Capital is the most important element for running a business, irrespective of the size or age of the firm. Often the owners do not have sufficient funds required to run the business smoothly. In such cases, they approach financial institutions to borrow money so they can sustain the business. This is called a Business Loan. And even though traditional financial institutions might have been calling you day and night offering business loans, availing one is not a cakewalk. The applicant needs to fulfill the eligibility criteria of the lenders.
An important part of this procedure is filling up the loan application form, which can make or break the deal. While terms and conditions might differ from one lender to another for the same loan request, by and large, all lenders ask for similar details and documents. Some applicants may not know the significance of correctly filling the application form and therefore treat the procedure quite casually. This could prove to be a costly mistake as lenders stress a lot on this form while assessing your loan eligibility.
So, here we will be talking about how to fill it properly leaving no doubts in the mind of the lenders that you have a solid and stable business and genuinely need some capital influx for your company’s growth.
How to know, if you need a business loan or not?
If you have a business, it is given that at some point in time you will face a financial crunch where revenues would be less and expenditure would be more. You might need working capital for purchasing inventory to ensure continuity of supply or purchasing machinery and equipment to maximize production. It could be for meeting day-to-day expenses or for project expansions and acquisitions.
If you can’t decide if you need a loan or not, ask yourself these simple questions:
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What’s the need for this loan?
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How soon I need it?
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What is the Return on Investment against the required fund?
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Do I have any other debts to take care of?
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Do I have a good credit score and personal background to help me secure the loan at good interest rates? How easily and how soon can I repay it?
If you feel that most answers require you to take a loan, then probably you should consider taking a loan for your business.
8 important things to include in Business Loan Application
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Cover Letter:
A well begun is half done goes the saying. A cover letter is like an introduction. Your loan application's cover letter should be about who you are and what kind of business you run. When asking the lender to consider your loan request, mention why your venture needs funds, how much loan amount are you seeking, and give them a fair idea of how you intend to use the capital.
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Business Plan - Business Vintage, Financial Reports, and Future Plans, etc.:
After explaining what your business is, give an idea about your firm’s potential of growth in the sector to the lender and then show him/her how you plan to achieve it. Present a strong business plan that entails your company’s description, background information of the owner(s) and management team, marketing strategies, target audience, business’s unique value proposition, market analysis, and future projections. To show your past performance, give supporting financial statements like cash flow and balance sheets. Financial institutions prefer candidates, who are able to present solid information. It should be extremely convincing and usually requires some effort.
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Personal and Business Credit History:
Lenders undoubtedly will check both the personal and business credit reports on their own and so, it would be a good idea to attach these reports anyway. You can obtain credit reports from any of the popular credit bureaus before applying for the loan. Sort out any inaccuracies in the credit report before submitting it. While the personal credit score shows your ability to handle your personal finances, a business credit score measures your business’ creditworthiness. The better the credit scores are, the more will be the loan amount and better will be the interest rates. Also, experts always suggest managing personal finances and businesses finances through separate accounts for better calculations.
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The Purpose and Amount of Loan:
The amount you are seeking and why you are seeking it is very important for the lender to know and you need to be very specific here. For instance, if you want a loan to purchase equipment, then you need to give details of machines you want to buy and their market price, installation fees, and how their purchase will help your business. While the loan amount will depend on your credit history, annual income, and a few other factors, mentioning the purpose of the loan helps the lender in deciding what kind of loan can be sanctioned to you and to make sure that the loan amount you are requesting matches the purpose.
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Legal Documents:
Lenders would want to make sure that the company they are helping with funds is not tangled up in legal issues and has all the required licenses. So, you must have the registration details, KYC of all owners and board members, articles of incorporation, copies of contracts, acquisitions, and mergers, rent receipts, ITRs filed, commercial leases, etc. These documents may differ from establishment to establishment but you get the drift!
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Collaterals:
One of the best ways to lower the risk factor for the lender is to offer collateral. Since the presence of collateral makes it a secured loan, the rate of interest will also be lowered. The loan application must give a list of available collateral, which can include- stocks and bonds, equipment, home equity, inventory, and invoice receivables, etc. along with their monetary worth according to market rate, which can be proved with documentation of the value.
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Disclosure of other debts:
If you have taken any other loan, disclose it in the new loan application with details of the previous debt. The outstanding loan amount may hamper your current loan amount but hiding it may cause bigger problems as these debts inform the lender about the current financial state of the applicant. If you have quite a few loans running, you may not get another as the lender will doubt your ability to pay the installments. In such a case, you can opt for refinancing, where existing debt is replaced with a less expensive loan.
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Banking history/statements:
These statements reveal the truth about the performance of the company and that’s why lenders insist on checking them. If the firm is in good shape and churning out a decent profit, lenders use the statements to calculate your average bank balance. If they feel confident that the owner has cash cushion as well as his business has growth potential, they sanction the loan. So, keep a minimum of three months of business bank statements ready.
Conclusion
Now, we hope that you have understood that the loan application form should be given due value and all the above points must be adhered to while filling it. The accuracy you show in the application form not only proves your credentials as a borrower and gets you the loan in no time but also reflects your business acumen and utter professionalism.
