How to Get a Bank Loan for a Small Business?

Posted on Monday, December 23rd, 2024 | By IndusInd Bank

Assume you are running a small Kirana store and need funds to expand operations. If you have not managed to attract investors, the other option you could consider is to apply for business loan. The same can also be applicable if you are facing a liquidity crunch or shortage of funds. Here is how you can go about it.             

What are the Requirements for getting a Business Loan?

Whether you apply for small loans for your business or Quick Business Loans, here are the requirements to keep in mind:

1. Credit score: A high credit score increases the chances of securing a loan with favourable terms.
2. Purpose of a loan: Some loans are specifically given for certain purposes. So, if you have applied for equipment financing, then the loan can only be used for that purpose.
3. 3.       Cash flows and financials:  To secure a business loan, you need to have a healthy and consistent cash flow. To showcase this, you will need to provide bank statements to the lender.

Additionally, note that GST registration is not be mandatory to secure a loan for your small business.

Also read: 6 Factors That Keep You from Getting a Business Loan

Benefits of Small Business Loans

Here are the pros of small or startup business loans:

1. Inherent safety nets: Quick business loans taken from a bank are likely less risky with lower interest rates than borrowing from unconventional lenders.
2. May offer longer terms: Possibly, you can repay a bank loan over a longer period as compared to other forms of loans.
3. Better experience: With the advent of the digitisation of banking processes, the time taken to get the services needed and complete your buying journey has become much lesser, assuring more satisfaction.

Risks of Small Business Loans

Small business loans come with their fair share of risks:

1. Choosing the wrong loan: It’s important to be clear about the type of loan right for your business otherwise, you will end up burdened with sunk costs, lost time, and other pain points.
2. Too long a wait for funding: If your funding needs are urgent, then small business loans might not always work because the time taken for disbursement could be longer.
3. Failure to repay: If your business does not grow as planned despite getting the funding you need, then the possibility of defaulting on your business loan could increase.

Steps to Apply for a Bank Loan for Your Business

1. Research lenders: Begin by conducting a comprehensive analysis of potential lenders for your loan application. Focus on key parameters such as interest rates, required credit scores, collateral, additional paperwork, and funding time frame.
2. Focus on financials: Ensure you have the last three to five years’ tax returns, both personal and business. You will also need to submit updated profit and loss statements, balance sheets, cash flow statements, account receivable reports, and inventory break-ups.
3. Create a business plan: Make sure you have a well-carved-out business plan which includes details of how you plan to go about growing the business and how the funds borrowed will be used to achieve this wisely.
4. Amount of funds needed: Be clear about the amount of funds you will need for the business, as well as some details on future projections for growth.
5. Complete and submit your application: After you complete and file the application, conduct periodic follow-ups to check on the status of your application.
6. Review the final loan offer: After securing your loan, carefully review the tailored contract provided by the bank. Ensure it aligns with your discussed terms and looks satisfactory before proceeding.

Conclusion –

Small business loans can help you meet your ambition of taking your business growth to the next level. If you have a well-thought-out business plan, then these loans can help you grow your business rather than weigh it down.  Know more about applying for a Quick business loan, if your business is more than 2 years old.

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.