Small Business Loan - How to Get One

Starting a small business is a life decision that can leave you rich in experience and if done right, rich in wealth too. With so many startups taking their ideas to market, today's environment is ripe to test your mettle with a dream of making it big.

Most businesses start off as a small business with a few employees and a small turnover. Typically small businesses can be a local outfit with 10 - 15 employees or a small manufacturing unit with up to 200 blue collar employees and a turnover between 2 -100 crores.

There comes a time when every business wants to go to the next level. Hire more. Grow more. Improve revenue and profits. Having that extra cash flow at the right time can equip you with added machinery, improve your bargains on raw material purchases or arm you with a marketing and promotional arsenal that can give you visibility, leads and sales. While there are many ways to raise funds, a small business loan can pump cash flow at the right time while you continue maintaining control over your business assets.

Obtaining a loan isn't a cake walk and requires considerable preparation from your end. Choosing the right lender, getting your documents in place and finally being able to channelize the loan to optimum use will all require forethought. Here are some points that can guide you along the way.

Determine What Type of Small Business Loan you want to take

You'll face two choices - one is to borrow in lump sum and then pay interest on the full amount. The other is to opt for a revolving line of credit where you have to pay interest on the balance of the line and you can continue to repeat it once you pay it off. Both methods have their advantages and disadvantages depending on what you want the loan for. If you are buying a range of machinery for your factory, you'll most likely need a lump sum loan. If you are buying additional raw material to scale your quantities, you can go for a revolving line of credit which can lower the overall interest you pay back.​​​​​​

Start with choosing the right lender

Choosing the right lender for your business is one of the key decisions every SME grapples with. Different lenders fill in need gaps of different types of business.

• Commercial banks: If you have transacted with a bank before, you'll most likely want to tap them to extend you a business loan owing to your existing relationship. The catch here is that banks can be very strict in their approval process. You can expect them to minutely check every aspect of your application. Moreover, the whole disbursal process may take up to 2 months. If you choose to apply with a bank, keep a buffer on the timeline.

• Non - Banking Financial Corporation (NBFC): These is the recommended option for SMEs as NBFCs have better approval policies and are open to not only looking at traditional companies but also uncommon industry and risk types. They tend to better understand the importance of a timely cash flow and some like Hero FinCorp process and disburse the loan in 10 days or less!

• Region specific lenders: These are banks or institutions that have interests in the economic development of a particular geographical area. They often tend to invite businesses to set up their shop in the area along with attractive offers on the loans.

• Micro and alternative lenders: If you think you have the next big idea that can change the world, online crowd funding sites like Kickstarter and IndieGoGo can be the place for you. There are kickstarter projects that have surpassed their monitory goals and continue to get love, funding, captive sales and backing from strangers all over the world.

Now that you know your options, you can choose one that has minimum risks and maximum gains for your business. Here is a quick background on how to prepare and apply for your loan:

• Connect with your lender early: The quicker you establish a relationship, the more comfortable you'll be during the lending and repaying process. Eventually, people tend to stick to the same lender if they are able to find trust and comfort in the lender's approach. Companies like Hero FinCorp even help you gain additional funding once your basics are set right.

• Provide 'valid' reasons for your loan request: Buying machinery or accelerating growth with marketing can work. Taking a loan to repay an existing debt or for non-essential business work can make you lose credibility.

• Know how much you need: One of the key mistakes that people make is an over or under estimation of the amount they need. An overestimation will lead to paying more interest in the long run. An underestimation may mean that you'll run out of capital before your project execution and will most likely have to go back to the drawing board to ask for more finances.

What a lender will check before he writes you that cheque

Lenders look at a combination of factors that'll tell them about your capacity to repay the loan. These include:

• Your credit score: A credit score in the 700 - 800 range can be the first step to getting you there. Anything less will leave them with a question mark.

• Debt to income: Personal debt payments should not be more than 30-40% of gross monthly income

• Business age: Quite a few banks do not offer a loan to businesses that have existed for 18 - 24 months. Lenders tend to provide working capital to businesses that are over 3 years old and can credibly show incoming receivables.

• Overall industry risk: Some industries are associated with more variable risks than others. A full crop potential in an agricultural business often comes with the risk of a haphazard weather playing spoilsport

• Higher operating margins: If you have extra cash in your operating margins, there is a higher likelihood of your business surviving a sluggish market.

Now that you know who to go with and what they will look for, you'll begin the crucial process of preparing your loan application.

• Take time to chalk out a business plan : Like any investor, one of the key things your lender will look for is a well written business plan. Start by clearly stating out what you do in a way that can get them interested. Keep in brief on how you plan to use the investment. Sell your business story without superlatives to give it credibility. Also give them a glimpse of where you plan to be in the long run and the scale of your expected monitory gain. Add in personal information like tax returns for the past three years. Some lenders may even look at your social media profile to do a background check so have the path cleared.

• Approach the lender with your business plan : Once you do this, a relationship manager will ask you about your business understand your requirements and create an optimum financing solution

• The test of eligibility : Your manager will work with your inputs to run the checks described earlier to confirm your loan type, amount and eligibility. With an NBFC like Hero FinCorp the process may take just one or two days

• Here it comes : Once you get a thumbs-up on your eligibility, you are just 7 (working) days away from securing your loan! You need to furnish all the requested documents in order during this time. This is also the time when the lenders will personally visit you in your office to check on your business and run a personal check on the veracity of your documents and application. If things play out as planned, you'll soon receive the much needed capital that can help you grow your business to the next level.

A small business loan at the right time can help you achieve your business goals and attain the success you have envisioned for you, your employees and partners. Use this guide to avoid making any mistakes and choosing the right lender who can be your partner in success.