An Essential Guide on How to Get a Business Loan

Posted on Monday, December 16th, 2024 | By IndusInd Bank

Consider a scenario where you run a well-established restaurant business in Mumbai and wish to expand to other cities. Looking at your balance sheet, you might realise that your cash reserves and other assets are not enough to fund the expansion. In this situation, you could consider applying for a business loan. But how? This article gives a flavour of the steps involved.

How Do Business Loans Work?

Business loans can be acquired for a variety of reasons such as funding an expansion, purchasing equipment, meeting working capital requirements, and buying commercial property.

Business loans can be in the form of revolving credit or installment loans. In installment loans, you are expected to repay in installments by paying a fixed amount every month which is determined at the time of availing the loan. In revolving credit, you are allowed to borrow up to a certain limit. You can either repay this every month or roll it over to the next month. Meanwhile, you can borrow again as long as it is capped at the limit set.

Secured loans are backed by collateral such as property or shares; if you can’t repay, the bank takes the collateral. Unsecured loans, without collateral, are riskier for banks, leading to higher interest rates.

Also Read: How Easy Is It to Get an Unsecured Business Loan?

How to Get a Business Loan: Important Steps –

Here are some steps to follow when applying for new business loans:

Amount needed: You first need to decide how much you wish to borrow. This will require much thinking and deeper analysis of your business goals, the strategies involved in achieving these goals, and how you accordingly intend to use the funds borrowed.

Type of loan: You then need to decide the type of loan that will best match your requirements. In India, these are the types of business loans typically offered:

• Term or bank loans for business: These can be both long-term and short-term. Long-term bank loans for business are typically of a longer duration such as five years or more, while short-term loans tend to be for 12 months or less.
  
• Working capital loans: These loans are used for the daily running of the business and tend to be short-term in nature. These could range from anywhere between six and 24 months.
  
• Accounts receivable financing: Here, companies or businesses can get advance payments on their outstanding invoices.
  
• Letters of Credit: Useful in international trade, a letter of credit is a guarantee by the foreign buyer’s bank that payments will be made as soon as the goods are exported by the exporter.
  
• Overdraft Facility: In this, a business is allowed to withdraw cash from the business account even when the balance is zero. There exists a sanctioned limit that depends upon the credit history and cash flows of the business.
  
• Equipment Funding: As the name suggests, businesses can avail this loan for purchasing new equipment or replacing the existing one.

Credit Score: The credit history of your business influences the credit score. A healthy credit score is a barometer of a borrower’s financial responsibility and creditworthiness.

Required documents: Gather necessary documents for your loan application, including profit and loss statements, balance sheets, cash flow statements, tax returns, business licenses, and five-year financial projections, among others.

Assess your collateral: Putting up collateral can increase your chances of getting a business loan because secured loans minimise risks for a bank. Assets that can be put up for collateral include property, equipment, machinery, and accounts receivable.

Look around: While you may already have a business bank from whom you can borrow, it also makes sense to consider other lenders. Compare loans offered by different lenders based on the best rates offered and whether they meet your requirements and decide accordingly.

To conclude –

There is much work involved in getting a business loan. But a clear thought-out plan, discipline, the right documents, and financials can improve your business loan eligibility.

Disclaimer: The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information.