business, payment history of the credit card etc. If your credit score is low, work towards improving the credit score, by
    • Reducing debt
    • Ensure that you make all your payments on time
    • Use online tools such as e-invoicing for prompt payment and payment collection
    • Think of using business credit card
  5. Business plan and business projections for the next three years: having a sound business plan would give confidence to the lender about the prospects of your business.
  6. Debtors and Creditors list: comprehensive list of debtors and creditors would throw light into the business and the cash flow.
  7. Adequate cash flow in your account-Lending companies want to ensure that you have the capacity to repay the credit. Having a healthy cash flow will give them the confidence to extend you the credit.
  8. Keep your collaterals ready- Immovable assets such as land, residential and office spaces, tangible assets, liquid assets such as Mutual Funds, FD’s Shares etc.