You may have a well-run organization as a business owner that produces a very healthy profit. To reach this next growth stage, you would need a small business loan without security to invest in machinery, inventory, staff, technology, working capital etc.
This relies on a range of factors, including your credit score, industry, company time, and annual earnings. And there may be several more variables, depending on where a loan is applied for, whether a conventional bank or an alternative lender.
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Just 38.3% of small businesses are approved for a small business loan by NBFC. The key reasons are that small companies are perceived to be at high risk, and their ROI may not be as good.
Very few firms will survive long enough, without recourse to any sort of credit, at any stage in their lifespan. You already know that the first loan is the hardest to secure for people who have never taken out a loan before. There are several precautions to take and tips to bear in mind when getting a small business loan accepted.
Also Read: 4 Reasons Why Unsecured Business Loans Have Emerged As The Lifeline Of Small Businesses In India
1. Ensure that the company maintains a healthy cash flow.
Your cash flow is one of the key metrics that lenders use to assess your organisation’s financial health, and lenders conclude that future payments will be more likely to be made on time by potential borrowers with positive cash flow.
A late payment, also known as delinquency, will leave on your credit report a negative mark that will remain on your credit report for up to seven years from the date of the initial delinquency. This can damage your credit scores, which will eventually influence your opportunities for loans.
2. Get a report of your credit score.
If you are in a seasonal business, you will have a greater opportunity to get loan deals if you apply during your most lucrative months. Rising revenue would make it easier for lenders to service the loan.
The minimum credit score available for a small business loan to apply can differ by lender. But a bank would need at least 675 on average, while an alternate loan will need 500 on average. The lower the credit score, however, the greater your odds of dropping.
And if you are accepted, the loan amount and conditions could be less attractive than if you have a decent or outstanding credit score.
It is essential to get your credit score check in order before applying for a small business loan. There are many ways that the credit score can be strengthened, but some strategies take longer than others. Improving this would boost your odds of getting a loan from a business.
Also Read: Factors That Affect The Eligibility For Small Business Loans
3. Don’t seek several quotes from various lenders.
Having several quotations from various lenders sounds like a reasonable scheme. But if you don’t have flawless credit, your credit score can be more negative than it’s worth. The reason for this is that some lenders will carry out a hard investigation of your credit.
A hard investigation is a review of the credit report that impacts the ranking. For each challenging investigation, this form of the search will adversely affect your score by 5 points.
It’s not to say you can’t get multiple quotes, but you can be particular about how you do so. To check your credit score, often inquire whether they intend on a “Soft Inquiry” or “Hard Inquiry” before going ahead with a lender.
It is not bad to get a hard investigation audit on the report, and it could be required at any stage in the funding process. It’s the various difficult inquiries that are bad. It should be run once after you have decided for which business you are planning on taking a loan to secure your credit score.
4. Limit your negative balance.
Consistent cash flow is a prerequisite to getting a small business loan accepted. In the balance sheet, shareholders don’t want to see the inconsistency. This reflects a chance.
For an investor, cash flow reflects an image of the businesses’ financial potential to repay a business loan. Basically, as well as the new loan’s expense, you put in enough funds to meet the existing cost commitments.
If you have some unfavourable balance days during the period when a conventional bank treats your business account, you would most likely be rejected for a loan.
A bit more forgiving is an alternate investor. If you have more than 3 or 5 gloomy days a month on average, though, you would have a more challenging time being approved for funding. So, before applying for grants, make sure that the cash flow is more stable.
Also Read: Common Mistakes To Avoid When Starting A Small Business
5. Find the optimal lender.
Not all borrowers have the same requests or financing options. And not all lenders are aware of your best interest. So when deciding which lender would be the right choice for your company, do your research.
Make a list of prospective banks and alternative creditors. Narrow the quest from there by observing what other firms have written about the lender. Many lenders should have on their website a summary feature.
This will help concentrate your list of lenders, by whom you may have a greater likelihood of having accepted, to consider what you will apply for. If you have a credit score of 600, for example, your business loan request would most likely not be accepted by a bank. To narrow down to alternate lenders on your list.
According to a recent report, India’s small business loan market is expected to grow at a noteworthy CAGR of 10% from 2020 to 2024. In 2019, the RBI cut its lending limit by 5 times, taking it to 5.15%, the lowest number since March 2010. This revision will make it easier and more competitive to obtain personal loans.
A personal loan does not require equity and, because lenders have nothing to fall back on in the event of a default, the qualifying parameters are much more strict. Obtaining a personal loan allows you to make an application that takes every step of the way to get the green light.