Business needs are very subjective. This means before approaching lenders; it is imperative to understand the purpose and requirement of the loan; as in, why they want the loan and how are they going to use it. Good debt creates value in the long term while bad debt pushes the business towards financial distress and eventually leads to bankruptcy or closure of the business.
Also, being over-leveraged or under-leveraged might have long term ramifications for the business and can affect the financial health of the company.
In short, it is important to assess the purpose, amount and timing of a business loan before you start reaching out to lenders.
Here’s a definitive list of options that’ll help you get a business loan approved.
Understanding the types of loans available for small businesses
Applying for a business loan can be an emotionally draining and time-consuming process.
Therefore, it is useful to understand the types of loans available in the market:
Term loan is regarded as one of the most mature and preferred forms of SME loans. In case of term loan, the borrower gets a lump sum amount and he is required to repay the amount in installments over the borrowing time period typically 6 months to 5 years. Some lending organisations give long-term loans against collaterals like land, building, etc.
Cash Credit Facility:
It is a form of a short-term source of financing. Borrowers can draw against a limit and can repay as payment hits their account. It is primarily used for short term requirements. Many lending organisations provide credit cash facility to SME entrepreneurs against collaterals.
Understand how the lender will review your credit and risk profile
Lenders eventually decide on whether or not to provide a loan based on the borrower’s credit and risk profile. Any financial institution will evaluate your eligibility based on the parameters given below:
Lenders will evaluate your creditworthiness for a business loan based on credit bureau scores and your credit history. So, having a credit score above 750 will aid in getting loans approved faster.