Business loans are an essential financial tool that can help entrepreneurs and businesses in India to achieve their growth goals.
Business loans can help entrepreneurs to finance their start-up costs and get their businesses off the ground. This can include costs such as buying equipment, renting a space, or hiring staff.
Overall, business loans are a vital source of funding for businesses of all sizes in India. They can help businesses to achieve their growth goals, increase their revenue, and become more competitive in the marketplace.
While there are several schemes from the government, businesses also reach out to private and public lenders, NBFCs, new-age lenders like FinTechs etc.. However, as the matter involves money, it is important for beginners to check a few things before signing the loan papers for a business purpose.
Experts suggest a detailed and well-thought-out business plan is essential for securing a loan. It should include information about your business, market research, financial projections, and a repayment plan.
Experts like Jinand Shah, MD and CEO of Online PSB Loans; Hardika Shah, founder and CEO, Kinara Capital; and Arun Nayyar, MD and CEO, NeoGrowth shared tips for entrepreneurs to keep in mind while planning a loan from any lender.
Jinand said, “Establishing a clear understanding of the loan’s purpose is fundamental to successful business financing. Business owners should be aware that financial institutions typically do not fund the entire capital requirement and therefore should be prepared to invest at least 20-25% of their own savings in the business.”
“It is crucial to ensure that the business loan is optimally utilised for productive purposes like generating revenues and driving growth within the business,” Jinand added.
Hardika also highlighted that business owners should keep in mind that while you carefully research your lender before applying for a loan, they (lender) too will conduct their own due diligence to assess your creditworthiness.
This will typically involve gathering income documents, tax returns, GST filings, and bank statements. It’s important to avoid withholding or altering any information related to your income, expenses, or previous borrowings, as a lack of full disclosure may be considered fraudulent and result in rejection of your loan application, legal action, and damage to your relationship with the lender.
Lenders need this information to determine whether you are capable of repaying the loan, and manipulating the numbers may result in you taking on a loan you cannot afford to repay, putting you in financial jeopardy.
Hardika suggested 5 things to keep in mind before taking a business loan;
1. Formalise Your Business: Formalising your business is an essential first step to securing credit. Lenders want to establish your ownership and credibility as an entrepreneur, and the legitimacy of your business, before they move forward with the process of issuing a business loan.
Formally registering your business automatically gives you a head start in this regard. Formalization provides a clearer picture of your business’s financial history and stability, which can be important factors for lenders.
Formal Registration means procuring licences, documentation or certifications to ensure your business is a legally registered entity in compliance with local, state and national laws. For e.g. a small-scale industries business in India should have an SSI certification, or many states require a trading business to have a Shops & Establishment licence.
Businesses in India can also get a PAN. Many businesses qualify for a GST number. All MSMEs must get an Udyam Registration number from the Government of India.
This is especially important for small businesses, because they are often turned away by lenders on grounds of being too high-risk as borrowers.
Depending on your sector, it is also important to obtain relevant certifications like Pollution No Objection Certificate (NOC) or Forest Department Clearance to improve your chances of getting a loan.
2. Get Your KYC In Place: When applying for a loan, it is important to have all your KYC documents in place. KYC is the process of verifying the identity of customers to prevent financial fraud and money laundering, so banks and other financial institutions are required by law to comply with it and obtain certain documents from their customers.
Typically, KYC documentation involves submitting your PAN card; Aadhaar card; and proof of address, which can be utility bills, passport, or driving licence.
In addition to these documents, some lenders may require additional paperwork such as bank statements, income tax returns, and salary slips to assess your creditworthiness.
It is important to have all these KYC documents in place before applying for a loan, since your application might be rejected or delayed if any of the documents are missing or incomplete.
It is also crucial to ensure that all the information provided in the documents is accurate and up-to-date.
3. Look For RBI-registered Lenders: Digital payments and data-driven processes have made the loan application and decision-making process faster and more efficient, but have also made it easier for unscrupulous lenders to exploit unsuspecting borrowers.
The proliferation of instant loan apps in India in recent years has resulted in many borrowers being misled with incorrect interest rates and subjected to the coercive recovery practices of unregulated lenders.
To protect yourself from such lenders, it is advisable to opt for lenders that are registered with the Reserve Bank of India (RBI). These organisations are under strict compliance, ensuring consumer safety.
RBI also issued Digital Guidelines in 2022 to further protect the borrower. Reputable lenders will ensure that the borrowing process is transparent, take the time to explain the process to you, disclose all aspects of the loan sanctioning charges upfront, and offer legitimate repayment options.
4. Avoid Making Multiple Inquiries: If you need a loan urgently, you may be tempted to approach multiple lenders to increase your chances of approval. However, while it may seem like a good idea, it can actually have negative consequences.
Every time you apply for a loan, the lender checks your credit history and scores with a credit bureau such as CIBIL. This is known as a hard inquiry, and each inquiry is recorded as an attempt to secure a loan.
If you apply to multiple lenders, it could be seen as a sign of financial distress, which could damage your credit score and increase your perceived risk as a borrower. This, in turn, could decrease your chances of getting approved for a loan in the future.
5. Disclose Your Financial Details: Full disclosure of your cash flows, financial statements, and other relevant details to the lender is crucial. This will help the lender assess your creditworthiness and make an informed decision about your loan application.
Nayyar also added that a business owner may opt for a loan for various business purposes including expansion, diversification, working capital needs, etc..
To ensure that the loan application process is smooth, Nayyar has suggested that a borrower must consider the following five points:
1.Purpose Of Loan: It is critical to identify the purpose and need for a business loan. The borrower should be clear on the end use of the business loan amount while applying. The quantum of the loan should thus be based on the factors driving the loan requirement.
2.Need For Collateral: Today, a borrower has the option to avail of both a collateral based and a collateral-free business loan, based on his ability. A borrower must therefore assess if the loan he is looking to acquire requires him to pledge collateral or not.
3.Ability To Repay: Small business owners should also assess their repayment ability, which is determined by the cash flow of their business.
4. Digitisation and Formalisation of Business: New-age lenders are now leveraging alternate data sources including financial transactions data to assess the creditworthiness and health of the business. Digital payments, for example, leave a verified trail of transactions, which act as surrogate data for traditional cash flow statements.
5. Responsible Financial Behaviour: A strong credit history of the business is a sign of responsible financial behaviour. Therefore, a business owner must honour all his past commitments, which include repayment of loans as per agreed schedule.
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