Veena has been selling fashionable dresses to her friends and acquaintances since the last three years. She is operating from her house. However, she wants to rent a space for opening a boutique in Noida. She needs more finance to buy some machinery; and to lease space for the operations and the boutique. She is getting ready to avail an unsecured Small Business Loan as she has no collateral to pledge.
Small business loans are a great leverage to expand your business and to fund the daily operations. You need to be well prepared to get approval for your loan in the very first shot.
You Can Avail A Small Business Loan in 5 Simple Steps:
1. The Amount And Purpose Of Loan
Get to the drawing board. It is important that you know your purpose, tenor, and the domain. Non-banking financial institutes (NBFC) provide loans under various categories. For example, Bajaj Finserv has unique products for traders, manufactures and service enterprises. You can avail either the machinery loan, working capital loan or a general small business loan. Each of the products has different domain eligibility criteria, though many of them overlap.
To further explain, in Business Loans, media agencies and boutique owners can avail business loans. Hotel owners can avail both business and working capital loans.
Lenders gauge the capacity of your business earnings to repay the loan interest and the principal. You need to be careful in deciding the amount of money you require and the purpose. Lesser loan coverage will not serve your purpose. If you take higher business loan coverage than is required, you might be burdened by larger EMI payouts. The lenders might doubt the liquidity of your business to pay back.
The tenor is also an important consideration. Choose a small business loan tenor in such a way that your business can adequately generate profits to serve the debt. Basically, your debt coverage ratio should be more than one. For very costly machines, a longer tenor might be needed. However, if your fixed costs are lower, or if you want a loan for working capital, the tenor and amount must be decided accordingly.
2. Assess Your Business Loan Options
Debt funding largely constitutes term loans, government lending and business loans, both secured and unsecured. If you can pledge collateral, you can choose term loans, secured business loans and government loans. However, it requires time to avail them and strict procedures need to be followed.
To make strategic timely decisions without the need for collateral, you can opt for unsecured business loans from NBFCs. Bajaj Finserv provides loans of up to Rs. 30 lakh within 24 hours for tenor 12-96 months.
3.Financial Stability Of Your Business
Though the processing of unsecured business loan is quick, lenders still ensure that your business potential can service the debt. They will consider your KYC, proof of business to know your business, and other financial statements. Important financial liquidity ratios to keep in mind are debt/equity ratio, current ratio, and debt service coverage ratio (DSCR). Lenders prefer lower debt/equity ratio. DSCR and current ratio should be more than 1. Better credit score can get you lower small business loan interest rates.
4.Documents Should Be Ready
Often, loans get rejected or delayed because the necessary documents are not submitted. Keeping all your documents ready speeds up the approval process of the small business loan. Lenders ensure that you are presently performing well on all your existing debt. They look out for negative remarks on your credit report of past few years. For small business loan eligibility for Bajaj Finserv, keep these documents handy:
●Business proof (certificate of practice)
●Bank account statement of the last month
●Financial statements on the business for a certain number of years such as Profit and Loss, balance sheet and cash flow statements
5. Business Plan
Business loan proposals should have a well etched business plan. You should be aware of your business plan – costs, markets, opportunities, limitations, time when it will become profitable and the debt servicing capacity.
If Veena and other small enterprises can take care of these 5 steps, they can easily avail the small business loans from NBFC such as Bajaj Finserv. Get an idea of their EMI before you apply for their business loans.